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

Overview

China Medicine Corporation ("we," "us" or the "Company"), through Guangzhou Konzern Medicine Co., Ltd. ("Konzern"), our wholly owned subsidiary organized under the laws of the People's Republic of China (the "PRC" or "China"), is a distributor of approximately 2,300 pharmaceutical products in China. Also as a developer of innovative pharmaceutical products, the Company currently has four patents registered with the PRC State Food and Drug Administration (the "SFDA"), and has seven other patents pending for approval. Co-win Bio-Engineering Ltd. ("Co-Win"), a PRC joint-venture company we created together with another entity (Konzern owns 70% ), has three patents related to ADTZ, an enzyme designed to eliminate a harmful toxin from food and animal feed. In 2007, Co-Win applied for patents in 20 different countries and regions including Australia, Canada, the European Union (including Germany, France, Britain, Italy, Spain, Portugal, Sweden, Swiss and Turkey), Indonesia, Israel, Japan, South Korea, Mexico, Russia, South Africa, the U.S., Hong Kong and India in 2007. Co-Win obtained a patent for ADTZ from the Australia Patent Office in July 2008 and a patent for ADTZ for South Africa in October 2008. Patent application approval for ADTZ from South Korea was made public in September 2008 and is pending; we expected to receive the official approval shortly. The other patent applications are under review as of the date of this report

We generate revenue in two ways, the distribution of pharmaceutical products obtained from suppliers and the sale of intellectual property, including drug formulas and technology, to third parties including manufacturing companies. In the future, we plan to obtain more national and provincial distribution rights for pharmaceutical products and therefore enhance our ability to gain higher profit.

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

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

Our distribution business depends on our ability to acquire and distribute our products in the Chinese markets. Typically, exclusive nationwide or regional distribution rights yield higher profit margins than non-exclusive distribution rights. In addition to our exclusive rights to nationwide distribution of seven products made by our suppliers, we also have obtained distribution rights throughout Guangdong Province of 774 products made by our suppliers through that province's on-line bidding system, called the Guangdong Sunshine Bid Program. We expect to obtain additional distribution rights through that system in the future.

In the nine months ended September 30, 2008, sales of the seven products as to which we had nationwide exclusive sales rights from our suppliers accounted for $10,992,735, or 37.63%, of our sales as compared to sales of those products (as to which we had the same rights) of $6,442,355, or 24.83% of sales in the nine months ended September 30, 2007. Sales revenue related to the seven products increased $4,550,380 during the same period. Sales revenue from products that we distribute in Guangdong province at September 30, 2008, amounted to $10,124,535, or 34.65% of sales in that period; an increase of $502,156 as compared to the period ended September 30, 2007.

Our contracts with our customers do not require minimum purchases, and our customers are not restricted from purchasing competitive products from others. Our customers are typically wholesale medical product companies, hospitals and retail drug stores. Our five largest customers accounted for 50.15% and 46% of our sales for the nine months ended September 30, 2008 and 2007, respectively.

Our largest account receivable at September 30, 2008 was approximately $5,118,277, representing approximately 12.65% of our total assets and approximately 15.03% of our working capital. Our three largest accounts receivable totaled approximately $7,891,854, representing approximately 19.51% of our total assets and approximately 23.17% of our working capital. Because a substantial portion of our sales are made to a small number of customers, our accounts receivable from a small number of customers may represent a large percentage of our accounts receivable and assets. We will continue to explore more customer groups in an effort to reduce our reliance on our major customers in the fourth quarter.

Our five largest suppliers accounted for 47.15% and 69.98% of our purchases for the nine months ended September 30, 2008 and September 30, 2007, respectively. Our agreements with our suppliers generally have a term of one year and state that the suppliers will provide us with the products we order. None of our supply agreements have minimum purchase requirements on our part. However, we are frequently required to make a significant down payment when we place an order. These down payments are made pursuant to contracts with the suppliers, and to the extent that we reduce the size of the order, we will receive a credit from the supplier. Down payments to our suppliers as of September 30, 2008 and December 31, 2007 accounted for 15% and 25% of the total advance payments to our suppliers respectively. In addition to down payments, we also make advance payments to our suppliers in exchange for receiving favorable prices, which enable us to offer competitive prices to our customers. The balance of our advances to suppliers was $9,976,022 and $5,983,277 as of September 30, 2008 and December 31, 2007, respectively.

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

Developments That Will Affect Our Business Going Forward

On August 31, 2008, bidding and negotiation for the 2008 Guangdong Province On-Line Sunshine Bidding System ended. In each of the 22 provincial bidding districts, we succeeded in obtaining rights to distribute more than 100 products through the system. Also during the third quarter of 2008, we registered to participate in the 2009 Guangdong Province On-Line Sunshine Bidding System and renewed our registration as a distributor of pharmaceutical products to governmental public medical facilities for the period from September 1, 2008 to August 31, 2009. We expect that sales of products for which we gained distribution rights through the Sunshine Bidding System will continue to contribute significantly to our revenue over the next several quarters.

On July 16, 2008, we began the first trial sales of products in the U.S. The product we are selling in the U.S. is a food supplement, Bethin Tablets, which is designed for use as a weight-loss aid. Bethin Tablets was developed by our subsidiary Konzern US Holding Corporation, and trial sales have occurred in Houston, Texas. We also attended the Natural Food Expo East, a trade show which was held in Boston in October, to explore resources and relationships that may assist us in distribution of Bethin Tablets in the U.S. and in making sales of the product in other countries. We are also actively exploring the Hong Kong market. We have obtained trademark protection from the Hong Kong government for our Konzern and Bethin marks and have registered with the Hong Kong Trade Development Council to search for potential distributors in Hong Kong.

We have communicated with a Pakistani importer for the export of Levocarnitine Powder Injection to Pakistan and delivered documentation and samples of the product. Currently, we are waiting for the official approval for the pricing of Levocarnitine Powder Injection from the food and drug regulatory authority in Pakistan. We expect that the export of Levocarnitine Powder Injection will help to extend our overseas business.

During the Beijing Olympic and Paralympic Games of 2008, for security reasons, the government ceased all toxic tests and prohibited the delivery of all toxic raw materials. Aflatoxin, a substance needed for tests of our ADTZ product, is a highly toxic substance. Suppliers in Beijing ceased the supply of aflatoxin throughout the third quarter, and our R&D staff called a halt to the tests that we worked on together with the Feed Research Institute of the Chinese Academy of Agriculture Sciences. We restarted the ADTZ tests in October and focused on the improvement of zymosis technology and the enhancement of ADTZ's capacity to detoxify animal feeds. In addition, we expect to rent a manufacturing facility for ADTZ and to apply for a production permit, which will facilitate the commercialization of ADTZ.

The national government has announced its intention to establish a national health care system to cover over 90% of municipal and rural citizens by 2020, and the government also encourages large public hospitals and medical service facilities to provide citizens with safe, convenient and sufficient medical care. We believe this policy will boost the sales of pharmaceutical products. The more area the public medical care system covers, the larger demand of pharmaceutical products will be.

In addition, sales of daily health care and dietary supplements are growing rapidly in China, and sales of products that address the daily health needs of individuals with significant health issues population have been growing rapidly. Currently, we are actively participating in the development of daily health care products. We expect to launch a self-branded dietary supplement pack in the first six months of 2009.

On November 9, 2008, the State Council of the PRC announced a US$586 billion economic stimulus package aimed at bolstering the country's slowing economy and helping fight the effects of any global economic slowdown. This stimulus plan may facilitate our operation and development in the following ways.

· The government is committed to increase the investment in medical care and financial support to hospitals, which we believe is likely to reduce the collection period of accounts receivable from hospitals.

· The State Council passed revised regulations on VAT, consumption tax and business tax, a part of the stimulus package, which would enable companies to receive tax deductions on spending on fixed assets.

· The government loosened restrictions on commercial credit and provided greater financial support to medium and small size enterprises. We believe this will improve the cash flow situation of our suppliers and clients, which in turn may reduce our accounts receivable.

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

Results of Operations

The following table sets forth our statements of operations for the three and
nine months ended September 30, 2008 and 2007, in U.S. dollars: (unaudited)

                                         Three Months Ended            Nine Months Ended
                                            September 30,                 September 30,
                                         2008           2007           2008           2007
Revenue                              $ 10,516,792   $ 12,588,938   $ 29,215,370   $ 25,945,901
Product sales                           9,963,571     11,904,525     27,882,029     24,552,269
Medical formula sales                     553,221        684,413      1,333,341      1,393,632
Costs of goods sold                     7,255,635      8,765,477     19,485,824     18,029,902
Gross profit                            3,261,157      3,823,461      9,729,546      7,915,999
R&D expenses                              288,353        336,794        484,569        437,449
Selling, general and
administrative costs                      642,919        830,518      2,515,509      2,435,288
Income from operations                  2,329,885      2,656,149      6,729,468      5,043,262
Other income, net                           7,368         13,694         45,455          3,604
Income before income taxes &
Minority interest                       2,337,253      2,669,843      6,774,923      5,046,866
Provision for income taxes                411,890        480,458      1,252,833      1,018,743
Income before minority interest         1,925,363      2,189,385      5,522,090      4,028,123
Minority interest                          39,777         16,529         85,087         68,646
Net income                              1,965,140      2,205,914      5,607,177      4,096,769
Other comprehensive income
(Foreign currency translation
adjustment)                                97,869        341,114      2,169,693        900,439
Comprehensive income                 $  2,063,009   $  2,547,028   $  7,776,870   $  4,997,208

Our revenue is derived primarily from the sale of prescription and over the counter medicines, traditional Chinese medicines, which are medicines derived from Chinese herbs, dietary supplements and medical instruments (collectively "Product Sales") and the sale of medical formulas ("Medical Formula Sales"). The following table sets forth the revenues and percentage of revenues derived from each of these types of products.

                                     Nine Months Ended September 30,
                                      2008                     2007

Drugs                        $ 27,261,660     93.31 % $ 24,239,169     93.42 %

Dietary Supplements               177,949      0.61 %       48,448      0.19 %

Medical Equipment                 422,819      1.45 %       79,950      0.31 %

Others                             19,601      0.07 %      179,693      0.69 %

Herbs & Medicine materials              0         0 %        5,009      0.02 %

Medical Formula                 1,333,341      4.56 %    1,393,632      5.37 %

Total                        $ 29,215,370       100 % $ 25,945,901       100 %




                                            Nine Months Ended September 30,
                                             2008                     2007

Western Prescription Products       $ 17,899,710     61.27 % $ 12,916,645     49.78 %

Western Over-the-Counter Products        841,969      2.88 %      634,949      2.45 %

TCM Prescription Products              5,612,014     19.21 %    3,322,787     12.81 %

TCM Over-the-Counter Products          2,907,967      9.95 %    7,364,789     28.39 %

Drugs/Dietary Supplements Total     $ 27,261,600     93.31 % $ 24,239,169     93,42 %

THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007

Sales

Total revenue for the three months ended September 30, 2008 was $10,516,792, a decrease of $2,072,146, or 16.46%, from total revenue of $12,588,938 for the comparable period in 2007. Total revenue includes revenue from Product Sales and revenue from Medical Formula Sales, which accounted for 94.75% and 5.25% of total revenue for the three months ended September 30, 2008 respectively.

Revenue from Product Sales for the three months ended September 30, 2008 was $9,963,571, a decrease of $1,940,954, or 16.30%, from $11,904,525 for the comparable period in 2007. Revenue from Product Sales includes revenue from sales of pharmaceutical products that we distribute and sales of products for which we hold a manufacturing license. Revenue from sales of pharmaceutical products we distribute for the three months ended September 30, 2008 was $9,004,779, accounting for 85.62% of the total revenue for the period, which was a decrease of $1,680,505, or 15.73%, from $10,685,284 for the comparable period in 2007. In particular, revenue from sales of products we distribute nationwide was $3,622,114, which accounts for 34.44% of the total revenue for the three months ended September 30, 2008. Revenue from sales of products we distribute regionally was $1,998,894, which accounts for 19.01% of the total revenue for the three months ended September 30, 2008. Revenue from sales of products for which we acquired distribution rights through the Guangdong Sunshine Bidding System was $3,383,772, which accounts for 32.17% of total revenue, for the three months ended September 30, 2008, a decrease of $1,383,533 from $4,767,305 for the same period in 2007.

Revenue from sales of products for which we hold a manufacturing license for the three months ended September 30, 2008 was $958,792, accounting for 9.12% of total revenue for the three months ended September 30, 2008, and representing a decrease of $260,449 or 21.36% from $1,219,241 for the comparable period in 2007.

The decrease of revenue from product sales for three months ended September 30, 2008 was due primarily to the following factors:

· Administrative delay in the execution of Guangdong Sunshine Medicine Public Internet Bidding Systems, which is typically held from May to July of each year. During the three months ended September 30, 2008, we had to allocate our resources to negotiating with hospitals, which is crucial to win bids in the public internet bidding systems. The sales from Guangdong Sunshine Medicine Public Internet Bidding Systems which would typically have been confirmed in the third quarter were postponed to be finalized in the fourth quarter. As of the date of this report, we have finalized all bids that we won through the system in September.

· Substantial decrease of revenue from sales of OTC products for the three months ended September 30, 2008. In order to increase our gross margin, we adjusted our sales strategy and distribution portfolio by focusing on increasing the sales of high-margin prescription products and reducing the sales of low-margin OTC products. Hence, revenue from sales of western OTC products for the three months ended September 30, 2008 was $189,603, a decrease of $55,008, or 22.49%, from $244,611 for the comparable period in 2007. Revenue from sales of Traditional Chinese Medicine OTC products for three months ended September 30, 2008 was $677,460, a decrease of $3,505,954, or 83.81%, from $4,183,414 for the comparable period in 2007. The decrease of sales of OTC products is part of our sales strategy, which is designed to promote our gross margin and gross profit in the long term.

Revenue from sales of western prescription products for the three months ended September 30, 2008 was $6,763,825, an increase of $1,150,061 or 20.49% from $5,613,764 for the comparable period in 2007. Revenue from sales of TCM prescription products for the three months ended September 30, 2008 was $2,102,322, an increase of $305,905 or 17.03% from $1,796,417 for the comparable period in 2007.

Revenue from Medical Formula Sales for the three months ended September 30, 2008 was $553,221, a decrease of $131,192 or 19.17%, from $684,413 for the comparable period in 2007. Medical Formula Sales revenues represent proceeds from the sale of certain technology and know-how relating to the production of medicines. We improve and develop the technology in its preliminary stage and then sell the improved technology to other pharmaceutical companies. Recent PRC government regulation has focused increasing attention to the effectiveness and safety of pharmaceutical products and food, has increased the burdens of our research and development efforts, and has resulted in the slower pace of our medical formula sales. In the future, we believe our medical formula sales will greatly rely on the sales of formulas relating to ADTZ.

Cost of Sales

Cost of sales for the three months ended September 30, 2008 was $7,255,635 a decrease of $1,509,842, or 17.22%, from $8,765,477 for the comparable period in 2007. Gross profit for the three months ended September 30, 2008 was $3,261,157, a decrease of $562,304, or 14.71 %, from $3,823,461 for the comparable period of 2007. Our gross margin for the three months ended September 30, 2008 was 31.01% as compared with 30.37% for the three months ended September 30, 2007, an increase of 0.64%. The main reasons for the decrease in gross profit for three months ended September 30, 2008 are the decrease of revenue from sales of medical formulas, the decrease of revenue from sales of both western and Traditional Chinese Medicine OTC products, and a delay in collection of accounts receivable from our hospitals customers. The increase in gross margin is due to our strategy of decreasing sales of lower-margin OTC products in order to increase our gross margin. We intend to continue to improve our product portfolio in order to maintain a high gross margin. In the long run, we intend to increase total sales as well as gross margin.

Research and Development

Research and development expenses for the three months ended September 30, 2008 were $288,353, an amount equal to 2.74% of total revenue, which was dedicated to further study of the molecular structure and technology improvement of the Yutian capsule. Research and development expenses for the same period of 2007 were $336,794, or approximately 2.67% of total revenue. Research and development expense for the whole year 2007 was $651,990, or 1.55% of total revenue. We expect research and development expense as a percentage of revenues in 2008 to remain consistent with that of 2007.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $642,919 for the three months ended September 30, 2008, a decrease of $187,599, or 22.59%, from $830,518 for the comparable period in 2007. Selling, general and administrative expenses include freight, professional service fees and advertising expenses. The reduction in selling, general and administrative expenses was due primarily to the reduction in advertising expenses, which were $39,777 for the three months ended September 30, 2008, compared to $325,189 for the comparable period of 2007. Advertising expenses were lower in the more recent period because most of our advertising during that period had been prepaid. Due to the increase in worldwide oil prices, freight for the three months ended September 30, 2008 was $96,906.

Income Taxes

Provision for income taxes was $411,890 for the three months ended September 30, 2008 as compared with $480,458 for the comparable period in 2007. The decrease was due to the decrease of product sales and operating income.

Comprehensive Income

Comprehensive income for the three months ended September 30, 2008, was $2,063,009, a decrease of $484,019 from $2,547,028 for the comparable period in 2007. The decrease was mainly due to the decrease in total revenues, the revenue from medical formula and the collection of account receivable from hospitals in particular.

THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2007

Sales

Total revenue for the nine months ended September 30, 2008 was $29,215,370, an increase of $3,269,469, or 12.60%, from the total revenues of $25,945,901 for the comparable period in 2007.

Revenue from Product Sales for the nine months ended September 30, 2008 was $27,882,029, an increase of $3,329,760, or 13.56%, from $24,552,269 for the comparable period in 2007. The main reason for the increase of Revenue from Product Sales for the nine months ended September 30, 2008 was the increase of revenue from sales of products for which we have national exclusive distribution rights in the latter period. The revenue from national exclusive distribution for the nine months ended September 30, 2008 was $8,752,860, an increase of $4,345,209, or 98.58%, from $4,407,651 for the comparable period in 2007. Revenue from sales of regional distribution for the nine months ended September 30, 2008 was $6,757,421, a decrease of $1,716,695 or 20.26%, from $8,474,116 for the comparable period in 2007.

Revenue from sales of products for which we hold a manufacturing license for the nine months ended September 30, 2008 was $2,247,214, an increase of $199,091 from $2,048,123 for the comparable period in 2007. Revenues from sales of products for which we have exclusive distribution rights for the nine months ended September 30, 2008 were $16,630,036, an increase of $4,811,174 from $11,818,862 for the comparable period in 2007.

Revenues from Medical Formula Sales for the nine months ended September 30, 2008 were $1,333,341, a decrease of $60,291, or 4.33%, from $1,393,632 for the comparable period in 2007.

Cost of Sales

Cost of sales for the nine months ended September 30, 2008 was $19,485,824, an increase of $1,455,922, or 8.08%, from $18,029,902 for the first nine months of 2007. Gross profit for the nine months ended September 30, 2008 was $9,729,546, an increase of $1,813,547, or 22.91%, from $7,915,999 for the comparable period of 2007. Our gross margin for the nine months ended September 30, 2008 was 33.30% as compared with 30.51% for the nine months ended September 30, 2007, an increase of 2.79%. The reason for the increase in cost of sales is the increase in total revenue described above.

Research and Development

Research and development expense was $484,569, an amount equal to 1.66% of total revenue for the nine months ended September 30, 2008. It was used for the further study of molecular structure and technology improvement of the Yutian capsule. Research and development expense for the same period of 2007 was . . .