UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(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,
2010




 ̈
              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 registrant as specified in its charter)





Nevada
              
              51-0539830(State or other jurisdiction of
              
              (IRS Employerincorporation or organization)
              
              Identification No.)





2/F,
Guangri Tower


No. 9
Siyounan Road, 1st
Street


Yuexiu
District


Guangzhou, China
510600


(Address
of principal executive offices) (Zip Code)





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


(Registrant
's telephone number, including area code)





Indicate
by check mark 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 preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x  No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈  No  ̈





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





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





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 23,764,473 shares of common stock, par
value $.0001 per share, were outstanding as of August 11, 2010.





TABLE
OF CONTENTS





PagePART
      I FINANCIAL INFORMATIONItem
      1.
                        Financial
      Statements
                        
                        3Consolidated
      Balance SheetsAs
      of June 30, 2010 (Unaudited) and December 31, 2009
                        
                        3Consolidated
      Statements of Income and Other Comprehensive Income (Loss)For
      the Three Months Ended June 30, 2010 and 2009 and for the Six Months Ended
      June 30, 2010 and 2009 (Unaudited)
                        
                        4Consolidated
      Statement of Changes in Equity
                          For the Year Ended December 31, 2009 and for the
      Six Months Ended June 30, 2010 and 2009 (Unaudited)
                        
                        5Consolidated
      Statements of Cash FlowsFor
      the Six Months Ended June 30, 2010 and 2009 (Unaudited)
                        
                        6Notes
      to Consolidated Financial Statements as of June 30, 2010
      (Unaudited)
                        
                        7Item
      2.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        35Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        46Item
      4.
                        Controls
      and Procedures.
                        
                        46PART
      II OTHER INFORMATIONItem
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        48Item
      6.
                        Exhibits
                        
                        48Signatures
                        
                        49Exhibits/Certifications
                        
                        50


2


PART
I - FINANCIAL INFORMATION





Item
      1.
            Financial
      Statements


CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 
 June 30,
                        
                        
                        December 31,2010
                        
                        
                        2009UnauditedASSETSCURRENT
      ASSETSCash
                        
                        $
                        9,004,104
                        
                        
                        $
                        471,769Restricted
      Cash
                        
                        
                        53,889,986
                        
                        
                        
                        1,760,400Accounts
      receivable, trade, net of allowance for doubtful accounts of$157,725
      and $157,083 as of June 30, 2010  and December 31,
      2009,  respectively
                        
                        
                        24,877,145
                        
                        
                        
                        22,314,660Inventories
                        
                        
                        3,883,201
                        
                        
                        
                        2,731,097Advances
      to suppliers
                        
                        
                        6,383,691
                        
                        
                        
                        2,518,396Other
      current assets
                        
                        
                        1,199,197
                        
                        
                        
                        465,407Total
      current assets
                        
                        
                        99,237,324
                        
                        
                        
                        30,261,729PLANT
      AND EQUIPMENT, NET
                        
                        
                        11,550,038
                        
                        
                        
                        12,000,687OTHER
      ASSETSLong
      term prepayments
                        
                        
                        7,876,181
                        
                        
                        
                        7,900,212Intangible
      assets, net
                        
                        
                        16,479,014
                        
                        
                        
                        16,681,854Total
      other assets
                        
                        
                        24,355,195
                        
                        
                        
                        24,582,066Total
      assets
                        
                        $
                        135,142,557
                        
                        
                        $
                        66,844,482LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term loans
                        
                        $
                        4,873,052
                        
                        
                        $
                        9,506,160Accounts
      payable, trade
                        
                        
                        2,523,532
                        
                        
                        
                        1,324,269Other
      payables and accrued liabilities
                        
                        
                        672,035
                        
                        
                        
                        939,887Customer
      deposits
                        
                        
                        690,122
                        
                        
                        
                        483,358Taxes
      payable
                        
                        
                        2,808,197
                        
                        
                        
                        2,119,745Liquidated
      damages payable
                        
                        
                        44,003
                        
                        
                        
                        44,003Total
      current liabilities
                        
                        
                        11,610,941
                        
                        
                        
                        14,417,422Fair
      value of warrant liabilities
                        
                        
                        634,659
                        
                        
                        
                        6,918,068Total
      liabilities
                        
                        
                        12,245,600
                        
                        
                        
                        21,335,490Commitments
      and contingenciesRedeemable
      convertible preferred stock, $0.0001 par value, 1,653,333 and Nilshares
      issued and outstanding at June 30, 2010 and December 31, 2009,
      respectively
                        
                        
                        49,600,000
                        
                        
                        
                        -SHAREHOLDERS'
      EQUITYCommon
      stock, $0.0001 par value; 90,000,000 shares authorized, 23,097,806 and15,451,105
      shares issued and outstanding at June 30, 2010 and December 31, 2009,
      respectively
                        
                        
                        2,309
                        
                        
                        
                        1,544Stock
      Subscription
                        
                        
                        2,088,000
                        
                        
                        
                        -Paid-in
      capital
                        
                        
                        39,181,305
                        
                        
                        
                        13,380,444Statutory
      reserves
                        
                        
                        4,389,665
                        
                        
                        
                        4,293,116Retained
      earnings
                        
                        
                        22,536,568
                        
                        
                        
                        22,875,987Accumulated
      other comprehensive income
                        
                        
                        4,733,199
                        
                        
                        
                        4,438,094Total
      shareholders' equity
                        
                        
                        72,931,046
                        
                        
                        
                        44,989,185NONCONTROLLING
      INTERESTS
                        
                        
                        365,911
                        
                        
                        
                        519,807Total
      equity
                        
                        
                        73,296,957
                        
                        
                        
                        45,508,992Total
      liabilities and shareholders' equity
                        
                        $
                        135,142,557
                        
                        
                        $
                        66,844,482
  3
  CHINA MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
 
 For Three Months Ended June 30,
                            
                            
                            For Six Months Ended June 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009REVENUESDistribution
      products
                            
                            $
                            15,153,848
                            
                            
                            $
                            14,553,440
                            
                            
                            $
                            24,708,356
                            
                            
                            $
                            24,199,863Proprietary
      products
                            
                            
                            2,036,239
                            
                            
                            
                            501,653
                            
                            
                            
                            2,904,308
                            
                            
                            
                            953,620Medical
      technology
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            149,712
                            
                            
                            
                            -Total
      revenues
                            
                            
                            17,190,087
                            
                            
                            
                            15,055,093
                            
                            
                            
                            27,762,376
                            
                            
                            
                            25,153,483COST
      OF REVENUESDistribution
      products
                            
                            
                            10,022,502
                            
                            
                            
                            11,154,440
                            
                            
                            
                            16,791,185
                            
                            
                            
                            18,171,868Proprietary
      products
                            
                            
                            1,060,143
                            
                            
                            
                            371,426
                            
                            
                            
                            1,616,361
                            
                            
                            
                            672,760Medical
      technology
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      cost of revenues
                            
                            
                            11,082,645
                            
                            
                            
                            11,525,866
                            
                            
                            
                            18,407,546
                            
                            
                            
                            18,844,628GROSS
      PROFIT
                            
                            
                            6,107,442
                            
                            
                            
                            3,529,227
                            
                            
                            
                            9,354,830
                            
                            
                            
                            6,308,855OPERATING
      EXPENSESResearch
      and development
                            
                            
                            344,517
                            
                            
                            
                            432,764
                            
                            
                            
                            708,924
                            
                            
                            
                            763,506Selling,
      general and administrative
                            
                            
                            1,974,259
                            
                            
                            
                            1,318,152
                            
                            
                            
                            3,610,912
                            
                            
                            
                            1,999,474Total
      operating expenses
                            
                            
                            2,318,776
                            
                            
                            
                            1,750,916
                            
                            
                            
                            4,319,836
                            
                            
                            
                            2,762,980INCOME  FROM
      OPERATIONS
                            
                            
                            3,788,666
                            
                            
                            
                            1,778,311
                            
                            
                            
                            5,034,994
                            
                            
                            
                            3,545,875OTHER
      INCOME (EXPENSE):Other
      income (expense), net
                            
                            
                            (46,257
                            )
                            
                            
                            (26,400
                            )
                            
                            
                            (166,960
                            )
                            
                            
                            (20,847
                            )Change
      in fair value of warrant liabilities
                            
                            
                            1,371,780
                            
                            
                            
                            (1,213,218
                            )
                            
                            
                            2,481,474
                            
                            
                            
                            (1,971,907
                            )INCOME
      BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS
                            
                            
                            5,114,189
                            
                            
                            
                            538,693
                            
                            
                            
                            7,349,508
                            
                            
                            
                            1,553,121PROVISION
      FOR INCOME TAXES
                            
                            
                            1,089,308
                            
                            
                            
                            570,014
                            
                            
                            
                            1,602,263
                            
                            
                            
                            1,115,500NET
      INCOME (CHINA MEDICINE CORPORATION AND NONCONTROLLING
      INTERESTS)
                            
                            
                            4,024,881
                            
                            
                            
                            (31,321
                            )
                            
                            
                            5,747,245
                            
                            
                            
                            437,621Add:
      Net loss attributable to noncontrolling interests
                            
                            
                            78,444
                            
                            
                            
                            73,317
                            
                            
                            
                            153,885
                            
                            
                            
                            154,457NET
      INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION
                            
                            
                            4,103,325
                            
                            
                            
                            41,996
                            
                            
                            
                            5,901,130
                            
                            
                            
                            592,078OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation adjustment
                            
                            
                            289,762
                            
                            
                            
                            (277
                            )
                            
                            
                            295,105
                            
                            
                            
                            (58,985
                            )Foreign
      currency translation attributable to noncontrolling
    interests
                            
                            
                            15
                            
                            
                            
                            68
                            
                            
                            
                            (11
                            )
                            
                            
                            (1,065
                            )COMPREHENSIVE
      INCOME
                            
                            $
                            4,393,102
                            
                            
                            $
                            41,787
                            
                            
                            $
                            6,196,224
                            
                            
                            $
                            532,028Less:
      Deemed preferred stock dividend
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6,144,000
                            )
                            
                            
                            -NET
      INCOME (LOSS) AVAILABLE TO CHINA MEDICINE CORPORATION COMMON
      SHAREHOLDERS
                            
                            $
                            4,103,325
                            
                            
                            $
                            41,996
                            
                            
                            $
                            (242,870
                            )
                            
                            $
                            592,078EARNINGS
      (LOSS) PER SHAREBasic
                            
                            $
                            0.19
                            
                            
                            $
                            -
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.04Diluted
                            
                            $
                            0.10
                            
                            
                            $
                            -
                            
                            
                            $
                            (0.01
                            )
                            
                            $
                            0.04WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBasic
                            
                            
                            21,885,645
                            
                            
                            
                            15,231,214
                            
                            
                            
                            20,419,738
                            
                            
                            
                            15,228,966Diluted
                            
                            
                            39,992,703
                            
                            
                            
                            15,355,660
                            
                            
                            
                            20,419,738
                            
                            
                            
                            15,248,178
  4
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
 
 AccumulatedRetained Earnings
                                      
                                      
                                      otherCommon Stock
                                      
                                      
                                      Stock
                                      
                                      
                                      Paid-in
                                      
                                      
                                      Statutory
                                      
                                      
                                      
                                      
                                      
                                      comprehensive
                                      
                                      
                                      NoncontrollingShares
                                      
                                      
                                      Par Value
                                      
                                      
                                      subscription
                                      
                                      
                                      capital
                                      
                                      
                                      reserves
                                      
                                      
                                      Unrestricted
                                      
                                      
                                      income
                                      
                                      
                                      interests
                                      
                                      
                                      TotalBALANCE,
      January 1, 2009
                                      
                                      
                                      15,226,742
                                      
                                      
                                      $
                                      1,522
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      12,469,477
                                      
                                      
                                      $
                                      3,178,861
                                      
                                      
                                      $
                                      22,272,565
                                      
                                      
                                      $
                                      4,428,294
                                      
                                      
                                      $
                                      835,532
                                      
                                      
                                      
                                      43,186,251Net
      income (loss)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      592,078
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (154,457
                                      )
                                      
                                      
                                      437,621Adjustment
      of statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Stock
      options exercised at $1.25
                                      
                                      
                                      17,500
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      21,873
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      21,875Stock
      option and warrant compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      9,622
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      9,622Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (58,985
                                      )
                                      
                                      
                                      (1,065
                                      )
                                      
                                      
                                      (60,050
                                      )BALANCE,
      June 30, 2009 (Unaudited)
                                      
                                      
                                      15,244,242
                                      
                                      
                                      
                                      1,524
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      12,500,972
                                      
                                      
                                      
                                      3,178,861
                                      
                                      
                                      
                                      22,864,643
                                      
                                      
                                      
                                      4,369,309
                                      
                                      
                                      
                                      680,010
                                      
                                      
                                      
                                      43,595,319Net
      income (loss)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,125,599
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (161,074
                                      )
                                      
                                      
                                      964,525Adjustment
      of statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,114,255
                                      
                                      
                                      
                                      (1,114,255
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Stock
      options exercised at $1.25
                                      
                                      
                                      22,500
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      28,123
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      28,125Warrants
      exercised in a cashless manner
                                      
                                      
                                      184,363
                                      
                                      
                                      
                                      18
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      729,844
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      729,862Stock
      option and warrant compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      121,505
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      121,505Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      68,785
                                      
                                      
                                      
                                      871
                                      
                                      
                                      
                                      69,656BALANCE,
      December 31, 2009
                                      
                                      
                                      15,451,105
                                      
                                      
                                      
                                      1,544
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      13,380,444
                                      
                                      
                                      
                                      4,293,116
                                      
                                      
                                      
                                      22,875,987
                                      
                                      
                                      
                                      4,438,094
                                      
                                      
                                      
                                      519,807
                                      
                                      
                                      
                                      45,508,992Net
      income (loss)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,901,130
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (153,885
                                      )
                                      
                                      
                                      5,747,245Adjustment
      of statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      96,549
                                      
                                      
                                      
                                      (96,549
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Issuance
      of common stock
                                      
                                      
                                      4,000,000
                                      
                                      
                                      
                                      400
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      11,999,600
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      12,000,000Redeemable
      convertible preferred stock - beneficial conversion
feature
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      6,144,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      6,144,000Redeemable
      convertible preferred stock - deemed dividend
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (6,144,000
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (6,144,000
                                      )Conversion
      of redeemable convertible preferred stock
                                      
                                      
                                      2,666,667
                                      
                                      
                                      
                                      267
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      7,999,733
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      8,000,000Cash
      exercise of warrants at $2.43
                                      
                                      
                                      440,475
                                      
                                      
                                      
                                      44
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,095,734
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,095,778Cashless
      exercise of warrants at $2.43
                                      
                                      
                                      486,179
                                      
                                      
                                      
                                      49
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,776,447
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,776,496Cashless
      exercise of warrants at $0.85
                                      
                                      
                                      53,380
                                      
                                      
                                      
                                      5
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (5
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Stock
      option compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      92,904
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      92,904Stock
      subscription
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,088,000
                                      
                                      
                                      
                                      (2,088,000
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Financing
      related fees
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (3,219,552
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (3,219,552
                                      )Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      295,105
                                      
                                      
                                      
                                      (11
                                      )
                                      
                                      
                                      295,094BALANCE,
      June 30, 2010 (Unaudited)
                                      
                                      
                                      23,097,806
                                      
                                      
                                      $
                                      2,309
                                      
                                      
                                      $
                                      2,088,000
                                      
                                      
                                      $
                                      39,181,305
                                      
                                      
                                      $
                                      4,389,665
                                      
                                      
                                      $
                                      22,536,568
                                      
                                      
                                      $
                                      4,733,199
                                      
                                      
                                      $
                                      365,911
                                      
                                      
                                      
                                      73,296,957
  5
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  Six months ended June 30,2010
                        
                        
                        2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income attributable to China Medicine Corporation
                        
                        $
                        5,901,130
                        
                        
                        $
                        592,078Net
      loss attributable to noncontrolling interests
                        
                        
                        (153,885
                        )
                        
                        
                        (154,457
                        )Net
      income
                        
                        
                        5,747,245
                        
                        
                        
                        437,621Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Depreciation
      and amortization
                        
                        
                        929,154
                        
                        
                        
                        433,934Bad
      debt expense
                        
                        
                        118,848
                        
                        
                        
                        -Loss
      on sale of assets
                        
                        
                        -
                        
                        
                        
                        27,816Stock-based
      compensation
                        
                        
                        92,904
                        
                        
                        
                        48,050Change
      in fair value of warrants liabilities
                        
                        
                        (2,481,474
                        )
                        
                        
                        1,971,907Change
      in operating assets and liabilities:Accounts
      receivable, trade
                        
                        
                        (2,460,984
                        )
                        
                        
                        3,845,752Inventories
                        
                        
                        (1,136,217
                        )
                        
                        
                        (3,288,910
                        )Advances
      to suppliers
                        
                        
                        (3,957,879
                        )
                        
                        
                        (1,538,563
                        )Other
      current assets
                        
                        
                        (729,086
                        )
                        
                        
                        39,706Accounts
      payable, trade
                        
                        
                        1,188,906
                        
                        
                        
                        139,758Other
      payables and accrued liabilities
                        
                        
                        (269,764
                        )
                        
                        
                        (25,157
                        )Customer
      deposits
                        
                        
                        203,939
                        
                        
                        
                        157,601Taxes
      payable
                        
                        
                        676,969
                        
                        
                        
                        (717,560
                        )Net
      cash provided by (used in) operating activities
                        
                        
                        (2,077,439
                        )
                        
                        
                        1,531,955CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of plant and equipment
                        
                        
                        (172,056
                        )
                        
                        
                        (381,321
                        )Purchase
      of intangible assets
                        
                        
                        -
                        
                        
                        
                        (234,512
                        )Proceeds
      from sale of equipment
                        
                        
                        -
                        
                        
                        
                        21,986Advances
      on long-term prepayments
                        
                        
                        56,109
                        
                        
                        
                        (1,934,767
                        )Net
      cash used in investing activities
                        
                        
                        (115,947
                        )
                        
                        
                        (2,528,614
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from exercise of options and warrants
                        
                        
                        1,070,338
                        
                        
                        
                        21,875Repayments
      on short-term loans
                        
                        
                        (8,416,339
                        )
                        
                        
                        -Proceeds
      from short-term loans
                        
                        
                        3,763,699
                        
                        
                        
                        -Proceeds
      from issuance of common stock
                        
                        
                        12,000,000
                        
                        
                        
                        -Proceeds
      from issuance of redeemable preferred stock
                        
                        
                        57,600,000
                        
                        
                        
                        -Payments
      on private placement related expenses
                        
                        
                        (3,219,552
                        )
                        
                        
                        -Increase
      in restricted cash
                        
                        
                        (52,122,386
                        )
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        10,675,760
                        
                        
                        
                        21,875EFFECT
      OF EXCHANGE RATE ON CASH
                        
                        
                        49,961
                        
                        
                        
                        (2,830
                        )CHANGE
      IN CASH
                        
                        
                        8,532,335
                        
                        
                        
                        (977,614
                        )CASH,
      beginning of period
                        
                        
                        471,769
                        
                        
                        
                        2,791,814CASH,
      end of period
                        
                        $
                        9,004,104
                        
                        
                        $
                        1,814,200Supplemental
      disclosure of cash flows:Cash
      paid interest
                        
                        $
                        177,927
                        
                        
                        $
                        -Cash
      paid income tax
                        
                        $
                        742,846
                        
                        
                        $
                        1,092,747
  6
 CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Note
1 - Organization
 
 Principal
Activities
 
 China
Medicine Corporation (“CMC” or the "Company") was incorporated on February 10,
2005.  The Company, through its subsidiaries in the People’s Republic
of China (“PRC” or “China”), engages in the research and development,
manufacture, and wholesale distribution of prescription and over the counter
medicines, traditional Chinese medicines, which are medicines derived from
Chinese herbs, dietary supplements, medical instruments and the sales of medical
technology in the PRC. The Company primarily operates through its wholly-owned
subsidiaries, Guangzhou Konzern Medicine Co., Ltd. (“Konzern”) and Guangzhou
LifeTech Pharmaceutical Co., Ltd (“LifeTech”).  Both companies are
organized under the laws of the PRC.  All other subsidiaries are still
in the development stage and either had not undertaken significant operating
activities or had no activities as of June 30, 2010.
 
 Current
Development
 
 On
January 7, 2010, the Company set up Konzern Company Limited (“Konzern Ltd.”)
which is 100% owned by the Company. Konzern Ltd. was established in China under
PRC law. Its business license is valid for 50 years from January 7, 2010. The
registered capital of Konzern Ltd. is approximately $29.3 million (RMB 200
million) of which $13.5 million has been contributed as of June 30, 2010. To
fulfill the requirement of the PRC local administrative affair, the remaining
capital of approximately $15.8 million has to be invested in Konzern Ltd. within
2 years after the issuance date of the business license.
 
 As of May
12, 2010, CMC completed reorganizing its PRC subsidiaries. All PRC subsidiaries
are controlled by Konzern Ltd. On May 26, 2010, Konzern Ltd. changed its
registered name to Konzern Group Ltd. (“Konzern Group”).
 
 Note
2 - Summary of Significant Accounting Policies
 
 Basis of
Presentation
 
 The
consolidated financial statements of the Company reflect its subsidiaries,
Konzern Group, Konzern, Konzern US Holdings (“Konzern Holding”), Konzern
Biotechnology Co., Ltd. (“Konzern Bio”), LifeTech, and LifeTech Medicine
Technologies Co., Ltd (“LifeTech Technology”), all of which are directly or
indirectly 100% owned subsidiaries. Guangzhou Co-Win Bioengineering Co., Ltd.
(“Co-Win”) is a 70% owned subsidiary of Konzern. The accompanying consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. All material inter-company
transactions and balances have been eliminated in consolidation.
 
 While
management has included all normal recurring adjustments considered necessary to
give a fair presentation of the operating results for the periods, interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2009 annual report filed on Form
10-K.
  7
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 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. For example, management estimates the fair
value of its options and warrants as well as the amount of potentially
uncollectible accounts.  Management believes that the estimates
utilized in preparing its consolidated financial statements are reasonable and
prudent. 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 banks in the PRC and Hong Kong.
 
 Restricted
Cash
 
 Restricted
cash represents amounts set aside by the Company in accordance with the
Company’s debt agreements with a financial institution and the Stock
Subscription Agreement that was completed on January 29, 2010. As part of the
Company’s loan agreements with a bank, the Company is expected to maintain
certain compensating cash balances at the bank’s desires. Pursuant to the Stock
Subscription Agreement, the use of funds has to be approved by the board of
directors and to be used on certain acquisitions and capital
expenditures.
 
 Concentrations and
Risks
 
 Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions or state-owned
banks within China, Hong Kong and U.S. which, from time to time, may exceed
Federal Deposit Insurance Corporation insured limits for banks that are located
in the Unites States. No deposits within the PRC are covered by insurance. As of
June 30, 2010 and December 31, 2009, the Company had deposits in excess of
federally insured limits totaling $62,023,916 and $2,232,169, 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.
 
 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 affecting
China's political, economic and social conditions. There is also no guarantee
that the Chinese government's pursuit of economic reforms will be consistent or
effective.
  8
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 For the
six months ended June 30, 2010, two suppliers accounted for approximately 46% of
the Company’s total purchases, individually accounting for 29% and 17%,
respectively. One of the suppliers accounted for 24% of accounts payable as of
June 30, 2010. The other supplier accounted for 18% of advances to suppliers as
of June 30, 2010.  For the six months ended June 30, 2009, five
suppliers accounted for approximately 54% of the Company’s total purchases.
Advances to those five suppliers represent 16% of the Company’s total advances
to suppliers as of June 30, 2009. There were no accounts payable due to these
suppliers as of June 30, 2009.
 
 For the
three months ended June 30, 2010, one supplier accounted for approximately 51%
of the Company’s total purchases. The supplier accounted for 24% of accounts
payable as of June 30, 2010.  For the three months ended June 30,
2009, five suppliers represented 68% of the Company’s total purchase. Advances
to these five suppliers represented 16% of the Company’s total advances to
suppliers.  There was no accounts payable due to these suppliers as of
June 30, 2009.
 
 For the
six months ended June 30, 2010, two customers accounted for approximately 39% of
the Company's total sales, individually accounting for 27% and 12%,
respectively. The accounts receivable balances of these customers amounted to
$7,907,718, representing 32% of the total accounts receivable as of June 30,
2010. For the six months ended June 30, 2009, five customers accounted for
approximately 48% of the Company’s total sales. The accounts receivable balance
of those five customers amounted to $9,720,386, representing 63% of the total
accounts receivable as of June 30, 2009.
 
 For the
three months ended June 30, 2010, one customer accounted for approximately 25%
of the Company’s total sales. The accounts receivable balance of this customer
amounted to $6,071,435, representing 24% of the total accounts receivable as of
June 30, 2010. For the three months ended June 30, 2009, five customers
accounted for approximately 52% of the Company’s total sales. The accounts
receivable balance of those five customers amounted to $9,720,386, representing
63% of the total accounts receivable as of June 30, 2009.
 
 Three
products accounted for approximately 31% and 24% of the Company’s total sales
for the six months ended June 30, 2010 and 2009, respectively, and 29% and 21%
for the three months ended June 30, 2010 and 2009, respectively.
 
 Accounts Receivable,
Trade
 
 The
Company extends unsecured credit to its customers in the ordinary course of
business.  Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
determine if the allowance for doubtful accounts is adequate.  An
estimate for doubtful accounts is made when collection of the full amount is no
longer probable. Account balances are written off after management has exhausted
all collection efforts.
  9
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Inventories
 
 Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted average method. Management reviews inventories for obsolescence or cost
in excess of net realizable value periodically and records an inventory
write-down and additional cost of goods sold when the carrying value exceeds net
realizable value.
 
 Advances to
Suppliers
 
 Advances
on inventory purchases are down payments or deposits for inventory
purchases. The inventory is normally delivered within one to two months
after the payments have been made except for vendors who have an agency
relationship with the Company. This amount is refundable and bears no
interest. The Company has legally binding contracts with its vendors, which
require the payments to be returned to the Company when the contract
ends.
 
 Related Party
Transactions
 
 As of
June 30, 2010 and December 31, 2009, receivables from related parties amounted
to $181,103 and $0, respectively, and are included in other current assets. The
receivables were generated from cash receiving from customers.  Due to
banking restriction on these customers, such collection is deposited in a key
executive’s personal bank account for ordinary course of business; the bank
account is controlled by the Company.
 
 Plant and
Equipment
 
 Plant and
equipment are stated at the actual cost of acquisition less accumulated
depreciation. Major additions and improvements are capitalized. Expenditures for
maintenance and repairs are charged to earnings as incurred. When assets are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in
operations. Depreciation is provided using the straight-line method for
substantially all assets with a residual value of 5% of the actual cost and
estimated lives as follows:
 
 Buildings
      and leasehold improvements
                  50
      yearsLeasehold
      improvements
                  5
      yearsProduction
      equipment
                  10
      -12 yearsFurniture,
      fixtures and office equipment
                  5
      yearsMotor
      vehicles
                  5 -
      10 years
 
 A
majority of the construction in progress represents costs incurred in connection
with the construction of equipment for manufacturing aflatonix-detoxifizyme
(“rADTZ”).  No depreciation is provided for construction in progress
until such time as the assets are completed and placed into
service.
  10
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Long Term
Prepayments
 
 Long term
prepayments mostly represent partial payments or deposits on acquiring
technology and exclusive distribution rights; these payments and deposits are
refundable.
 
 Intangible
Assets
 
 Intangible
assets mainly include land use rights and patents.  Intangible assets
are stated at cost (actual costs or estimated fair value upon acquisition), less
accumulated amortization.  Amortization expense is recognized on the
straight-line basis over the estimated useful lives of the assets as
follows:
 
 Intangible assets
                  
                  Weighted average
                    estimated useful
                    livesLand
      use rights
                  
                  41-46
      yearsManufacturing
      patents
                  
                  16
      yearsrADTZ
      patent
                  
                  11
      years
 
 All land
in the PRC is government owned.  However, the government grants “land
use rights.”  Lifetech acquired land use rights in 2002 and 2007 and
has the right to use the land for 50 years.  The rights are amortized
on a straight line basis over the weighted average useful lives.
 
 The
Company acquired manufacturing patents through the acquisition of LifeTech and
LifeTech Technology.  Acquired patents were measured based on their
fair values.  Generally, the manufacturing patents in PRC are being
amortized on a straight-line basis over a period of 20 years from the
application date.  The weighted average remaining life of the acquired
patents was 16 years on the date of the acquisition.
 
 Beginning
in 2007, the Company acquired technology to manufacture rADTZ.  The
major costs of intangibles includes patent and technology acquired and related
final experiment costs required by the government. The Company will begin
amortizing costs once manufacturing begins. In 2009, the Company made trial
production to meet government requirements and is in the process of applying the
government permit to allow the Company to manufacture rADTZ. The Company expects
to obtain the permit in 2010.
 
 Under the
FASB’s accounting standard for 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 at least annually or more often whenever there is an
indication that the carrying amount may not be recovered.
  11
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Impairment of Long-Lived
Assets
 
 Per
FASB’s accounting standards, long-lived assets are analyzed for impairment. The
Company tests for impairment of long-lived assets at least annually or more
often whenever there is an indication that the carrying amount of the asset may
not be recovered. Recoverability of these assets is determined by comparing the
forecasted undiscounted cash flows generated by those assets to the assets' net
carrying value. The amount of impairment loss, if any, is measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.
 
 Management
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. As of June 30, 2010, the Company believes that
there were no impairments of long-lived assets.
 
 Fair Value of Financial
Instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires fair value
disclosures of those financial instruments.  The fair value measurement
accounting standard defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
balance sheets for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest.  The
three levels are defined as follow:
  ·
                Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
                Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
                Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 Determining
the category into which an asset or liability falls within the hierarchy
requires significant judgment. The Company evaluates the hierarchy disclosures
each quarter. Liabilities measured at fair value on a recurring basis are
summarized as follows:
 
 Carrying Value as
                    of
      June 30, 2010
                  
                  Fair Value Measurements at June
      30, 2010
                    Using Fair Value Hierarchy(Unaudited)
                  
                  Level
      1
                  
                  Level
      2
                  
                  Level
      3Warrant
      liabilities
                  
                  $
                  634,659
                  
                  
                  
                  $
                  634,659
 
 A
discussion of the valuation techniques used to measure fair value for the
liabilities listed above and activity for these liabilities for the six and
three months ended June 30, 2010, is provided elsewhere in the
footnotes.
  12
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis.  Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment charges. For
the six and three months ended June 30, 2010, there were no impairment
charges.
 
 Redeemable Convertible
Preferred Stock
 
 In
accordance with ASC 480-10-S99, the Company’s preferred stock is classified as
mezzanine equity.  The preferred stock holder can request redemption
at the liquidation value in the event of a material adverse effect; however,
such condition is not considered mandatory.
 
 At the
issuance date, the Company allocated the gross proceeds received between
preferred stocks and common stocks.  Based on the initial carrying
value, a beneficial conversion feature in the amount of $6.1 million was
recognized, which was credited to additional paid-in-capital. As preferred
stocks can be converted at any time at the option of the holder and is
immediately convertible, the entire beneficial conversion feature was recognized
immediately as a deemed dividend to the investors of the preferred
stock.
 
 Noncontrolling
Interest
 
 Noncontrolling
interest consists of the 30% interest which the Company owns in Co-Win.
Effective on January 1, 2009, the Company adopted the FASB’s standard
regarding noncontrolling interests in consolidated financial
statements.  Certain provisions of this statement are required to be
adopted retrospectively for all periods presented. Such provisions include a
requirement that the carrying value of noncontrolling interests (previously
referred to as minority interests) be removed from the mezzanine section of the
balance sheet and reclassified as equity; and consolidated net income to be
recast to include net income attributable to the noncontrolling
interest.
 
 Revenue
Recognition
 
 The
Company recognizes revenue when all four of the following criteria are met: (1)
persuasive evidence has been received that an arrangement exists; (2) delivery
of the products and/or services has occurred; (3) the selling price is fixed or
determinable; and (4) collectability is reasonably assured. The Company follows
the accounting standard regarding revenue recognition 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. The Company requires its customers to deposit
monies with the Company when they place an order. The Company does not pay
interest on these amounts.
 
 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
VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product.
  13
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Output
VAT on sales and input VAT on purchases amounted to $4,702,893 and $3,069,675,
respectively, for the six months ended June 30, 2010, and $4,269,713 and
$3,756,118, respectively, for the six months ended June 30, 2009 and $2,931,364
and $1,860,594 for the three months ended June 30, 2010 and $2,553,286 and
$1,975,868 for the three months ended June 30, 2009, respectively. Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Research and Development
Costs
 
 Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and development
or sales and marketing, are classified as equipment and depreciated over their
estimated useful lives.
 
 Shipping and Handling
Costs
 
 Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs and totaled $394,513 and $312,052 for the six
months ended June 30, 2010 and 2009, and totaled $255,849 and $187,973 for the
three months ended June 30, 2010 and 2009.
 
 Advertising
Costs
 
 The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. For the six months ended June 30, 2010 and 2009,
advertising expenses amounted to $153,284 and $312,459, respectively. For the
three months ended June 30, 2010 and 2009, advertising expenses amounted to
$139,783 and $282,288, respectively.
 
 Foreign Currency
Translation
 
 The
reporting currency of the Company is the US dollar. The Company uses its local
currency, Renminbi (RMB), as its functional currency. Results of operations and
cash flow are translated at average exchange rates during the period, and assets
and liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the Consolidated Statements of Shareholders’
Equity.  Because cash flows are also translated at average exchange
rates, amounts reported on the Consolidated Statements of Cash Flows will not
necessarily agree with changes in the corresponding balances on the Consolidated
Balance Sheets.
  14
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Asset and
liability accounts at June 30, 2010 and December 31, 2009 were translated at RMB
6.79 and RMB 6.82 to $1.00, respectively. Equity accounts were stated at their
historical rate. The average exchange rates applied to income and cash flow
statements for the six months ended June 30, 2010 and 2009, were RMB 6.82 to
$1.00, respectively.
 
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. No material transaction gains and losses were
recognized during the six months ended June 30, 2010, and 2009. Historically,
the Company has not entered into any currency trading or hedging transactions,
although there is no assurance that the Company will not enter into such
transactions in the future.
 
 Income
Taxes
 
 The
Company records income taxes pursuant to FASB’s accounting standards for income
taxes. The provision consists of the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the income tax basis and financial reporting basis of assets
and liabilities. The provision for income taxes consists of taxes currently due
plus deferred taxes.
 
 The
charge for taxation is based on the results for the six months as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantially enacted as of the balance sheet
date.
 
 The
deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences can be utilized.
 
 The
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 is 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.
 
 Under
FASB’s accounting standards, a tax position is recognized as a benefit only if
it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded.  Penalties and interest
incurred related to underpayment of income tax are classified as income tax
expense in the year incurred.  No significant penalties or interest
relating to income taxes have been incurred during the six months ended June 30,
2010 and 2009.  GAAP also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition.
  15
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Stock-Based
Compensation
 
 The
Company records and reports the employee stock-based compensation in accordance
with FASB’s accounting standards for share-based payments. This accounting
standard requires a public entity to measure the cost of services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. That cost is recognized over the period during which services are
received. Stock compensation for stock granted to non-employees is determined in
accordance with FASB’s accounting standards regarding accounting for stock-based
compensation and accounting for equity instruments that are issued to other than
employees for acquiring or in conjunction with selling goods or services, as the
fair value of the consideration received or the fair value of equity instruments
issued, whichever is more reliably measured.
 
 Earnings Per
Share
 
 The
Company reports earnings per share in accordance with FASB’s accounting
standards for earnings per share, which 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 are computed
by dividing net income (loss) available to common stockholders by the weighted
average common shares outstanding during the period using the two-class method.
Under the two-class method, net income (loss) is allocated between common stock
and redeemable convertible preferred stock as it is deemed to be a participating
security based on its participation rights. Diluted earnings per common 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. Diluted loss per common share is calculated by dividing net loss
attributable to common stockholders by the weighted average number of common and
potential dilutive securities outstanding during the period if the effect is
dilutive. The numerator of diluted earnings per share is calculated by starting
with income allocable to common stock under the two-class method and adding back
income allocable to preferred stock to the extend they are
dilutive.
 
 Business
Combination
 
 Effective
January 1, 2009, we account for business combinations using the acquisition
method of accounting. The acquisition method requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date. The provisions of the acquisition method related to income tax adjustments
apply to all business combinations regardless of consummation date.
 
 Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. This is an exit price concept for the valuation of the
asset or liability. In addition, market participants are assumed to be buyers
and sellers in the principal market for the asset or liability. Fair value
measurements for an asset assume the highest and best use by these market
participants. As a result of these standards, we may be required to record
assets which we do not intend to use or sell (defensive assets) and/or to value
assets at fair value measures that do not reflect our intended use of those
assets. Many of these fair value measurements can be highly subjective and it is
also possible that other professionals, applying reasonable judgment to the same
facts and circumstances, could develop and support a range of alternative
estimated amounts.
  16
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Segment
Reporting
 
 The
Company uses a “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. The
Company has determined that it has two reportable segments: LifeTech and
Konzern, which includes all the other subsidiaries.
 
 Recently Issued Accounting
Pronouncements
 
 In
December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company adopted this standard and the standard did
not have material effect on the Company’s consolidated financial
statements.
 
 In
January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard and the standard did not
have material effect on the Company’s consolidated financial
statements.
 
 In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary.  Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value.  In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.  This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets.  This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009.  The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
  17
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 In
January 2010, FASB issued ASU No. 2010-06, Improving Disclosures about Fair
Value Measurements.  This update provides amendments to Subtopic
820-10 that requires new disclosure to include transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements.  Further, this
update clarifies existing disclosures on level of disaggregation and disclosures
about inputs and valuation techniques.  A reporting entity should
provide fair value measurement disclosures for each class of assets and
liabilities and should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3.  The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years.  The Company is currently evaluating the impact of this
ASU; however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
 
 In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
 
 In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010.  The Company does not expect the adoption of ASU 2010-17 to have
a significant impact on its consolidated financial statements.
  18
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Reclassification
 
 The
Company reclassified the following items in the prior year’s consolidated
statement of income and other comprehensive income to conform to the
classification used in the current year: $293,370 and $147,508 for the six and
three months ended June 30, 2009 were reclassified from selling, general and
administrative expenses to research and development; $953,620 and $501,653 for
the six and three months ended June 30, 2009 were reclassified from distribution
products sales to proprietary products; and $672,760 and $371,426 for the six
and three months ended June 30, 2009 were reclassified from distribution
products cost of revenues to proprietary products cost of revenue.
 
 Note
3 – Accounts Receivable
 
 Accounts
receivable consisted of the following:
  June 30, 2010
                          
                          
                          December 31, 2009(Unaudited)Trade
      accounts receivable
                          
                          $
                          25,034,870
                          
                          
                          $
                          22,471,743Allowance
      for doubtful accounts
                          
                          
                          (157,
      725
                          )
                          
                          
                          (157,083
                          )Trade
      accounts receivable, net
                          
                          $
                          24,877,145
                          
                          
                          $
                          22,314,660
  June 30, 2010
                                          
                                          
                                          December 31, 2009(Unaudited)Beginning
      allowance for doubtful accounts
                                          
                                          $
                                          157,083
                                          
                                          
                                          $
                                          96,609Additions
      charged to bad debt expense
                                          
                                          
                                          -
                                          
                                          
                                          
                                          60,474Foreign
      currency translation adjustments
                                          
                                          
                                          642
                                          
                                          
                                          
                                          -Ending
      allowance for doubtful accounts
                                          
                                          $
                                          157,725
                                          
                                          
                                          $
                                          157,083
 
 Note
4 – Inventories
 
 Inventories
consisted of the following:
  June 30, 2010
                              
                              
                              December 31, 2009(Unaudited)Raw
      materials
                              
                              $
                              339,656
                              
                              
                              $
                              328,586Work
      in progress
                              
                              
                              323,551
                              
                              
                              
                              389,346Finished
      goods
                              
                              
                              3,219,994
                              
                              
                              
                              2,013,165Total
                              
                              $
                              3,883,201
                              
                              
                              $
                              2,731,097
  19
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Note
5 – Plant and Equipment
 
 Plant and
equipment consisted of the following:
  June 30, 2010
                                    
                                    
                                    December 31, 2009(Unaudited)Buildings
      and leasehold improvements
                                    
                                    $
                                    5,110,692
                                    
                                    
                                    $
                                    5,089,384Production
      equipment
                                    
                                    
                                    7,234,878
                                    
                                    
                                    
                                    7,025,291Furniture,
      fixture and office equipment
                                    
                                    
                                    324,950
                                    
                                    
                                    
                                    270,661Motor
      vehicles
                                    
                                    
                                    463,685
                                    
                                    
                                    
                                    409,396Construction
      in progress
                                    
                                    
                                    2,948,357
                                    
                                    
                                    
                                    3,051,360Total
                                    
                                    
                                    16,082,562
                                    
                                    
                                    
                                    15,846,092Less
      accumulated depreciation
                                    
                                    
                                    (4,532,524
                                    )
                                    
                                    
                                    (3,845,405
                                    )Buildings
      and equipment, net
                                    
                                    $
                                    11,550,038
                                    
                                    
                                    $
                                    12,000,687
 
 A
majority of the construction in progress represents the costs incurred in
connection with the construction of equipment for manufacturing
aflatonix-detoxifizyme “rADTZ”. Management expects the equipment will be
completed in 2010 and has outstanding commitments of approximately $762,000 as
of June 30, 2010.
 
 In
November 2009, the Company entered into a construction design contract for
expansion of LifeTech.  The Company made a prepayment of
$1.1million.  Refer to Note 6 for further discussion.
 
 Depreciation
expense amounted to $668,618 and $433,893 for the six months ended June 30, 2010
and 2009, respectively, and $336,626 and $217,718 for the three months ended
June 30, 2010 and 2009, respectively.
 
 Note
6 – Long Term Prepayments
 
 Long term
prepayments consisted of the following:
  June 30, 2010
                              
                              
                              December 31, 2009(Unaudited)Prepayment
      for exclusive distribution rights
                              
                              $
                              883,800
                              
                              
                              $
                              880,200Advances
      to suppliers
                              
                              
                              1,281,492
                              
                              
                              
                              1,276,272Long
      term deferred expense
                              
                              
                              35,720
                              
                              
                              
                              71,150Deposit
      for exclusive distribution rights
                              
                              
                              2,182,686
                              
                              
                              
                              2,225,140Deposit
      for technology know-how
                              
                              
                              2,356,800
                              
                              
                              
                              2,347,200Deposit
      for construction design project
                              
                              
                              1,135,683
                              
                              
                              
                              1,100,250Total
      long term prepayment
                              
                              $
                              7,876,181
                              
                              
                              $
                              7,900,212
 
 In 2008,
the Company entered into two separate contracts to acquire distribution rights
to a multivitamin pack and manufacturing of the multivitamin pack and to
self-develop various types of herbal tea.  The Company prepaid
$880,200 for ten years of exclusive distribution rights, which will begin to be
amortized once the products are ready for commercial sale. The total contractual
term of the exclusive distribution rights is 15 years.  As of June 30,
2010, the Company was in the process of applying for government
approval.  The Company also advanced the bio-technological company
approximately $1.52 million as payment for future inventory purchase, of which
approximately $1.28 million was included in advances to suppliers – long term as
of June 30, 2010 and December 31, 2009.
 
 Long term
deferred expense represents prepayment for the research and development of
rADTZ.  The decrease was due to amortization over the term of the
contract.
  20
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 As of
June 30, 2010 and December 31, 2009, the Company had made long term deposits in
the aggregate of $2,182,686 and $2,225,140, respectively to secure its
position to purchase national exclusive distribution rights for various
products. Deposits are refundable upon the termination or signing of the
contracts.
 
 In
November 2009, the Company entered into a construction design contract for
expansion of LifeTech.  The Company made a prepayment of $1.1 million
related to designing the plant.  As of June 30, 2010, the construction
had not yet commenced.  The Company expects the project to be
completed in the third quarter of 2011.
 
 Note
7 – Intangible Assets
 
 Intangible
assets consisted of the following:
  June 30, 2010
                          
                          
                          December 31, 2009(Unaudited)Land
      use rights
                          
                          $
                          11,918,410
                          
                          
                          $
                          11,877,954Patents
                          
                          
                          5,082,593
                          
                          
                          
                          5,063,202Total
                          
                          
                          17,001,003
                          
                          
                          
                          16,941,156Less:
      accumulated amortization
                          
                          
                          (521,989
                          )
                          
                          
                          (259,302
                          )Intangible
      assets, net
                          
                          $
                          16,479,014
                          
                          
                          $
                          16,681,854
 
 Amortization
expense amounted to approximately $260,536 and $41 for the six months ended June
30, 2010 and 2009, respectively, and $130,299 and $21 for the three months ended
June 30, 2010 and 2009, respectively. As of June 30, 2010, future amortization
expense for each of the years ending December 31, are as follows:
 
 2010
                          
                          
                          2011
                          
                          
                          2012
                          
                          
                          2013
                          
                          
                          2014
                          
                          
                          ThereafterAmortization
      expense
                          
                          $
                          328,546
                          
                          
                          $
                          657,091
                          
                          
                          $
                          657,091
                          
                          
                          $
                          657,091
                          
                          
                          $
                          657,091
                          
                          
                          $
                          13,522,104
 
 Note
8 – Short-Term Loans
 
 Short
term loans represent amounts due to various banks and are normally due within
one year.  The principal is due at maturity and can be renewed with
the banks. The short-term loans consisted of the following:
 
 June 30, 2010
                                
                                
                                December 31, 2009(Unaudited)Two
      loans with Industrial and Commercial Bank of China due on August 13, 2010
      with an annual interest rate of 5.31%, secured by the Company's
      properties
                                
                                $
                                -
                                
                                
                                $
                                5,838,660Four
      loans under a facility with Bank of China, due on December 1, 2010 with an
      annual interest rate of 5.31%, guaranteed and secured by Co-Win and the
      Company’s officers (a)
                                
                                
                                2,958,152
                                
                                
                                
                                3,667,500One
      loan with Bank of China, due on July 4, 2010 with an annual interest rate
      of 4.37%, secured by $2.5M of cash (b)
                                
                                
                                1,914,900
                                
                                
                                
                                -Total
      – bank loans
                                
                                $
                                4,873,052
                                
                                
                                $
                                9,506,160
  21
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 (a)
                  The
      Chinese government refunded a partial amount of interest paid by the
      Company as grants. For the six months ended June 30, 2010, the Company
      received refunds of $6,049 which was recognized as a reduction of interest
      expense. The effective interest rate of these loans was 4.63% for the six
      months ended June 30, 2010. These loans are a credit facility in the
      amount of $3.7 million. The four loans would be due
      on August 31, 2010, September 27, 2010, October 25, 2010 and November 22,
      2010, respectively.
 (b)
                Due
      to the currency exchange limitation imposed by the PRC government, the
      Company pledged $2.5 million funds available from the Stock Subscription
      Agreement to obtain the loan for working capital purpose. The $2.5 million
      is classified as restricted cash as of June 30, 2010 and was subsequently
      released.
 
 For the
six months ended June 30, 2010 and 2009, total interest expenses incurred
amounted to $177,927 and $0, respectively. For the three months ended June 30,
2010 and 2009, total interest expenses incurred amounted to $83,714 and $0,
respectively.
 
 Note
9 - Taxes
 
 The
United States of America
  The
Company and its subsidiaries file separate income tax returns. The Company is
incorporated in the U.S., and is subject to a graduated U.S. federal corporate
income tax of 15% to 35% if the Company has taxable income.
 
 PRC
 The
Company conducts all its operating business through its operating subsidiaries
in China. The operating subsidiaries are governed by the income tax laws of the
PRC and do not have any deferred tax assets or deferred tax liabilities under
the income tax laws of the PRC because there are no temporary differences
between financial statement carrying amounts and the tax bases of existing
assets and liabilities.
 
 The
Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Chinese
Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
  22
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 The key
changes are:
 
 a.
                The
      new standard EIT rate of 25% replaced the 33% rate currently applicable to
      both DES and FIEs, except for High Tech companies who pay a reduced rate
      of 15%;
 
 b.
                Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of either the
      next 5 years or until the tax holiday term is completed, whichever is
      sooner. These companies will pay the standard tax rate as defined in point
      “a” above when the grace period
expires.
 
 The
Company and its subsidiaries were established before March 16, 2007 and
therefore are qualified to continue enjoying the reduced tax rate as described
above.
 
 All of
the Company’s subsidiaries except for Konzern Holding are located and doing
business in China.  Konzern was approved as a foreign joint-venture
enterprise in 2004 and as a wholly-owned foreign enterprise in
2006.  All of the subsidiaries except for LifeTech were subject to an
effective tax rate of 25% for the periods ended as of June 30, 2010 and
2009.
 
 LifeTech
was approved as a wholly owned foreign enterprise in 2006 and was established
before March 16, 2007 and therefore was qualified to continue enjoying the
reduced tax rate as described above. The exemption commences from the first
profitable year. LifeTech became profitable in 2007; thus, LifeTech was exempt
from corporate income tax for the years ended December 31, 2008 and 2007 and is
entitled to a 50% reduction of the income tax rate of 25% (or a rate of 12.5%)
from 2009 through 2011.
 
 The
estimated tax savings for the six and three months ended June 30, 2010 amounted
to $61,473. The net effect on earnings per share if the income tax had been
applied would decrease earnings per share from ($0.01) to ($0.01) for the six
months and from $0.10 to $0.10 for the three months ended June 30, 2010. There
were no tax savings for the six and three months ended June 30, 2009. The
provision for income taxes consisted of the following:
 
 For the six months ended
                            June30,
                          
                          For the three months ended
                            June 30,2010
                          
                          
                          2009
                          
                          2010
                          
                          2009(Unaudited)
                          
                          (Unaudited)Provision
      for China income tax
                          
                          $
                          1,602,263
                          
                          
                          $
                          1,115,500
                          
                          
                          $
                          1,089,308
                          
                          
                          $
                          570,014Provision
      for local tax
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Tax
      provision – PRC
                          
                          $
                          1,602,263
                          
                          
                          $
                          1,115,500
                          
                          
                          $
                          1,089,308
                          
                          
                          $
                          570,014
  23
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the six and three months ended June 30:
 
 For the six months ended
                                        June 30,
                                      
                                      
                                      For the three months ended
                                        June 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009(Unaudited)
                                      
                                      
                                      (Unaudited)U.S.
      statutory rates
                                      
                                      
                                      34.0
                                      %
                                      
                                      
                                      34.0
                                      %
                                      
                                      
                                      34.0
                                      %
                                      
                                      
                                      34.0
                                      %Foreign
      income not recognized
                                      
                                      
                                      (34.0
                                      )
                                      
                                      
                                      (34.0
                                      )
                                      
                                      
                                      (34.0
                                      )
                                      
                                      
                                      (34.0
                                      )China
      tax rates
                                      
                                      
                                      25.0
                                      
                                      
                                      
                                      25.0
                                      
                                      
                                      
                                      25.0
                                      
                                      
                                      
                                      25.0China
      income tax exemption
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Other
      items
                                      
                                      
                                      (3.2
                                      )
                                      
                                      
                                      46.8
                                      
                                      
                                      
                                      (3.7
                                      )
                                      
                                      
                                      80.8Effective
      income tax rates
                                      
                                      
                                      21.8
                                      %
                                      
                                      
                                      71.8
                                      %
                                      
                                      
                                      21.3
                                      %
                                      
                                      
                                      105.8
                                      %
 
 The other
items represent losses incurred by Chinese subsidiaries that are under
development stage and have no operations currently and losses from non-Chinese
entities; all were not subjected to PRC income taxes.
 
 Taxes
payable consisted of the following:
 
 June 30, 2010
                          
                          
                          December 31, 2009(Unaudited)Income
      taxes payable
                          
                          $
                          1,529,955
                          
                          
                          $
                          664,248Value
      added tax
                          
                          
                          1,218,827
                          
                          
                          
                          1,451,693Other
      taxes
                          
                          
                          59,415
                          
                          
                          
                          3,804Total
                          
                          $
                          2,808,197
                          
                          
                          $
                          2,119,745
 
 The
Company was incorporated in the United States and has incurred net operating
losses for income tax purposes for the six months ended June 30, 2010 and 2009,
respectively. The estimated net operating loss carry forwards for United States
income taxes amounted to $3,248,859 and $3,532,086 as of June 30, 2010 and
December 31, 2009, respectively, which may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, from 2025 and
2030. Management believes that the realization of the benefits from these losses
appears uncertain due to the Company’s limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. The valuation allowance at June 30, 2010 was approximately
$1,105,000. The net change in the valuation allowance for the year ended
December 31, 2009 was a decrease of approximately $96,000. Management will
review this valuation allowance periodically and make adjustments as
warranted.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $43.6 million as of June 30, 2010, which was included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
  24
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Note
10 - 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 $91,667 and $38,636 for the six months
ended June 30, 2010 and 2009, respectively, and $42,768 and $19,887 for the
three months ended June 30, 2010 and 2009.
 
 Note
11 - Commitments and Contingencies
 
 In 2008,
the Company entered into agreements to acquire distribution rights to a
multivitamin pack and manufacturing of the multivitamin pack and to self-develop
various types of herbal tea.  The total contractual term of the
exclusive distribution rights is 15 years.  The Company prepaid
approximately $880,000 for ten years of exclusive distribution rights, with the
remaining $440,000 to be fulfilled starting in 2019.
 
 On
January 7, 2010, the Company set up Konzern Company Limited (“Konzern Ltd.”)
which is 100% owned by the Company. Konzern Ltd. was established in China under
PRC law. The registered capital of Konzern Ltd. is approximately $29.3 million
(RMB 200 million) of which $13.5 million has been contributed as of June 30,
2010. To fulfill the requirement of the PRC local administrative affair, the
remaining capital of approximately $15.8 million has to be invested in Konzern
Ltd. within 2 years after the issuance date of the business
license.
 
 The
Company leases its facilities under short-term and long-term, non-cancelable
operating lease agreements expiring through November 2013. The non-cancelable
operating lease agreement states for various lease periods that the Company pays
certain monthly operating expenses applicable to the leased
premises.
 The
future minimum annual lease payments required are as follows:
 
 For the year ended December 31,
                          
                          Amount2010
                          
                          $
                          84,8322011
                          
                          
                          82,0442012
                          
                          
                          10,0992013
                          
                          
                          1,264Thereafter
                          
                          
                          -Total
                          
                          $
                          178,239
 
 For the
six months ended June 30, 2010 and 2009, total rental expense amounted to
$85,613 and $71,788, respectively. For the three months ended June 30, 2010 and
2009, total rental expense amounted to $42,524 and $38,339,
respectively.
 
 Note
12 – Redeemable Convertible Preferred Stock
 
 On
December 31, 2009, the Company entered into a Stock Subscription Agreement for
an equity private placement (the "Subscription Agreement") with an accredited
investor. This agreement became effective on January 29, 2010. According to the
Subscription Agreement, the investor purchased 4,000,000 shares of the Company's
common stock at $3.00 per share and 1,920,000 shares of the Company's preferred
stock at $30.00 per share, for an aggregate purchase price of $69.6 million, of
which $57.6 million is required to be placed in escrow. Each share of Redeemable
Convertible Preferred Stock is initially convertible into ten shares of common
stock and is entitled to receive dividends and have voting rights based on the
number of shares of common stock into which such share is
convertible.
  25
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 The terms
of the Subscription Agreement also required the Company to issue to the investor
additional shares of Common Stock in the event the Company fails to achieve
certain revenue targets in 2010 and 2011.  However, the aggregate of
all such issuances of additional shares will not cause the Investor’s ownership
percentage to be greater than 75%.
 
 In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation (“Liquidation Event”), the holders of shares of redeemable
convertible stock are entitled to be paid out of the assets of the Company
available for distribution ratably with holders of common stock and any class or
series of stock ranking on parity on liquidation with the redeemable convertible
preferred stock, after payment to the holders of any other class or series of
stock ranking senior on liquidation but before any payment to the holders of any
class or series of stock of the Corporation ranking junior on liquidation, an
amount (the “Preference Amount”) equal to ((1.042)a * US$30)
(where a is a fraction, the numerator of which is the number of days passed
since the closing of the Subscription Agreement to the date of determination and
the denominator of which is 365) per share of redeemable convertible preferred
stock then outstanding plus any accrued but unpaid dividends thereon (whether or
not declared).  If upon any such Liquidation Event the remaining
assets of the Corporation available for distribution are insufficient to pay the
full Preference Amount, the holders of shares of redeemable convertible
preferred stock and any class or series of stock ranking on parity on
liquidation with the redeemable convertible preferred Stock shall share ratably
in any distribution of the remaining assets and funds of the
Corporation.
  In April
2010, 266,667 shares of preferred stock were converted to 2,666,667 shares of
common stock, and $8,000,000 was released from the escrow account to strengthen
the working capital and to fund the LifeTech’s facility expansion plan in
2010.
 
 Note
13 - Statutory Reserves
 
 The laws
and regulations of the PRC require that before an enterprise distributes profits
to its partners, it must first satisfy all tax liabilities, provide for losses
in previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserve. The statutory
reserves include the surplus reserve fund and the enterprise fund and represents
restricted retained earnings.
 
 Surplus Reserve
Fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
  26
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders.  The surplus reserve fund is non-distributable other
than during liquidation. It 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, in each
case provided that the remaining reserve balance after such issue is not less
than 25% of the registered capital.
 
 All of
the PRC subsidiaries are subject to the statutory surplus reserve. The required
reserve, 50% of the Company’s total registered capital, approximated to $23.0
million (RMB 161.7 million). As of June 30, 2010, Konzern and LifeTech had
appropriated $4.3 million and $79,000, respectively, as allocations to the
statutory surplus reserve. The other subsidiaries were still in the development
stage and had not allocated any contribution to the statutory surplus reserve.
As of June 30, 2010, the Company needs to contribute an additional $18.7 million
from future earnings to the statutory reserve.
 
 Enterprise
Fund
 
 The
enterprise fund may be used to acquire plant and equipment or to increase the
working capital available to spend on production and operation of the business.
No minimum contribution is required and the Company did not make any
contribution to this fund for the six and three months ended June 30, 2010 and
2009, respectively.
 
 Note
14- Shareholders’ Equity
 
 Stock-Based
Compensation
 
 In
January 2006, the Company created the 2006 Long-Term Incentive Plan (“2006
Plan). This plan authorized the issuance of 1,575,000 shares of the
Company’s common stock.  All grants have been at prices which
approximate the fair market value of the Company’s common stock at the date of
grant.  The contractual term is generally 5 years. On May 27, 2010,
the 2006 Plan was amended where the exercise price on awards granted to newly
elected independent director approximates to the greater of the fair market
value on the date of grant or $3.00.
 
 On June
2, 2009, the Company granted a total of 15,000 stock options to three of its
independent directors. The options become exercisable for 7,500 shares of common
stock six months from the grant date and the remaining 7,500 options, eighteen
months from the grant date.  The grant date fair value was $1.41 per
share. On April 30, 2010, an amendment was provided to extend the exercise
period for awards granted to three directors. The incremental compensation cost
resulting from the modification was approximately $27,000.
 
 On August
25, 2009, the Company granted 240,000 shares of stock options to the Company’s
former chief financial officer (“CFO”). The options become exercisable for
60,000 shares of common stock one year from the grant date, and the remaining
180,000 options will become exercisable on the second anniversary of the grant
date at a rate of 15,000 shares per quarter. The grant date fair value was $1.10
per share. The CFO resigned in December 2009; all 240,000 options were
forfeited in accordance with the employment agreement.
  27
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 On April
30, 2010, the Company granted a total of 15,000 stock options to one of its
independent directors and two of its former independent directors. The options
become exercisable for 7,500 shares of common stock six months from the grant
date and the remaining 7,500 options, eighteen months from the grant date. The
grant date fair value was $2.40 per share.
 
 On May
27, 2010, the Company granted a total of 150,000 stock options to three of its
new independent directors. The options become exercisable for 75,000 shares of
common stock six months from the grant date and the remaining 75,000 options,
eighteen months from the grant date. The grate date fair value was $1.90 per
share.
 
 The fair
value of the options was estimated on the date of grant using a Black-Scholes
Option Pricing model using the following assumptions:
 
 2010
                      
                      
                      2009Annual
      dividend yield
                      
                      
                      -
                      
                      
                      
                      -Expected
      life (years)
                      
                      
                      5.00
                      
                      
                      
                      4.00
      - 5.00Risk-free
      interest rate
                      
                      
                      2.18%
      - 2.52
                      %
                      
                      
                      1.52%
      - 2.02
                      %Expected
      volatility
                      
                      
                      87.6%
      - 88.0
                      %
                      
                      
                      88.0%
      - 90.0
                      %
 
 The
Company expensed $75,904 and $9,622 related to the stock options and warrants
for the six months ended June 30, 2010 and 2009, respectively, and $72,990 and
$8,373 for the three months ended June 30, 2010 and 2009,
respectively.
 
 Summary of option
activity:
 
 Outstanding
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Average
                      Remaining
                      Contractual
                      Term
                      (Year)
                    
                    
                    Exercisable
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Intrinsic Value12/31/2008
                    
                    
                    380,000
                    
                    
                    $
                    1.35
                    
                    
                    
                    
                    
                    
                    372,500
                    
                    
                    $
                    1.34
                    
                    
                    $
                    -Granted
                    
                    
                    255,000
                    
                    
                    
                    1.67
                    
                    
                    
                    
                    
                    
                    15,000
                    
                    
                    
                    1.81Exercised
                    
                    
                    (40,000
                    )
                    
                    
                    1.25
                    
                    
                    
                    
                    
                    
                    (40,000
                    )
                    
                    
                    1.25
                    
                    
                    
                    29,825Forfeited
                    
                    
                    (240,000
                    )
                    
                    
                    1.70
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
      -
                    
                    
                    
                    -12/31/2009
                    
                    
                    355,000
                    
                    
                    
                    1.39
                    
                    
                    
                    
                    
                    
                    347,500
                    
                    
                    
                    1.38
                    
                    
                    
                    1,033,050Granted
                    
                    
                    165,000
                    
                    
                    
                    3.04
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -6/30/2010
      (unaudited)
                    
                    
                    520,000
                    
                    
                    $
                    1.91
                    
                    
                    
                    2.46
                    
                    
                    
                    347,500
                    
                    
                    $
                    1.38
                    
                    
                    $
                    372,550Exercisable
      at 6/30/2010
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.24
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    371,625
  28
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 On April
30, 2010, the Company agreed to issue to 120,000 shares of common stock to its
CFO during the term of a-four-year employment agreement, which would vest in
four equal installments of 30,000 shares on the date after each anniversary of
the employment. The trading value of the common stock on April 30, 2010 was
$3.40 per share for a total value of $408,000. These shares were not vested as
of June 30, 2010. Compensation expense is recognized on a straight-line basis
over the vesting period. Total compensation expense of $17,000 was charged to
general and administrative expenses for the six and three months ended June 30,
2010.
 
 Warrants
 
 Contemporaneously
with the reverse acquisition, the Company entered into a Preferred Stock
Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which the
Company issued and sold 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.  On April 23, 2007, the Company and
the holders of the warrants executed a Waiver and Agreement that reduced the
conversion price for the preferred stock and the exercise price of the warrants
by 3% from the original conversion amounts.  The warrants have a term
of five years and are exercisable by the holder at any time within the
term.
 
 Effective
January 1, 2009, the Company adopted the provisions of an accounting
standard regarding whether an instrument (or embedded feature) is indexed to an
entity’s own stock.  This accounting standard specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  It provides a new two-step model to
be applied in determining whether a financial instrument or an embedded feature
is indexed to an issuer’s own stock and thus able to qualify for the scope
exception within the standards.
 
 As a
result of adoption, 3,348,686 warrants previously treated as equity pursuant to
the derivative treatment exemption are no longer afforded equity treatment
because the strike price of the warrants is denominated in US dollars, a
currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.
 
 These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
Option Pricing Model using the following assumptions:
 
 June 30, 2010
                            
                            
                            December 31, 2009(Unaudited)Annual
      dividend yield
                            
                            
                            -
                            
                            
                            
                            -Expected
      life (years)
                            
                            
                            0.61
                            
                            
                            
                            1.10Risk-free
      interest rate
                            
                            
                            0.22
                            %
                            
                            
                            0.54
                            %Expected
      volatility
                            
                            
                            61
                            %
                            
                            
                            95
                            %
  29
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Expected
volatility is based on historical volatility. Historical volatility was computed
using daily pricing observations for recent periods that correspond to the term
of the warrants. We believe this method produces an estimate that is
representative of our expectations of future volatility over the expected term
of these warrants. We have no reason to believe future volatility over the
expected remaining life of these warrants is likely to differ materially from
historical volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the warrants.
 
 For the
six months ended on June 30, 2010, several investors exercised of 440,475 Series
B warrants for cash, for an aggregate price of $1,070,354.  The
Company valued the conversion on the exercise date and recorded an aggregate of
$37,482 income from changes in fair value of warrant liabilities.
 
 For the
six months ended on June 30, 2010, several investors performed cashless
exercises of 1,026,474 Series B warrants, which were converted into 486,179
shares of common stock.  The Company valued the conversion on the
exercise date and recorded an aggregate of $299,485 losses from changes in fair
value of warrant liabilities.
 
 For the
six months ended on June 30, 2010, a vendor performed a cashless exercise of
70,000 Series C warrants, which were converted in 53,380 shares of common
stock.
 
 Summary of
warrant activity:
 
 Outstanding
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Average
                        Remaining
                        Contractual
                        Term (Years)December
      31, 2008
                      
                      
                      3,418,686
                      
                      
                      $
                      2.35
                      
                      
                      
                      2.17Granted
                      
                      
                      70,000Exercised
                      
                      
                      (485,422
                      )Forfeited
                      
                      
                      -December
      31, 2009
                      
                      
                      3,003,264
                      
                      
                      $
                      2.38
                      
                      
                      
                      1.15Granted
                      
                      
                      -Exercised
                      
                      
                      (1,536,949
                      )Forfeited
                      
                      
                      -June
      30, 2010 (Unaudited)
                      
                      
                      1,466,315
                      
                      
                      $
                      2.41
                      
                      
                      
                      0.64
  30
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Note
15 – Earnings (Loss) Per Share
 
 The
following is a reconciliation of the basic and diluted earnings per share
computations:
 
 For the six months ended
                        June 30,
                      
                      
                      For the three months ended
                        June 30,For the six months ended
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      2009(Unaudited)
                      
                      
                      (Unaudited)Net
      income
                      
                      $
                      5,901,130
                      
                      
                      $
                      592,078
                      
                      
                      $
                      4,103,325
                      
                      
                      $
                      41,996Less:
      Deemed preferred stock dividend
                      
                      
                      (6,144,000
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      income (loss) available to common shareholders
                      
                      $
                      (242,870
                      )
                      
                      $
                      592,078
                      
                      
                      $
                      4,103,325
                      
                      
                      $
                      41,996Shares
      of common stock and common stock equivalents:Weighted
      average common shares used in basic computation
                      
                      
                      20,419,738
                      
                      
                      
                      15,228,966
                      
                      
                      
                      21,885,645
                      
                      
                      
                      15,231,214Diluted
      effect of convertible preferred stock, stock options and
      warrants
                      
                      
                      -
                      
                      
                      
                      19,212
                      
                      
                      
                      18,107,058
                      
                      
                      
                      124,446Weighted
      average common shares used in diluted computation
                      
                      
                      20,419,738
                      
                      
                      
                      15,248,178
                      
                      
                      
                      39,992,703
                      
                      
                      
                      15,355,660Earnings
      per share:Basic
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.19
                      
                      
                      $
                      0.003Diluted
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.10
                      
                      
                      $
                      0.003
 
 For the
six months ended June 30, 2010, all options and warrants outstanding were
excluded from the earnings per share calculation due to net loss available to
common shareholders. Therefore, there was no dilutive effect. For the six months
ended June 30, 2009, 3,418,686 warrants whose exercise price was between $1.70
to $2.43 and 15,000 options whose exercise price was $3.00 were excluded from
the calculation because of their anti-dilutive nature.
 
 For the
three months ended June 30, 2010, 70,000 warrants whose exercise price was $3.86
and 180,000 options whose exercise price was between $3.00 to $3.40 were
excluded from the earnings per share calculation because of their anti-dilutive
nature. For the three months ended June 30, 2009, 3,039,738 warrants whose
exercise price was between $2.26 to $2.43 and 22,500 options whose exercise
price is between $2.01 and $3.00 were excluded from the calculation because of
their anti-dilutive nature.
  Note
16 – Business Combination
  In 2009,
Konzern entered into an Equity Ownership Transfer Agreement with Sinoform
Limited (“Sinoform”) to acquire 100% of Sinoform’s equity interests in
LifeTech.  LifeTech was founded in 1992 and is a developer and
manufacturer of pharmaceutical products with a focus on vascular medicines,
anti-inflammatory medicines, women’s health and other general health traditional
Chinese medicines.  Concurrently, Konzern entered into a separate agreement
with Mcwalts Investment Holdings Limited (“Mcwalts”) to acquire 100% of Mcwalts
ownership in LifeTech Technology.  LifeTech Technology was in the
development stage and had no operations as of December 31,
2009.  LifeTech and LifeTech Technology were under common control and
ownership of Mcwalts.  The two acquisitions were considered as one
acquisition and are referred to as the “Acquisition” below.  Konzern
gained control of LifeTech and LifeTech Technology on October 26,
2009.
  31
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 The
purchase price of the Acquisition included cash payments of approximately $8.2
million (RMB 55,775,000). In connection with the acquisition, an independent
third party appraiser which is a certified public appraiser under the laws of
PRC was engaged by Konzern to perform an appraisal of certain of the assets of
entities to be acquired.  The assets evaluated included fixed assets
(equipment and buildings) and intangible assets (land-use rights and patents).
The appraiser conducted an on-site visit, inspected each item, conducted market
research and investigation, followed some asset evaluation policies and
regulations issued by the Chinese government, and provided an evaluation report.
The Company’s management also performed an internal evaluation; taking into
account of the PRC certified public appraiser’s evaluation report, to determine
the fair value of these assets reported in the financial statements. Fair value
of other assets acquired and liabilities assumed approximated their book
value.  Net assets acquired after the fair value measurement exceeded
the purchase consideration.  Management reviewed the procedures and
methodologies used to measure the fair value of fixed assets and intangibles and
determined to reduce the excess to the value of intangible assets.
 
 The
following table summarizes the net book value and the fair value of the assets
acquired and liabilities assumed at the date of acquisition:
 
 Fair value
                      
                      
                      Book valueCash
      and cash equivalent
                      
                      $
                      165,945
                      
                      
                      $
                      165,945Other
      current assets
                      
                      
                      2,271,310
                      
                      
                      
                      2,271,310Buildings
      and equipment
                      
                      
                      5,778,383
                      
                      
                      
                      4,155,122Intangible
      assets
                      
                      
                      15,278,544
                      
                      
                      
                      1,474,346Total
      assets
                      
                      
                      23,494,182
                      
                      
                      
                      8,066,723Total
      liabilities
                      
                      
                      (15,306,412
                      )
                      
                      
                      (15,306,412
                      )Net
      Assets
                      
                      $
                      8,187,770
                      
                      
                      $
                      (7,239,689
                      )
 
 For the
six months ended June 30, 2010, LifeTech and LifeTech Technology’s revenue and
net income included in the Company’s consolidated income statement was
approximately $2,843,000 and $82,000, respectively. For the three months ended
June 30, 2010, LifeTech and LifeTech Technology’s revenue and net income
included in the Company’s consolidated income statement was approximately
$2,003,000 and $355,000, respectively.
 
 Pro
Forma
 
 The
following unaudited pro forma condensed income statement for the six and three
months ended June 30, 2010 and 2009 were prepared under generally accepted
accounting principles, as if the acquisition of LifeTech and LifeTech Technology
had occurred the first day of the respective periods. The pro forma information
may not be indicative of the results that actually would have occurred if the
acquisition had been in effect from and on the date indicated.
  32
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 Six months ended
                      
                      
                      Three months endedJune 30, 2009
                      
                      
                      June 30, 2009(Unaudited)
                      
                      
                      (Unaudited)Sales
                      
                      $
                      27,625,188
                      
                      
                      $
                      16,502,643Cost
      of sales
                      
                      
                      20,054,762
                      
                      
                      
                      12,199,972Gross
      profits
                      
                      
                      7,570,426
                      
                      
                      
                      4,302,671Operating
      expenses
                      
                      
                      3,373,384
                      
                      
                      
                      1,978,450Income
      from operations
                      
                      $
                      4,197,042
                      
                      
                      $
                      2,324,221Other
      Income (expense) net
                      
                      
                      (1,997,818
                      )
                      
                      
                      (924,983
                      )Income
      tax
                      
                      
                      (1,115,500
                      )
                      
                      
                      (570,014
                      )Net
      income before noncontrolling interest
                      
                      $
                      1,083,724
                      
                      
                      $
                      829,224Net
      income attributable to controlling interest
                      
                      $
                      1,238,181
                      
                      
                      $
                      902,541
  Note
17 – Segment Information
 
 Based on
its internal reporting and management structure, the Company has determined that
it has two reportable segments: LifeTech and Konzern, which includes all the
other subsidiaries except LifeTech. LifeTech derives its revenue exclusively
from proprietary products and Konzern derives its revenue primarily from
distribution products, but it also derives its revenue from proprietary products
and medical technology.
 
 The
Company evaluates segment performance and allocates resources based on segment
gross profit and segment operating income. The table below illustrates analysis
of reportable segments (management information):
 
 For the
six months ended June 30, 2010 (a):
 
 LifeTech
                        
                        
                        Konzern
                        
                        
                        Elimination
                        
                        
                        Total(Unaudited)Revenues
                        
                        
                        2,843,182
                        
                        
                        
                        24,980,919
                        
                        
                        
                        (61,725
                        )
                        
                        
                        27,762,376Gross
      Profit
                        
                        
                        1,240,380
                        
                        
                        
                        8,114,450
                        
                        
                        
                        -
                        
                        
                        
                        9,354,830Operating
      income (loss)
                        
                        
                        230,618
                        
                        
                        
                        4,804,376
                        
                        
                        
                        -
                        
                        
                        
                        5,034,994Capital
      expenditures
                        
                        
                        158,148
                        
                        
                        
                        13,908
                        
                        
                        
                        -
                        
                        
                        
                        172,056
  33
  CHINA
MEDICINE CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2010
 (Unaudited)
 
 For the
three months ended June 30, 2010 (a):
 
 LifeTech
                        
                        
                        Konzern
                        
                        
                        Elimination
                        
                        
                        Total(Unaudited)Revenues
                        
                        
                        2,002,637
                        
                        
                        
                        15,249,175
                        
                        
                        
                        (61,725
                        )
                        
                        
                        17,190,087Gross
      Profit
                        
                        
                        950,635
                        
                        
                        
                        5,156,807
                        
                        
                        
                        -
                        
                        
                        
                        6,107,442Operating
      income (loss)
                        
                        
                        43,188
                        
                        
                        
                        3,745,478
                        
                        
                        
                        -
                        
                        
                        
                        3,778,666Capital
      expenditures
                        
                        
                        96,296
                        
                        
                        
                        11,743
                        
                        
                        
                        -
                        
                        
                        
                        108,039
 
 (a)
                Since
      the LifeTech was acquired in October 2009, there is no comparable
      operating information for the six and three months ended June 30,
      2009.
 
 Total AssetsLifeTech
                                              
                                              
                                              Konzern
                                              
                                              
                                              Elimination
                                              
                                              
                                              TotalAs
      of June 30, 2010 (Unaudited)
                                              
                                              
                                              26,805,414
                                              
                                              
                                              
                                              194,739,414
                                              
                                              
                                              
                                              (86,509,193
                                              )
                                              
                                              
                                              135,065,635As
      of December 31, 2010
                                              
                                              
                                              25,385,141
                                              
                                              
                                              
                                              114,721,802
                                              
                                              
                                              
                                              (73,262,461
                                              )
                                              
                                              
                                              66,844,482
  Note
18 – Subsequent Events
  Conversion of Preferred
Stock
 
 On July
7, 2010, $2 million of the escrowed proceeds was released pursuant to the stock
Subscription Agreement.  On July 15, 2010, 666,667 shares of common
stock were issued upon the conversion of 66,667 shares of redeemable convertible
preferred stock.
 
 Stock Repurchase
Plan
 
 On June
30, 2010, the Company's board of directors approved a stock repurchase
program for up to $2.0 million. The program is valid through July 2011 and
allows the Company to repurchase shares of the Company’s common stock from time
to time on the open market or in privately negotiated transactions. As of August
10, 2010, the Company had repurchased 73,062 shares with the purchase cost
totaling approximately $192,282.
  34




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




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, which 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.





The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the financial statements and accompanying notes and the other
financial information appearing in Part I, Item 1 and elsewhere in this report,
and the financial
statements and notes in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.





Overview





China
Medicine Corporation (“we,” “us” or the “Company”), operating through Guangzhou
Konzern Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized
under the laws of the People’s Republic of China (the “PRC” or “China”), is a
distributor of approximately 1,243 pharmaceutical products in China. Through
Guangzhou LifeTech Pharmaceutical Co., Ltd. (“LifeTech”), a wholly owned
subsidiary of the Company, we are a manufacturer of Traditional Chinese
Medicines and lyophilized powder of injection in China. Through Guangzhou Co-Win
Bioengineering Co., Ltd. (“Co-Win”), a 70%-owned subsidiary of Konzern organized
under the laws of PRC, the Company is a developer and manufacturer of Aflatoxin
Detoxifizyme (“rADTZ”).





Our
revenues are derived from three sources: the resale of pharmaceutical products
and medicine devices purchased from suppliers (“distribution products”); the
manufacture, distribution and sale of the Company’s products under its own brand
names (“proprietary products”) and the royalty or techniques income derived from
customers for research and development of new or improved drug formulas and
production techniques (“medical technology”).




Our
distribution products include prescription and over-the-counter drugs, Chinese
herbs, Traditional Chinese Medicines (“TCM”) made from Chinese herbs,
nutritional supplements, dietary supplements and medical instruments. The most
significant of our distribution products is Iopamidol Injection, a prescription
medicine that is used for angiography & CT scanning.





Our
proprietary products consist primarily of products acquired through our
acquisition of LifeTech. The most significant products include Shuangdan
Capsules, a prescription Traditional Chinese Medicine that is used for the
treatment of thoracic obstruction and cardialgia, and Hoerhuan Capsules, a
prescription Traditional Chinese Medicine that is used to treat upper
respiratory infection, acute laryngopharyngitis, acute tonsillitis and acute
enterogastritis.


35




Our
medical technology revenues typically consist of sales of technologies that are
either self-developed or initially acquired in an undeveloped state from other
companies and that are then sold to drug manufacturers after we have made
improvements to the technologies.





Following
the completion of the LifeTech acquisition in December 2009, we have
transitioned from a pharmaceutical distributor to a vertically-integrated
pharmaceutical enterprise that combines nationwide pharmaceutical distribution
with significant research and development and manufacturing capabilities. The
Company would spend more resources and effort on the LifeTech’s products in the
future. The addition of LifeTech’s product portfolio has enabled us to expand
our portfolio of proprietary products, which typically have higher gross margins
than our distribution products. As we continue to reposition and integrate
LifeTech into our operations, we expect significant gross margin improvement
through the increased sale of proprietary products. We also expect further gross
margin improvement by strategically focusing more on the sale of products with
exclusive national and regional exclusive distribution rights and reducing our
sales of lower margin generic distribution products.





During
the six months ended June 30, 2010, our revenues were up approximately 10.3% as
compared to the corresponding period in the prior year. Our revenues during the
period in review was affected by (i) the aforementioned strategic reduction in
the sale of generic distribution products; (ii) the limited production capacity
of LifeTech; (iii) the re-positioning of LifeTech’s products in the market in
terms of pricing and marketing strategy and (iv) the final integration of
LifeTech with our existing businesses. In an effort to alleviate our
manufacturing capacity constraints, the board of directors has approved the
capacity expansion of LifeTech’s manufacturing facilities and construction is
expected to be completed in the third quarter of 2011.





Current
Group Structure





On June
30, 2010, the group structure is as follows:








36





Results
of Operations





The
following table sets forth our statements of operations for the three months and
the six months ended June 30, 2010 and 2009, in U.S. dollars:


Three Months Ended June 30,
                            
                            
                            Six Months Ended June 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Revenue
                            
                            $
                            17,190,087
                            
                            
                            $
                            15,055,093
                            
                            
                            $
                            27,762,376
                            
                            
                            $
                            25,153,483Costs
      of goods sold
                            
                            
                            11,082,645
                            
                            
                            
                            11,525,866
                            
                            
                            
                            18,407,546
                            
                            
                            
                            18,844,628Gross
      profit
                            
                            
                            6,107,442
                            
                            
                            
                            3,529,227
                            
                            
                            
                            9,354,830
                            
                            
                            
                            6,308,855R&D
      expenses
                            
                            
                            344,517
                            
                            
                            
                            432,764
                            
                            
                            
                            708,924
                            
                            
                            
                            763,506Selling,
      general and administrative expenses
                            
                            
                            1,974,259
                            
                            
                            
                            1,318,152
                            
                            
                            
                            3,610,912
                            
                            
                            
                            1,999,474Income
      from operations
                            
                            
                            3,788,666
                            
                            
                            
                            1,778,311
                            
                            
                            
                            5,034,994
                            
                            
                            
                            3,545,875Other
      income (expense), net
                            
                            
                            (46,257
                            )
                            
                            
                            (26,400
                            )
                            
                            
                            (166,960
                            )
                            
                            
                            (20,847
                            )Change
      in fair value of warrants liabilities
                            
                            
                            1,371,780
                            
                            
                            
                            (1,213,218
                            )
                            
                            
                            2,481,474
                            
                            
                            
                            (1,971,907
                            )Income
      before income taxes and noncontrolling interest
                            
                            
                            5,114,189
                            
                            
                            
                            538,693
                            
                            
                            
                            7,349,508
                            
                            
                            
                            1,553,121Provision
      for income taxes
                            
                            
                            1,089,308
                            
                            
                            
                            570,014
                            
                            
                            
                            1,602,263
                            
                            
                            
                            1,115,500Net
      income (loss) before noncontrolling interest
                            
                            
                            4,024,881
                            
                            
                            
                            (31,321
                            )
                            
                            
                            5,747,245
                            
                            
                            
                            437,621Add:
      net income attributable to noncontrolling interest
                            
                            
                            78,444
                            
                            
                            
                            73,317
                            
                            
                            
                            153,885
                            
                            
                            
                            154,457Consolidated
      net income attributable to CHINA MEDICINE CORPORATION
                            
                            $
                            4,103,325
                            
                            
                            $
                            41,996
                            
                            
                            $
                            5,901,130
                            
                            
                            $
                            592,078





THE
THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2009





Revenues




Total
revenues for the three months ended June 30, 2010 was $17,190,087, an increase
of $2,134,994, or 14.2%, from total revenues of $15,055,093 for the three months
ended June 30, 2009.





Our
revenues are derived from the sale of distribution products, proprietary
products and medical technology. The following table sets forth the revenues and
percentage of revenues derived from each of these types of
products.




Three Months Ended June 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  $ Increase
                                  
                                  
                                  % IncreaseDistribution
      products
                                  
                                  $
                                  15,153,848
                                  
                                  
                                  
                                  88.2
                                  %
                                  
                                  $
                                  14,553,440
                                  
                                  
                                  
                                  96.7
                                  %
                                  
                                  $
                                  600,408
                                  
                                  
                                  
                                  4.1
                                  %Proprietary
      products
                                  
                                  
                                  2,036,239
                                  
                                  
                                  
                                  11.8
                                  %
                                  
                                  
                                  501,653
                                  
                                  
                                  
                                  3.3
                                  %
                                  
                                  
                                  1,534,586
                                  
                                  
                                  
                                  305.9
                                  %Medical
      technology
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      revenues
                                  
                                  $
                                  17,190,087
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  15,055,093
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  2,134,994
                                  
                                  
                                  
                                  14.2
                                  %





Distribution
products. Distribution products revenues for the three months ended June 30,
2010 were $15,153,848, an increase of $600,408, or 4.1%, from total revenues of
$14,553,440 for the three months ended June 30, 2009. The small increase was
primarily due to the change of the distribution products portfolio, we focused
on the high profit margin products and reduced certain low profit margin
products. The most significant of these products is Iopamidol Injection, a
prescription medicine that is used for angiography and CT scanning. For the
three months ended June 30, 2010 and 2009, our total revenues from sale of this
product amounted to $3,967,639 and $2,505,158, respectively, which were 23.1%
and 16.6% of our total revenues, respectively. Our top 5 distribution products
generated revenues of $7,197,200 or 41.9% of our total revenues for the three
months ended June 30, 2010.


37




Our
distribution products revenues can be further categorized as
follows:


Three Months Ended June 30,2010
                      
                      
                      2009Western
      prescription products
                      
                      
                      10,089,061
                      
                      
                      
                      66.6
                      %
                      
                      
                      8,831,869
                      
                      
                      
                      60.7
                      %Western
      Over-the-Counter products
                      
                      
                      1,328,984
                      
                      
                      
                      8.8
                      %
                      
                      
                      1,817,777
                      
                      
                      
                      12.5
                      %TCM
      prescription products
                      
                      
                      1,962,024
                      
                      
                      
                      13.0
                      %
                      
                      
                      1,808,275
                      
                      
                      
                      12.4
                      %TCM
      Over-the-Counter products
                      
                      
                      874,709
                      
                      
                      
                      5.8
                      %
                      
                      
                      1,628,241
                      
                      
                      
                      11.2
                      %Other
      products
                      
                      
                      899,070
                      
                      
                      
                      5.9
                      %
                      
                      
                      467,278
                      
                      
                      
                      3.2
                      %Total
      distribution products
                      
                      
                      15,153,848
                      
                      
                      
                      100.0
                      %
                      
                      
                      14,553,440
                      
                      
                      
                      100.0
                      %





Proprietary
products. Proprietary products revenues for the three months ended June 30, 2010
were $2,036,239, an increase of $1,534,586, or 305.9%, from total revenues of
$501,653 for the three months ended June 30, 2009. The increase was primarily
due to the additional revenues from LifeTech’s products, and there was no
comparable revenue in the corresponding period in prior year.




Our
Proprietary products revenues can be further categorized as
follows:


Three Months Ended June 30,2010
                    
                    
                    2009Western
      prescription products
                    
                    
                    96,080
                    
                    
                    
                    4.7
                    %
                    
                    
                    475,108
                    
                    
                    
                    94.7
                    %Western
      Over-the-Counter products
                    
                    
                    -
                    
                    
                    
                    -
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    %TCM
      prescription products
                    
                    
                    1,644,093
                    
                    
                    
                    80.7
                    %
                    
                    
                    2,093
                    
                    
                    
                    0.4
                    %TCM
      Over-the-Counter products
                    
                    
                    278,244
                    
                    
                    
                    13.7
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    %Other
      products
                    
                    
                    17,822
                    
                    
                    
                    0.9
                    %
                    
                    
                    24,452
                    
                    
                    
                    4.9
                    %Total
      proprietary products
                    
                    
                    2,036,239
                    
                    
                    
                    100.0
                    %
                    
                    
                    501,653
                    
                    
                    
                    100.0
                    %





Medical
technology. There was no medical technology revenue for the three months ended
June 30, 2010 and 2009.





Cost
of Revenues and Gross Profit




Three Months Ended June 302010
                      
                      
                      2009
                      
                      
                      $ Increase
                      
                      
                      % IncreaseDistribution
      productsRevenues
                      
                      $
                      15,153,848
                      
                      
                      $
                      14,553,440
                      
                      
                      $
                      600,408
                      
                      
                      
                      4.1
                      %Cost
      of revenues
                      
                      
                      10,022,502
                      
                      
                      
                      11,154,440
                      
                      
                      
                      (1,131,938
                      )
                      
                      
                      (10.1
                      )%Gross
      profit
                      
                      $
                      5,131,346
                      
                      
                      $
                      3,399,000
                      
                      
                      $
                      1,732,345
                      
                      
                      
                      51.0
                      %Gross
      margin %
                      
                      
                      33.9
                      %
                      
                      
                      23.4
                      %Proprietary
      productsRevenues
                      
                      $
                      2,036,239
                      
                      
                      $
                      501,653
                      
                      
                      $
                      1,534,586
                      
                      
                      
                      305.9
                      %Cost
      of revenues
                      
                      
                      1,060,143
                      
                      
                      
                      371,426
                      
                      
                      
                      688,717
                      
                      
                      
                      185.4
                      %Gross
      profit
                      
                      $
                      976,096
                      
                      
                      $
                      130,226
                      
                      
                      $
                      845,870
                      
                      
                      
                      649.5
                      %Gross
      margin %
                      
                      
                      47.9
                      %
                      
                      
                      26.0
                      %TotalRevenues
                      
                      $
                      17,190,087
                      
                      
                      $
                      15,055,093
                      
                      
                      $
                      2,134,994
                      
                      
                      
                      14.2
                      %Cost
      of revenues
                      
                      
                      11,082,645
                      
                      
                      
                      11,525,866
                      
                      
                      
                      (443,221
                      )
                      
                      
                      (3.8
                      )%Gross
      profit
                      
                      $
                      6,107,442
                      
                      
                      $
                      3,529,227
                      
                      
                      $
                      2,578,215
                      
                      
                      
                      73.1
                      %Gross
      margin %
                      
                      
                      35.5
                      %
                      
                      
                      23.4
                      %




38




Gross
profit for distribution products for the three months ended June 30, 2010 was
$5,131,346, an increase of $1,732,345, or 51.0%, from $3,399,000 for the three
months ended June 30, 2009. Our gross margin of distribution products for the
three months ended June 30, 2010 was 33.9%, as compared with 23.4% for the three
months ended June 30, 2009. This increase was due to the increase of the higher
gross margin products.





Gross
profit for proprietary products for the three months ended June 30, 2010 was
$976,096, an increase of $845,870, or 649.5%, from $130,226 for the three months
ended June 30, 2009. Our gross margin of proprietary products for the three
months ended June 30, 2010 was 47.9%, as compared with 26.0% for the three
months ended June 30, 2009. This increase was due to the revenues of the higher
gross margin of LifeTech’s products.





Research
and Development Expenses





Research
and development expenses were $344,517 for the three months ended June 30, 2010,
as compared with $432,764 for the three months ended June 30, 2009. Research and development
expenses consisted primarily of the depreciation of $148,810 and $147,508 of
Co-Win, for the testing and technology optimization of rADTZ for the three
months ended June 30, 2010 and 2009 respectively.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $1,974,259 for the three months ended
June 30, 2010, an increase of $656,107 from $1,318,152 for the three months
ended June 30, 2009. The increase was mainly due to: (i) combined headcounts of
LifeTech upon acquisition and hiring of new officers, (ii) allowance for the
advances to a supplier of Konzern,, (iii) amortization and depreciation of
LifeTech, especially revaluation upon acquisition, (iv) office fees for
establishing the group, and (v) freight expenses for the sales of the
goods.




Other
Income (Expense), net





Other
expense primarily consists of interest expense on the short-term loans,
including interest expense of $77,663 for Konzern’s loans and the interest
revenue of $31,215 from the escrow fund.




Due to
the change in the market price of our common stock from $3.44 on March 31, 2010
to $2.42 on June, 2010, there was a fair value gain on warrant liabilities of
$1,371,780 for the three month ended June 30, 2010.




Income
Taxes





The
provision for income taxes was $1,089,308 for the three months ended June 30,
2010, compared with $570,014 for the three months ended June 30, 2009. The
income tax rate is 25% based on the tax law of PRC.





Net
Income Attributable to China Medicine Corporation





Net
income attributable to China Medicine Corporation for the three months ended
June 30, 2010 was $4,103,325, an increase of $4,061,329, or 9,670.8% from
$41,996 for the three months ended June 30, 2010. The increase was mainly due to
the increase of the income from operations and the change in the fair value of
warrant liabilities.





We use
non-GAAP adjusted net earnings to measure the performance of our business
internally by excluding non-cash charges related to the warrants. We believe
that the non-GAAP adjusted financial measure allows us to focus on managing
business operating performance because the measure reflects our essential
operating activities and provides a consistent method of comparison to
historical periods. We believe that providing the non-GAAP measures that we use
internally is useful to investors for a number of reasons. The non-GAAP measure
provides a consistent basis for investors to understand our financial
performance in comparison to historical periods without variation of
non-recurring items and non-operating related charges. In addition, it allows
investors to evaluate our performance using the same methodology and information
as that used by our management. Non-GAAP measures are subject to inherent
limitations because they do not include all of the expenses included under GAAP
and because they involve the exercise of judgment regarding which charges are
excluded from the non-GAAP financial measure. However, we compensate for these
limitations by providing the relevant disclosure of the items
excluded.


39




The
following table provides a non-GAAP financial measure and a reconciliation of
that non-GAAP measure to the GAAP net income:





Three Months EndedJune 30,2010
                          
                          
                          2009Net
      Income available to common shareholders
                          
                          $
                          4,103,325
                          
                          
                          $
                          41,996Change
      in fair value of warrant liabilities
                          
                          
                          (1,371,780
                          )
                          
                          
                          1,213,218Adjusted
      Net Income
                          
                          $
                          2,731,545
                          
                          
                          $
                          1,255,214Diluted
      EPS
                          
                          $
                          0.10
                          
                          
                          $
                          0.00Add
      back (Deduct):Change
      in fair value of warrant liabilities
                          
                          
                          (0.03
                          )
                          
                          
                          0.08Adjusted
      EPS
                          
                          $
                          0.07
                          
                          
                          $
                          0.08Diluted
      weighted average common shares outstanding
                          
                          
                          39,992,703
                          
                          
                          
                          15,355,660





Excluding
this non-cash expenses adjusted net income of the three months ended June 30,
2010 was approximately $2.7 million, or $0.07 per fully diluted share. Earnings
per share was calculated using a diluted weighted average common share count of
40.0 million shares for the three months ended June 30, 2010 and 15.4 million
shares for the three months ended June 30, 2009.





THE
SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2009





Revenues




Total
revenues for the six months ended June 30, 2010 was $27,762,376, an increase of
$2,608,893, or 10.4%, from total revenues of $25,153,483 for the six months
ended June 30, 2009.





Our
revenues are derived from the sale of distribution products, proprietary
products and medical technology. The following table sets forth the revenues and
percentage of revenues derived from each of these types of
products.




Six months ended June 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      $ Increase
                                      
                                      
                                      %  IncreaseDistribution
      products
                                      
                                      $
                                      24,708,356
                                      
                                      
                                      
                                      89.0
                                      %
                                      
                                      $
                                      24,199,863
                                      
                                      
                                      
                                      96.2
                                      %
                                      
                                      $
                                      508,493
                                      
                                      
                                      
                                      2.1
                                      %Proprietary
      products
                                      
                                      
                                      2,904,308
                                      
                                      
                                      
                                      10.5
                                      %
                                      
                                      
                                      953,620
                                      
                                      
                                      
                                      3.8
                                      %
                                      
                                      
                                      1,950,688
                                      
                                      
                                      
                                      204.6
                                      %Medical
      technology
                                      
                                      
                                      149,712
                                      
                                      
                                      
                                      0.5
                                      %
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      %
                                      
                                      
                                      149,712
                                      
                                      
                                      
                                      100.0
                                      %Total
      revenues
                                      
                                      $
                                      27,762,376
                                      
                                      
                                      
                                      100.0
                                      %
                                      
                                      $
                                      25,153,483
                                      
                                      
                                      
                                      100.0
                                      %
                                      
                                      $
                                      2,608,893
                                      
                                      
                                      
                                      10.4
                                      %




Distribution
products. Distribution products revenues for the six months ended June 30, 2010
were $24,708,356, an increase of $508,493, or 2.1%, from total revenues of
$24,199,863 for the six months ended June 30, 2009. The most significant of
these products is Iopamidol Injection, a prescription medicine that is used for
angiography and CT scanning. For the six months ended June 30, 2010 and 2009,
our total revenues from sale of this product amounted to $6,758,909 and
$4,193,092, respectively, which were 24.4% and 16.7% of our total revenues,
respectively. Our top 5 distribution products generated revenues of $12,525,761
or 45.1% of our total revenues.


40





Our
distribution products revenues can be further categorized as
follows:




Six Months Ended June 30,2010
                
                
                2009Western
      prescription products
                
                $
                17,744,453
                
                
                
                71.8
                %
                
                $
                13,695,554
                
                
                
                56.6
                %Western
      Over-the-Counter products
                
                
                1,689,196
                
                
                
                6.8
                %
                
                
                2,180,711
                
                
                
                9.0
                %TCM
      prescription products
                
                
                2,999,286
                
                
                
                12.1
                %
                
                
                4,330,201
                
                
                
                17.9
                %TCM
      Over-the-Counter products
                
                
                1,040,711
                
                
                
                4.2
                %
                
                
                3,429,207
                
                
                
                14.2
                %Other
      products
                
                
                1,234,710
                
                
                
                5.0
                %
                
                
                564,190
                
                
                
                2.3
                %Total
      distribution products
                
                $
                24,708,356
                
                
                
                100.0
                %
                
                $
                24,199,863
                
                
                
                100.0
                %





Proprietary
products. Proprietary products revenues for the six months ended June 30, 2010
were $2,904,308, an increase of $1,950,688, or 204.6%, from total revenues of
$953,620 for the six months ended June 30, 2009. The increase was primarily due
to the additional revenues from LifeTech’s products, and there was no comparable
revenue in the corresponding period in prior year.





Our
proprietary products revenues can be further categorized as
follows:


Six Months Ended June 30,2010
                  
                  
                  2009Western
      prescription products
                  
                  $
                  204,265
                  
                  
                  
                  7.0
                  %
                  
                  $
                  923,998
                  
                  
                  
                  96.9
                  %Western
      Over-the-Counter products
                  
                  
                  -
                  
                  
                  
                  -
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  %TCM
      prescription products
                  
                  
                  2,236,468
                  
                  
                  
                  77.1
                  %
                  
                  
                  4,098
                  
                  
                  
                  0.4
                  %TCM
      Over-the-Counter products
                  
                  
                  445,643
                  
                  
                  
                  15.3
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  %Other
      products
                  
                  
                  17,932
                  
                  
                  
                  0.6
                  %
                  
                  
                  25,524
                  
                  
                  
                  2.7
                  %Total
      Proprietary products
                  
                  $
                  2,904,308
                  
                  
                  
                  100.0
                  %
                  
                  $
                  953,620
                  
                  
                  
                  100.0
                  %





Medical
technology. Medical technology revenues for the six months ended June 30, 2010
were $149,712, and there was no revenue for the six months ended June 30, 2009.
The cost of developing medical technology was expensed when incurred, therefore,
there was no direct cost related to such sale.





Cost
of Revenues and Gross Profit




Six
      months ended June 30,2010
                              
                              
                              2009
                              
                              
                              $ Increase
                              
                              
                              % IncreaseDistribution
      productsRevenues
                              
                              $
                              24,708,356
                              
                              
                              $
                              24,199,863
                              
                              
                              $
                              508,493
                              
                              
                              
                              2.1
                              %Cost
      of revenues
                              
                              
                              16,791,185
                              
                              
                              
                              18,171,868
                              
                              
                              
                              (1,380,683
                              )
                              
                              
                              (7.6
                              )
      %Gross
      profit
                              
                              $
                              7,917,171
                              
                              
                              $
                              6,027,995
                              
                              
                              $
                              1,889,176
                              
                              
                              
                              31.3
                              %Gross
      margin %
                              
                              
                              32.0
                              %
                              
                              
                              24.9
                              %Proprietary
      productsRevenues
                              
                              $
                              2,904,308
                              
                              
                              $
                              953,620
                              
                              
                              $
                              1,950,688
                              
                              
                              
                              204.6
                              %Cost
      of revenues
                              
                              
                              1,616,361
                              
                              
                              
                              672,760
                              
                              
                              
                              943,601
                              
                              
                              
                              140.3
                              %Gross
      profit
                              
                              $
                              1,287,947
                              
                              
                              $
                              280,860
                              
                              
                              $
                              1,007,087
                              
                              
                              
                              358.6
                              %Gross
      margin %
                              
                              
                              44.3
                              %
                              
                              
                              29.5
                              %TotalRevenues
                              
                              $
                              27,762,376
                              
                              
                              $
                              25,153,483
                              
                              
                              $
                              2,608,893
                              
                              
                              
                              10.4
                              %Cost
      of revenues
                              
                              
                              18,407,546
                              
                              
                              
                              18,844,628
                              
                              
                              
                              (437,082
                              )
                              
                              
                              (2.3
                              )
      %Gross
      profit
                              
                              $
                              9,354,830
                              
                              
                              $
                              6,308,855
                              
                              
                              $
                              3,045,975
                              
                              
                              
                              48.3
                              %Gross
      margin %
                              
                              
                              33.7
                              %
                              
                              
                              25.1
                              %


41




Gross
profit for distribution products for the six months ended June 30, 2010 was
$7,917,171, an increase of $1,889,176, or 31.3%, from $6,027,995 for the six
months ended June 30, 2009. Our gross margin of distribution products for the
six months ended June 30, 2010 was 32.0%, as compared with 24.9% for the six
months ended June 30, 2009. This increase was due to the increase of the higher
gross margin products.





Gross
profit for proprietary products for the six months ended June 30, 2010 was
$1,287,947, an increase of $1,007,087, or 358.6%, from $280,860 for the six
months ended June 30, 2009. Our gross margin of proprietary products for the six
months ended June 30, 2010 was 44.3%, as compared with 29.5% for the six months
ended June 30, 2009. This increase was due the higher gross margin of LifeTech’s
products.





Research
and Development Expenses





Research
and development expenses were $708,924 for the six months ended June 30, 2010,
as compared with $763,506 for the six months ended June 30, 2009. Research and development
expenses consisted primarily of the depreciation of $295,681 and $293,370 of
Co-Win, for the testing and technology optimization of rADTZ for the six months
ended June 30, 2010 and 2009 respectively.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $3,610,912 for the six months ended
June 30, 2010, an increase of $1,611,438 from $1,999,474 for the six months
ended June 30, 2009. The increase was mainly due to: (i) combined headcounts of
LifeTech upon acquisition and hiring of new officers, (ii) amortization and
depreciation of LifeTech, especially revaluation upon acquisition, (iii)
allowance for the advances to a supplier of Konzern, (iv) office fees for
establishing the group, and (v) consulting fee,.




Other
Income (Expense), net





Other
expense primarily consists of interest expense on the short-term loans,
including interest expense of $100,442 for Konzern’s loans, and the interest
expense of $87,837 for LifeTech’s loans, and the interest revenue of $31,215
from the escrow fund.





Due to
the change in the market price of our common stock from $4.30 on December 31,
2009 to $2.42 on June 30, 2010, there was a fair value gain on warrant
liabilities of $2,481,474 for the six month ended June 30, 2010.




Income
Taxes





The
provision for income taxes was $1,602,263 for the six months ended June 30,
2010, compared with $1,115,500 for the six months ended June 30, 2009. The
income tax rate is 25% based on the tax law of PRC.





Net
Income Attributable to China Medicine Corporation





Net
income attributable to China Medicine Corporation for the six months ended June
30, 2010 was $5,901,130, an increase of $5,309,052, or 896.7% from $592,078 for
the six months ended June 30, 2010. The increase was mainly due to the increase
of the income from operations and the change in the fair value of warrant
liabilities.


42




Deemed
Preferred Stock Dividend





Pursuant
to the Stock Subscription Agreement (“Subscription Agreement”) dated on December
31, 2009 between the Company and OEP, 1,920,000 shares of convertible preferred
stock, which can be converted into 19,200,000 shares of common stock, were
issued at the price of $30.00 per share on January 29, 2010, using the
conversion price of our common stock on January 29, 2010 of $3.00. Using the
closing price of our common stock on January 29, 2010 of $3.32, the beneficial
conversion feature was accounted for at $6,144,000, and was treated as a deemed
preferred stock dividend in the income statement in accordance with SAB
No.98.





Net
Loss Available to Common Shareholders





After the
beneficial conversion feature was included, the net loss available to common
shareholders was $242,870 for the six months ended June 30, 2010, compared to
net income available to common shareholders of $ 532,028 for the six months
ended June 30, 2009.





We use
non-GAAP adjusted net earnings to measure the performance of our business
internally by excluding non-cash charges related to the warrants. We believe
that the non-GAAP adjusted financial measure allows us to focus on managing
business operating performance because the measure reflects our essential
operating activities and provides a consistent method of comparison to
historical periods. We believe that providing the non-GAAP measures that we use
internally is useful to investors for a number of reasons. The non-GAAP measure
provides a consistent basis for investors to understand our financial
performance in comparison to historical periods without variation of
non-recurring items and non-operating related charges. In addition, it allows
investors to evaluate our performance using the same methodology and information
as that used by our management. Non-GAAP measures are subject to inherent
limitations because they do not include all of the expenses included under GAAP
and because they involve the exercise of judgment regarding which charges are
excluded from the non-GAAP financial measure. However, we compensate for these
limitations by providing the relevant disclosure of the items
excluded.





The
following table provides a non-GAAP financial measure and a reconciliation of
that non-GAAP measure to the GAAP net income:





Six Months EndedJune 302010
                        
                        
                        2009Net
      income (loss) available to common shareholders
                        
                        $
                        (242,870
                        )
                        
                        $
                        592,078Add
      back (deduct):Deemed
      preferred stock dividend
                        
                        
                        6,144,000Change
      in fair value of warrant liabilities
                        
                        
                        (2,481,474
                        )
                        
                        
                        1,971,907Adjusted
      net income
                        
                        $
                        3,419,656
                        
                        
                        $
                        2,563,985Diluted
      EPS
                        
                        $
                        (0.01
                        )
                        
                        $
                        0.04Add
      back (deduct):Deemed
      preferred stock dividend
                        
                        
                        0.30Change
      in fair value of warrant liabilities
                        
                        
                        (0.12
                        )
                        
                        
                        0.13Adjusted
      EPS
                        
                        $
                        0.17
                        
                        
                        $
                        0.17Diluted
      weighted average common shares outstanding
                        
                        
                        20,419,738
                        
                        
                        
                        15,248,178





Excluding
these non-cash expenses, adjusted net income of the six months ended June 30,
2010 was approximately $3.4 million, or $0.17 per fully diluted share. Earnings
per share were calculated using a diluted weighted common share count of 20.4
million shares for the six months ended June 30, 2010 and 15.2 million shares
for the six months ended June 30, 2009.


43




Liquidity
and Capital Resources





As of
June 30, 2010, we had $62.9 million in cash and cash equivalents, which included
the restricted cash. We have historically funded our working capital needs from
operations, advance payments from customers, bank borrowings, and capital from
shareholders. Our working capital requirements are influenced by the level of
our operations, seasonal factors, the progress of our contract execution, and
the timing of accounts receivable collections.





Pursuant
to the Subscription Agreement, on January 29, 2010, the Company completed an
equity private placement with OEP, and 4,000,000 shares of the Company's common
stock at $3.00 per share and 1,920,000 shares of the Company's redeemable
convertible preferred stock at $30 per share, were issued for an aggregate
purchase price of $69.6 million. Each share of redeemable convertible preferred
stock is initially convertible into 10 shares of common stock.





At the
closing, $57,600,000 of the proceeds was placed in an escrow account. In April
2010, $8,000,000 of the escrowed proceeds was released to strengthen the working
capital and fund the LifeTech’s facility expansion plan. In July 2010,
$2,000,000 of the escrowed proceeds was released to fund the Repurchase
Plan.





Operating
Activities





Net cash
used in operating activities was $2,077,439 for the six months ended June
30, 2010, a decrease of $3,609,394 from net cash of $1,531,955 provided by our
operations for the six months ended June 30, 2009. The decrease in net cash
provided by operating activities was largely due to the increase in accounts
receivable, and advances to suppliers.





As of
June 30, 2010, we had working capital of $87,626,383, an increase of $71,782,076
or 453.0%, from $15,844,307 as of December 31, 2009. The increase was mainly due
to the cash and the restricted cash coming from completed placement under the
Subscription Agreement with OEP.





To
present the results of operations exactly, the Company calculated the days sales
outstanding (“DSO”), days inventory outstanding (“DIO”), days payable
outstanding (“DPO”), and cash conversion cycle (“CCC”) in accordance with the
definitions below: (i) the advances to suppliers and costomer deposits on June
30, 2010 and 2009, respectively, were included in the calculation of DIO, (ii)
the revenues and cost of revenues in the period of annual circle were
used.





For the
six months ended June 30, 2010 and 2009, DSO was 134 days and 97 days,
respectively, DIO was 87 days and 128 days, DPO was 20 days and 2 days,
repectively, and CCC was 202 days and 223 days, respetively. Please note that
the data of LifeTech wasn’t consolidated in the calculation of the aforesaid
indicators for 2009.


The
following table sets forth the changes in certain balance sheet items, in U.S.
dollars and percentages, comparing June 30, 2010 and December 31,
2009.





Balance Sheet Caption
                            
                            Change in US dollars
                              12/31/09 to 6/30/10
                            
                            
                            Percentage Change
                              12/31/09 to 6/30/10Accounts
      receivable
                            
                            
                            2,460,984
                            
                            
                            
                            11.0
                            %Inventories
                            
                            
                            1,136,217
                            
                            
                            
                            41.6
                            %Advances
      to suppliers
                            
                            
                            3,957,879
                            
                            
                            
                            157.2
                            %Accounts
      payable, trade
                            
                            
                            1,188,906
                            
                            
                            
                            89.8
                            %Customer
      deposits
                            
                            
                            203,939
                            
                            
                            
                            42.2
                            %





The
changes in these balance sheet captions reflect the nature of the cash
requirements of our business. Comparing June 30, 2010 and December 31, 2009, our
inventories increased $1,136,217 or 41.6%.


44




Our
accounts receivable increased $2,460,984 or 11.0% from December 31, 2009 to June
30, 2010. The increase was attributed to a change in the sales network and
extending the credit period of several customers. As of June 30, 2010, our net
accounts receivable totaled approximately $24,877,145.





In the
course of our business, we must make significant deposits with our suppliers
when we place orders. Our advances to suppliers increased $ 3,957,879 or 157.2%
from December 31, 2009 to June 30, 2010. The increase was intended to obtain for
the Company better purchase prices from our suppliers. As of June 30, 2010, our
advance payments to our suppliers totaled approximately $6,383,691.





In
addition, our customer deposits increased $203,939 or 42.2 % comparing June 30,
2010 and December 31, 2009, which reflects our strategy change on the sales
policy of LifeTech’s products to obtain more market share. As of June 30, 2010,
our customer deposits totaled approximately $690,122.





Investing
Activities





Net cash
used in investing activities was $115,947 during the six months ended June 30,
2010, an decrease of $2,412,667, from net cash $2,528,614 used by investing
activities during the six months ended June 30, 2009.




Financing
Activities





Net cash
provided by financing activities was $10,675,760 during the six months ended
June 30, 2010. Net cash provided by financing activities consisted of
$69,600,000 in gross proceeds from the issuance of common stock and convertible
preferred stock to OEP, $1,070,338 in proceeds from exercise of warrants and
options, $8,416,339 in payments on short-term loans of LifeTech and Konzern and
$3,763,699 in loan proceeds, and was offset by payments on private placement
related expenses of $3,219,552 and an increase in restricted cash of
$52,122,386.




Critical
Accounting Policies and Estimates




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.





Revenues
Recognition





We
recognize revenues 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. We follow the
provisions of the SEC’s Staff Accounting Bulleting No. 104, which sets forth
guidelines for the timing of revenues recognition based upon factors such as
passage of title, installation, payments and customer acceptance. Any amounts
received prior to satisfying our revenues recognition criteria are recorded as
deferred revenues.




Sales
revenues represent 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
products.


45




Research
and Development Costs




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





Use
of Estimates





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





Inventories





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





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





Not
applicable.





Item
      4.
            Controls
      and Procedures





Disclosure
Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2010.





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





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our Chief Executive Officer and our Chief Financial Officer.
Based on that evaluation, management concluded that our disclosure controls and
procedures were not effective as of June 30, 2010, due principally to a material
weakness in internal control over financial reporting because of significant
deficiencies in our U.S. GAAP expertise and internal audit functions. We are
working to enhance the effectiveness of our disclosure controls and procedures.
We recently hired a Chief Financial Officer who has extensive experience in
internal control and certain level of knowledge on U.S. GAAP reporting
compliance, to take charge of the financial reporting process and training of
the accounting staff. On May 27, 2010, a new Audit Committee was formed with
experienced non-executive independent directors who possess extensive knowledge
and experience in US GAAP, internal control, accounting, healthcare management
and biochemistry. In particular, Mr. Ian Robinson, a former senior partner of
Ernst & Young Hong Kong, was selected as Chairman of the Audit Committee and
brings 30-years of financial and accounting experience to the Company. To
enhance our financial reporting and internal control function, we recruited a
senior internal audit manager in July, 2010. In addition, on July 7, 2010, the
Company entered into a consultanting agreement with Ernst & Young (China)
Advisory Limited for advisory services with respect to compliance with SOX 404.
The project will be completed in first quarter of 2011. We expect
that these enhancements, will improve the effectiveness of our disclosure
controls and procedures and remediate the ineffectiveness of certain controls
and procedures that existed as of June 30, 2010.


46





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
most recent quarter of fiscal year 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




47




PART
II OTHER INFORMATION





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





On May
11, 2010, we issued 2,666,667 shares of common stock to OEP CHME Holdings, LLC
upon the conversion of 266,666.7 shares of redeemable convertible preferred
stock.





On July
15, 2010, we issued an additional 666,667 shares of common stock to OEP CHME
Holdings, LLC upon the conversion of 66,666.7 shares of redeemable convertible
preferred stock.




These
transaction were exempt from registration pursuant to Section 3(a)(9) of the
Securities Act.




The
following table sets forth information regarding shares of our common stock that
we repurchased during the three months ended June 30, 2010.




Issuer
Purchases of Equity Securities


Period
                
                (a)
                  Total Number of
                  Shares Purchased
                
                
                (b)
                  Average Price Paid
                  per Share
                
                
                (c)
                  Total Number of
                  Shares Purchased
                  as Part of Publicly
                  Announced Plans
                  or Programs
                
                
                (d)
                  Maximum Number
                  (or Approximate
                  Dollar Value) of
                  Shares that May
                  Yet Be Purchased
                  Under the Plans or
                  ProgramsApril1
      to April 30, 2010
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                N/AMay
      1 to May 31, 2010
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                N/AJune
      1 to June 30, 2010
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,000,000Total
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,000,000





(1)
            On
      June 30, 2010 our board of directors authorized the repurchase and
      retirement of up to $2,000,000 worth of our common stock in open market
      transactions or in privately negotiated transactions. No repurchases where
      made in the quarter ended June 30, 2010. As of August 10, 2010, 73,062
      shares of common stock have been repurchased under the repurchase
      program.





Item
      6.
            Exhibits





The
exhibits required by this item are set forth on the Exhibit Index attached
hereto.


48


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 thereunto duly
authorized.





CHINA
      MEDICINE CORPORATIONDate:
      August 12, 2010
                By:
                /s/
      Senshan YangSenshan
      YangPresident
      and Chief Executive Officer
                  (Principal
      Executive Officer)Date:
      August 12, 2010
                By:
                /s/
      Fred W. CheungFred
      W. CheungChief
      Financial Officer
                  (Principal
      Financial Officer and
                  Accounting
      officer)


49


Exhibit
Index





Exhibit
                  Number
                
                Exhibit Title31.1
      *
                
                Certification
      of our Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
      *
                
                Certification
      of our Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
      *
                
                Certification
      of our Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
      *
                
                Certification
      of our Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


*
            Filed
      herewith


50