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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR 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 333-150835

BABY FOX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

|Nevada                                   | 26-0775642         
|---------------------------------------- | -------------------
|(State or other jurisdiction of          | (I.R.S. Employer   
|incorporation or organization)           | Identification No.)
|                                         |                    
|Shanghai Minhang District                |                    
|89 Xinbang Road, Suite 305-B5, PRC       |                    
|(Address of principal executive offices) | (Zip code)         

Registrants telephone number, including area code: + 86
21 5415 3855

Securities registered pursuant to Section 12(b) of the Exchange
Act: None

Securities registered pursuant to Section 12(g) of the Exchange
Act: None

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes[   ]No[X]

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act:

Yes[   ]No[X]

Indicate by check mark whether the registrant (1) has 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 day.

Yes[ 
 ]No[X]

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 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 if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

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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 if the
Exchange Act.

|Large Accelerated filer [   ]         | Accelerated
      filer [  
      ]
|------------------------------------- | -----------------------------------
|Non-accelerated filer   
       [   ] | Smaller reporting company [X]      

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

Yes[ 
 ]No[X]

The aggregate market value of the Registrants voting and
non-voting common equity held by non-affiliates as of December 31, 2009 was
$436,740, based on 2,183,700 shares of common stock held by non-affiliates
valued at $.20 per share, the last known sale price of the Registrants common
stock.

As of September 17, 2010, the registrant had 40,427,500 shares
of common stock outstanding.

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TABLE OF CONTENTS

|               |                                                                                                                            | **Page**
|-------------- | -------------------------------------------------------------------------------------------------------------------------- | --------
|               |                                                                                                                            |         
|PART
      I  
|               |                                                                                                                            |         
|Item
      1.  | Business.                                                                                                                  | 3       
|Item
      1A. | Risk
      Factors.                                                                                                        | 17      
|Item
      1B. | Unresolved
      Staff Comments.                                                                                           | 29      
|Item
      2.  | Properties.                                                                                                                | 29      
|Item
      3.  | Legal
      Proceedings.                                                                                                   | 29      
|               |                                                                                                                            |         
|PART II       
|               |                                                                                                                            |         
|Item
      5.  | Market
      for Registrants Common Equity, Related Stockholders Matters and Issuer
      Purchases of Equity Securities. | 29      
|Item
      6.  | Selected
      Financial Data.                                                                                             | 30      
|Item
      7.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations.                               | 30      
|Item
      7A. | Quantitative
      and Qualitative Disclosures About Market Risk.                                                          | 40      
|Item
      8.  | Financial
      Statements and Supplementary Data.                                                                         | 40      
|Item
      9.  | Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.                          | 40      
|Item
      9A. | Controls
      and Procedures.                                                                                             | 40      
|Item
      9B. | Other
      Information.                                                                                                   | 40      
|               |                                                                                                                            |         
|PART
      III
|               |                                                                                                                            |         
|Item
      10. | Directors,
      Executive Officers and Corporate Governance.                                                              | 41      
|Item
      11. | Executive
      Compensation.                                                                                              | 44      
|Item
      12. | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.                | 46      
|Item
      13. | Certain
      Relationships and Related Transactions, and Director Independence.                                           | 47      
|Item
      14. | Principal
      Accountant Fees and Services.                                                                              | 49      
|               |                                                                                                                            |         
|PART
      IV 
|               |                                                                                                                            |         
|Item
      15. | Exhibits
      and Financial Statement Schedules.                                                                          | 49      

1

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FORWARD LOOKING STATEMENTS

Information included or incorporated by reference in this
annual report may contain forward-looking statements. This information may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, should, expect,
anticipate, estimate, believe, intend or project or the negative of
these words or other variations on these words or comparable terminology.

This annual report contains forward-looking statements,
including statements regarding, among other things, (a) our projected sales and
profitability, (b) our plans for growth, (c) our relationship with our key
manufacturers, (d) the regulation to which we are subject, (e) anticipated
trends in our industry and (f) our needs for working capital. These statements
may be found under Managements Discussion and Analysis of Financial Condition
and Results of Operations and Business, as well as in this annual report
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under Risk Factors and matters described in
this annual report generally. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this annual
report will in fact occur.

Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the
risk factors described in the annual report, whether as a result of new
information, future events, changed circumstances or any other reason after the
date of this annual report.

2

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PART I.

ITEM 1. BUSINESS.

Overview

Baby Fox is a growing specialty retailer, developer, and
designer of fashionable, value-priced womens apparel and accessories. Our
products are aimed to target women aged 18 to 40 in China. Our management team
is experienced with fashion design, operations management, apparel sales and
marketing. We continuously update our fashions and clothing designs to stay in
sync with the latest fashions and trends in Korea, Japan, & Europe. As of
June 30, 2010, the Baby Fox brand has gained exposure in leading womens
magazines, which has helped us open 165 stores in over 30 cities. The Baby Fox
brand was initially registered in Italy in May of 2003 and it is promoted as an
international brand in China (i.e. designs based on current fashions in Europe,
Japan, etc.). Foreign apparel brands from France, Italy, U.S, Japan, and the U.K
have traditionally dominated the high end fashion scene in China.

We have been making changes in our business and planning to
address recent developments in the retail sector related to the current economic
cycle. Our changes include introducing warehouse clearance sales and discount
sales at our Class B stores.

We lease our offices and distribution facilities, and utilize
strategic relationships with leading manufactures in China. Our flexible
organizational structure, strong relationships and core focus on design enables
us to launch a garment from concept to distribution in just weeks.

We lease our store space from mall operators generally for an
initial term of one year. The lease generally includes provisions providing that
the mall operator can cancel or modify the lease if the sales of the store are
below the mall operators expected levels for any three consecutive months.
Approximately 26% of the store leases require payment of a fixed minimum rental
plus percentage rentals if sales of such stores exceed certain levels. The
remaining leases require payment of percentage rentals with no minimum fixed
rental. The percentage of sales paid as rent ranges from 16% to 39% depending
upon, among other things, the location of the store, with rentals being higher
in large cities. As of the date of annual report, none of our corporate stores
has been closed by mall operators due to its lower than expected sales.

We began generating revenue in August 2006. We generated sales
of $25,199,660, and a net loss of $435,531 for the year ended June 30, 2010. We
generated sales of $24,251,143, and a net loss of $4,482,629, for the year ended
June 30, 2009.

The accompanying consolidated financial statements have been
prepared on a basis that contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business.

As of June 30, 2010, the Companys current liabilities exceeded
its current assets by $6,483,693 and the Companys total liabilities exceeded
its total assets by $7,035,715. The Companys cash position on June 30, 2010 was
$180,476. Our auditor Friedman LLP has expressed their concern as to our ability
to continue as a going concern in the audit opinion of our financial statements
for the year ended June 30, 2010. The Company has taken steps to improve its
cash position by slowing down the rate of new store openings, selling inventory
from prior seasons at its discount stores and warehouse sales, negotiating
longer payment terms from a related party manufacturer and stepping up efforts
in collecting past due accounts receivables. In addition, the Company is seeking
future equity and debt financing, although there is no assurance that such
financing will be available or be available at terms acceptable to the Company.

Company Structure

Baby Fox International, Inc. (Baby Fox) is a Nevada
corporation organized on August 13, 2007 by Hitoshi Yoshida, a Japanese citizen,
as a listing vehicle to acquire Shanghai Baby Fox Fashion Co., Ltd. (Shanghai
Baby Fox) and to be quoted on the Over-The-Counter Bulletin Board (OTCBB).
Shanghai Baby Fox, a wholly owned China-based subsidiary of Baby Fox, was
originally founded by our board director, Fengling Wang, in March 2006 under Chinese laws. On
September 20, 2007, we entered into an Equity Share Acquisition Agreement with
Fengling Wang. Pursuant to the Equity Share Acquisition Agreement, we purchased
100% of the equity shares of Shanghai Baby Fox in exchange for 5.72 million RMB,
approximately equivalent to $806,608. Since at the time of the acquisition,
Hitoshi Yoshida and Fengling Wang were married to each other, this transaction
is deemed between entities under common control, the financial statements in
this annual report are those of Shanghai Baby Fox. The transaction was treated
as a reverse merger and, accordingly, Shanghai Baby Fox is the accounting
acquirer and Baby Fox is the legal acquirer. The acquisition was consummated on
November 26, 2007 when we received the Certificate of Approval from the Shanghai
Foreign Economic Relation & Trade Commission.

3

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On January 18, 2008, we issued a total of 37,957,487 shares of
our common stock, $.001 par value per share, to Baby Fox Limited, a British
Virgin Islands entity controlled by Hitoshi Yoshida, our former officer and
director, as founders shares. On May 6, 2008, Hitoshi Yodshida entered into
stock option agreements with our directors, Jieming Huang, Jieping Huang and
Linyin Wang, to purchase all of the shares of Baby Fox Limited. Pursuant to the
option agreements, Mr. Yodshida granted Jieming Huang an option to purchase
7,000 shares at an aggregate exercise price of $700, granted Jieping Huang an
option to purchase 1,500 shares at an exercise price of $150, and granted Linyin
Wang an option to purchase 1,500 shares at an exercise price of $150. The three
stock option agreements were originally exercisable until December 31, 2018 upon
the Company achieving certain milestones as set out in the Exercise Schedule
attached to each agreement. Jieming Huang and Jieping Huang are the sons of
Fengling Wang. Linyin Wang is the ex-husband of Fengling Wang and father of
Jieming Huang and Jieping Huang.

The option agreements were entered into to permit the
acquisition of equity in Baby Fox Limited over time by Jieming Huang, Jieping
Huang and Linyin Wang under the PRC merger and acquisition, or M&A, related
regulations. These M&A regulations were promulgated on August 8, 2006 by six
Chinese regulatory agencies (including the PRC Ministry of Commerce, or MOFCOM,
and China Securities Regulatory Commission, or CSRC). The jointly issued M&A
regulations, known as Circular 10, were captioned Regulation on Mergers and
Acquisition of Domestic Enterprises by Foreign Investors and they became
effective on September 6, 2006. Under Circular 10, an offshore special purpose
vehicle, or SPV, formed for purposes of overseas listing of equity interests in
China-based companies and controlled directly or indirectly by Chinese companies
or individuals must obtain the approval of the CSRC prior to the listing of such
SPVs securities on an overseas stock exchange. Circular 10 also requires
approval from MOFCOM for round-trip investment transactions in which a
China-based company or a PRC resident, or Acquirer, using an offshore entity
controlled by the Acquirer, acquires any PRC local company that is an affiliate
of the Acquirer. Mr. Yoshida is not a Chinese resident and is not subject to the
PRC merger and acquisition related regulation which applies only to Chinese
residents; therefore, no approval will be or was required by either CSRC or
MOFCOM in connection with the listing of our stock on the OTCBB or the business
combination transaction among Baby Fox, Shanghai Baby Fox and Baby Fox Limited.
In addition, there is no registration requirement of the stockownership of Mr.
Yoshida under PRC laws.

The options granted pursuant to the three stock option
agreements were originally exercisable until December 31, 2018 in accordance
with the Exercise Schedule attached to each agreement. Mr. Yoshida is the owner
of 10,000 shares of Baby Fox Limited which represent 100% of the issued and
outstanding common stock of Baby Fox Limited.

Five of the seven milestones set out in the option agreements
were not achieved and it was not clear if the achievement of such milestones was
practicable, and it appeared that the options might never vest. Furthermore, the
option arrangements might have triggered certain unintended accounting issues
for the Company. As a result of these factors, on June 17, 2010, Mr. Yoshida
entered into rescission agreements with Jieming Huang, Jieping Huang, and Linyin
Wang rescinding the stock option agreements. No options had been exercised by
Jieming Huang, Jieping Huang, or Linyin Wang as of the effective date of the
rescission agreements.

The parties to the option agreements are close family members
and by nature of their familial relationships, they will continue to have
control over the underlying equity interest. As such, we believe the management
will continue to be motivated despite the rescission of the option agreements.
We plan to design and adopt a stock option plan to reward and incentivize our management
team and to retain and attract management talent after our shares are quoted on
the OTC Bulletin Board.

4

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The option agreements were not rescinded in response to any
government inquiries and will not impact our business and the current resale
offering of our common stock.

Pursuant to the Chinese Company Law, Shanghai Baby Fox is a
wholly foreign owned enterprise (WFOE). A WFOE is a limited liability company
wholly owned by foreign investor(s), which was originally created to encourage
manufacturing business that was either export-oriented or related to the
introduction of advanced technology. However, with China's entry into the WTO, a
WFOE structure has been increasingly adopted by service providers, including,
but not limited to, consulting and management services, software development,
retail and trading.

The acquisition of Shanghai Baby Fox was effectuated upon the
issuance of the Certificate of Approval by the Shanghai Foreign Economic
Relation & Trade Commission and the approval by the State Administration of
Foreign Exchange (SAFE) Shanghai local branch. These approvals authorized the
change of our status from a domestic enterprise to a WFOE, and the continued
operation of our business in the womens apparel industry as a WFOE.

The following flow chart illustrates our Companys
organizational structure:



The advantages of establishing a WFOE include, but are not
limited to:

| | 1. | Independence and freedom to implement the worldwide
      strategies of its parent company without having to consider the
      involvement of Chinese partner(s);                             
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Ability to formally carry out business rather than just
      function as a representative office and being able to issue invoices to
      their customers in RMB and receive revenues in RMB;
| | 3. | Capability of converting RMB profits into US dollars for
      remittance to its parent company outside of China;                                                                              
| | 4. | Protection of intellectual know-how and
  technology;                                                                                                                                          

5

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| | 5. | No requirement for Import / Export license for its own
      products;    
| | -- | --------------------------------------------------------------------------
| | 6. | Full control of human resources;                                          
| | 7. | Greater efficiency in operations, management and future
      development.

Impact of Applicable Chinese Laws and Regulations

Because all of our sales are generated in China, our business
operations are subject to applicable Chinese laws and regulations. There is no
special restriction on apparel distribution in China. Our everyday business
activities are subject to laws and regulations governing domestic trade, which
are mainly promulgated by the Ministry of Commerce. We operate in compliance
with various applicable laws and regulations including, but not limited to,
labor and employment law, taxation, environmental laws and regulations, land use
rights, property and other matters. We believe that our operations in China are
in material compliance with all applicable legal and regulatory requirements.
However, the central government or local governments and agencies of the
jurisdictions where we operate our business may impose new, stricter regulations
or interpretations of existing regulations that would require additional
expenditures and efforts from us to ensure our compliance with such regulations
or interpretations.

Our internal and vendor operating guidelines promote compliance
with laws and our sourcing personnel periodically visit and monitor the
operations of our independent manufacturers. The violation of labor or other
laws by one of our related party or independent manufacturers, or the divergence
of our related party or independent manufacturers labor practices from those
generally accepted as ethical, could result in adverse publicity for us and
could have a material adverse effect on us.

Since January 2008, China began to implement its new corporate
tax rates which range from 15% to 25%. The actual tax rate depends on where a
company is registered and the industry that such company engages in. Our
subsidiary, Shanghai Baby Fox, is currently subject to a corporate tax rate of
25%.

As a foreign invested enterprise, Shanghai Baby Fox is
permitted to remit profits offshore and such remittance does not require any
prior approval from the SAFE. Pursuant to the applicable laws and regulations, a
foreign invested enterprise, such as Shanghai Baby Fox, cannot distribute
dividends offshore if the losses of previous years have not been covered, but
dividends that were not distributed in previous years may be distributed
together with those of the current year. Repatriating registered capital
offshore, however, is always forbidden during the term of business operations.

Chinas Economy and its Apparel Industry

Within the next three decades, China's population is estimated
to increase by another 260 million. China's current population is approximately
1.3 billion and the UN Population Division estimates that China's population
will increase to 1.5 billion by 2025.

With the rapid growth of Chinas economy and urbanization
across the region, consumer trends and preferences are quickly evolving. Chinese
consumers, especially urban citizens, are purchasing more apparel goods than
before. China is undergoing an astonishing socioeconomic transformation from
agriculture to industry and from a rural society to an urbanized one. The
economic benefits are enormous as some 400 million people have left the ranks of
the impoverished since the early 1980s. Chinas GDP reached 4,326 billion
dollars or 6.98% of the world economy, according to the World Bank, in the first
quarter of 2010, which represented a growth rate of 11.9%, while the annual GDP
growth rate is 8.58% for 2009 and 9.13% in 2008. The World Bank reports that
Chinas GDP grew 6.2% in first quarter of 2009, 7.9% in the second quarter of
2009 followed by 9.1%% in the third quarter and 10.7% for the last quarter of
2009. This quarterly rise in the GDP growth rate indicated the bottoming out of
the Chinese economy following the global financial crisis. (Source:
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY#ixzz0qPX3q6Cx)

Since we sell our products exclusively in the Chinese domestic
market, we do not expect the downturn in the global economy to have significant
effects on our business.

6

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Following the announcement of the 4 trillion Yuan
(approximately $588 billion in USD) stimulus plan in November 2008, the Chinese
government has published and is considering a series of packages to boost the
economy, especially, the support plans for ten key industries that have been
heavily hurt by the global recession, including autos & steel, textiles,
equipment manufacturing, non-ferrous metals, petrochemicals, shipbuilding,
electronics & information, logistics and light industries. These
concentrated policy initiatives aim at boosting investment and domestic
consumption and help Chinas economy to recover faster from the current global
economic crisis. Those policies have played a critical role in mitigating the
impact of a global recession and quickly turned around Chinas economy.

According to Li & Fung Research Centres Report China
Distribution & Trading (Issue 66, June 1010) and Li & Fung report
China Trade Quarterly - Domestic and Foreign (May 2010 Issue 18), Chinas
total retail sales of consumer goods reached 12,534.3 billion yuan in 2009
(approximately 1,850.6 billon USD), and the growth was 16.9% year-over-year.
Total retail sales of consumer goods reached 3,637.4 billion yuan (approximately
537 billion USD) in the first quarter in 2010, up 17.9% compared with the first
quarter in 2009.

China represents one of the most promising apparel markets in
the world. According to Li & Fung Research Centers most recent report
available, Chinas apparel market is listed after Brazil as the second-most
attractive among emerging economies. Li & Fung Research Centers research
report Latest Developments of Chinas Apparel Market, (Issue Number 15 in
December 2009), shows that Chinas apparel market had experienced significant
growth over the past years, though the growth pace slows down a bit after the
global financial crisis. The total retail value of clothing, shoes, hats and
textiles in 2009 grew 18.8% year-over-year. In the first quarter in 2010,
Clothing, shoes, hats and textiles grew 23.9%. The growth rate in 2008 was
24.8%. Apparel retail sales begin to regain its momentum since the second half
of 2009 and first quarter in 2010. Chinas consumers, in general, have remained
optimistic about their economic prospects. The consumer confidence index
improved from 103.9 in Dec 2009 to 104.7 in Jan 2010, and then dropped slightly
to 104.2 in February.

The Company

The Baby Fox style appeals to modern, sexy, sophisticated,
body-conscious women who take pride in their appearance. Shanghai Baby Fox was
founded by our lead designer and board director, Fengling Wang, in March of 2006
and launched its first mall based retail store in July of 2006. Since opening up
the first store, we have greatly expanded the number of our retail stores. As of
June 30, 2010, we have expanded to a total of 165 mall based stores (131
corporate, 34 non-corporate) located across more than 30 major cities within
China. We are currently focused on improving sales in our existing stores, and
are currently slightly reducing our total number of stores by closing
underperforming stores.

We are currently in the process of applying for quotation of
our common stock on the OTCBB, which we estimate will cost around $470,000. The
breakdown of such costs is estimated as following:

|Legal Counsel     | $ | 100,000 | 
|----------------- | - | ------- | 
|Auditor           | $ | 110,000 | 
|Other consultants | $ | 260,000 | 
|Total:            | $ | 470,000 | 

We estimate that to maintain a listing status it will cost us
from $200,000 to $300,000 annually which will include legal, auditing and CFO
salary expenses.

We will rely on professional services to carry out this plan,
which includes, but is not limited to, a U.S. law firm with a corporate and
securities practice, a PCAOB registered auditor and some consultants. In
addition, we also expect to employ a CFO who is familiar with US generally
accepted accounting principles and the requirements related to public company
listing. We already started searching for such a CFO but as of the date of this
report, we have not located such a CFO. We engaged the Crone Law Group as our legal counsel and Friedman LLP as our auditor. Our
initial registration statement under the Securities Act of 1933 was declared
effective on August 6, 2010.

7

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In order to reach our present goal of being quoted on the
OTCBB, we have engaged a market maker to file an application for a trading
symbol on our behalf with the Financial Industry Regulatory Authority (FINRA),
and our application with FINRA is currently pending. It is our intention that
the market maker will create a market for our common stock. This application
process can take between three (3) to six (6) months. Assuming our stock is
accepted for quotation on the OTC Bulletin Board, shareholders should have a
market to provide liquidity for their equity holdings in the Company.

Competition

The womens retail apparel industry is highly fragmented in
China, offering excellent growth opportunities for well positioned brands. Baby
Foxs brand cache and style put us ahead of larger mall stores, and the Company
views its competition as leading international brands entering the Chinese
market and fast fashion forward domestic companies. Other specialty retailers
currently active in China include foreign entrants Zara China, ELLE China,
Esprit China, as well as domestic competitors Etam, Only, Elite, Fairy Fair, and
Mokuba. The market opportunity is large and can support several competitors,
however we believe our strong knowledge of local markets, domestic media
contacts, and award winning design experience give the organization significant
competitive advantages.

The Chinese fashion industry is trending towards shorter
product life cycles and better designs and development. The ability to respond
to instantaneous fashion trends is a key attribute to the success of an apparel
retailer. Baby Fox is at the forefront of trends by having the unique ability to
launch a garment from design to production, and finally to distribution in just
weeks. Product flexibility allows us to not become too vested in a single trend
or line of products. Utilizing a fast product cycle should strengthen Baby Foxs
position in Chinas apparel industry.

Our business model and strategy is very similar to some of the
leading U.S. specialty retailers, however, we are exclusively focused on serving
the needs of Chinas modern and sophisticated women. By utilizing a globally
focused design team and local manufacturers, we quickly adapt to shifting market
trends and fashions. In China, it is a common practice for stores to use
multi-level agents. Conversely, we have adopted a flat management model that
mirrors Western business models. This model accelerates store and customer
feedback as our operations center deals directly with each store. This
organizational structure along with enterprise resource planning (ERP) and
point-of-sale (POS) systems allow us to maintain optimal inventories, pricing,
customer service, and brand imaging across all stores. We believe our direct
point-to-point one-stop service sales model allows us to maintain higher
standards than many of our domestic peers.

Our business strategy combines several elements to create a
merchandise assortment that appeals to the markets high-spending consumers:
primarily women age 18 to 40. The principal elements of our business strategy
include:

Active Style & Design Management :
Extensive monitoring of global trends, market research and fast design
development (concept to store floor in weeks).

Active Inventory Monitoring & Management :
Outstanding supply-chain management, inventory monitoring & sales tracking
capabilities.

Broad Merchandise Assortment : Broad assortment
allows for one stop shopping for new outfits; promoting mix and match design
themes and accessories.

Premium Brand Image : Building a
differentiated and strong international brand image by using international
models, designs, and stylish and sophisticated merchandise displays.

8

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Value Offering : High fashion and style at
competitive or better prices than other mall-based specialty retailers.

Customer Loyalty & Incentives :
Numerous customer loyalty and rewards programs such as frequent purchaser
discounts.

Target Customers

We have established our target market as female consumers
between 18-40 years old. This draws strong foot traffic and a large base of
consumers into our retail locations. Approximately 60% of our merchandise is
geared towards the taste and fashions favored by women between 20-30 years old.
In addition, we seek to fulfill the need of adolescents aged 18-24 with a more
mature mindset, as well as people between age 30-40 who have a young mindset.
About 40% of the products are designed and developed for these two groups of
people. This not only attracts potential consumers and expands the horizon for
profits, but also makes the brand promotion more flexible by analyzing the
different needs of different psychological age groups.

The bulk of our frequent buyers are 25-35 year old women with
moderate to affluent economic backgrounds. This age group is mostly comprised of
white-collar workers and career women, who have high sensitivity for fashion,
strong consumption ability and high updating rate per time unit (which means how
many clothes they change during a time unit).

Our market survey indicated that our targeted customers
have the following income profiles:

Monthly Income
      Level (US$)
    
    as % of Total Customer BaseBelow $300
    
    8.6%$300 to $600
    
    46.2%$600 to $1,200
    
    32.7%Above $1,200
    
    12.5%Total
    
    100%


China Laws and Regulations

Under Chinese laws and regulations, an industry is considered a
key industry if the acquisition of the industry by an foreign entity may have
an impact on national economic security or result in a transfer of actual
control of a domestic enterprise that owns a well-known trademark or historic
Chinese brand name. The women's apparel industry is not considered as a key
industry in China. Accordingly, Chinese laws and regulations do not restrict
foreign investment in Chinas women apparel industry.

When we acquired Shanghai Baby Fox on September 20, 2007, we
received the Certificate of Approval from the Shanghai Foreign Economic Relation
& Trade Commission and the approval from the SFAE Shanghai local branch. The
approvals gave us the permission to change our entity status from a domestic
enterprise to a WFOE, and to continue our business in the womens apparel
industry in China as a WFOE without being subject to any restrictions.

Business Strategy

The elements of Baby Fox's business strategy combine to create
a merchandise assortment that appeals to Chinese women 18-40 years old. Baby Fox
provides stylish fashions at affordable prices, which ultimately distinguish
them from their competitors. The core elements of our business strategy include
the following:

Active Style & Design Management Baby Fox
adopts a fashion brand management model of fast in speed to market, less in
quantity, more in design and style, which keeps us focused on constantly
developing new styles and designs. Baby Fox engages in extensive market research
and analysis, actively monitors global fashion trends, quickly develops new
designs, and works primarily with domestic vendors. All of these components
result in relatively short lead times, with new designs from concept to store
floors in weeks. Close relationships with domestic manufacturers and leading publications allows for
quick production and promotion of trendy styles.

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Active Inventory Monitoring & Management
Our quick design to store floor approach to managing the merchandise mix
is helping to build the Baby Fox brand. Any product in a Baby Fox corporate
owned store that is not sold in two to three weeks is either sent back to our
headquarters or immediately discounted for clearance and popular items are
restocked quickly. We rent a temporary 2,000 square meter space at our
headquarters. Three times each year we conduct special discount sales to the
public to sell these returned products at an 80%- 90% discount. Similarly,
non-corporate owned stores are typically required to follow similar pricing
strategies and inventory policies. This strategy is successful because of our IT
system that supports their responsive supply-chain management.

Broad Merchandise Assortment Baby Foxs
assortment of apparel and accessories are consistently updated to maintain style
and appeal. Our merchandise includes ready-to-wear apparel such as knit and
woven tops, dresses, shorts, pants and skirts, as well as accessories such as
shoes, handbags and jewelry. This allows customers to create ensembles that are
complemented by our color coordinated and fashion-forward accessory items. We
consistently introduce new fashion merchandise into the stores and regularly
update merchandise displays.

Premium Brand Image Baby Fox is building a
focused and differentiated brand image based on fashion nobility, attitude,
value pricing and quality. This image is consistently communicated throughout
our business; including merchandise assortments, in-store visual merchandising
and marketing materials. For example, black and wine-red carpet, trendy clothes
and decoration are sharp contrast to the ordinary storefronts of competing
retailers. Baby Foxs stores currently make strong use of the four colors:
black, gold, red and green which are passionate, free and exceptional in
elevating each stores image and perceived level of sophistication. Baby Fox
attracts fashionable women into its stores through its unique design, color
scheme, and fashionable displays. The brand is largely geared towards
metropolitan women who are in pursuit of uniquely trendy designs that are rich
in individuality.

Value Offering

Baby Fox focuses on offering highly fashionable merchandise at
prices that are competitive, or better than other mall-based specialty
retailers. Baby Fox is able to create a perception of value among an expanding
customer base by utilizing a variety of pricing techniques such as buy two get
one free and buy one get one free. Rather than simply discounting merchandise
Baby Foxs sales strategy is to consistently bring in new fashions at strong
price points, then discount them through offers that encourage and reward larger
quantity purchases.

Customer Loyalty & Rewards

Baby Fox is also implementing many customer loyalty and rewards
programs such as frequent purchaser discounts.

Design & Quality Control

Baby Fox uses computer aided design systems to develop patterns
and production guidelines as part of its product development process. The design
team tests sample garments before production to ensure patterns are accurate,
stylish, and desirable. Baby Fox and its manufacturing partners adhere to strict
quality control programs. Garments that do not pass inspection are immediately
returned to manufacturers for rework. All of our merchandise is marketed under
the Baby Fox brand name. Baby Fox designs and develops its merchandise in-house,
which is manufactured to our specifications. The majority of Baby Foxs
merchandise is received, inspected, processed, warehoused and distributed
through our distribution center based in the in the heart of the Changzhou
fashion district in the Jiangsu Province.

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Operations & Distributions Center

We lease a five story 30,139 square ft. distribution center,
storage facilities, and operations center in Changzhou fashion district in the
Jiangsu Province from our strategic partner and related company Changzhou CTS
Fashion Co., Ltd. CTS. We also lease executive offices in Shanghai from one of
our board directors. With our headquarters and distribution center in Shanghai
and the center of the Jiangsu fashion district and in close proximity to our
manufacturers, Baby Fox is able to continuously monitor quality control and
easily collaborate with its key suppliers.

Baby Fox has a close strategic relationship with its primary
manufacturer CTS which was originally co-founded by Baby Foxs lead designer.
CTS maintains a number of large industrial parks and nine large clothing
manufacturing facilities in the Jiangsu Province. CTSs nine production bases
produce coats, jeanswear, furs, jackets, coats, skirts, sweaters and other
products specific to Baby Foxs design specifications. Our strategic
relationship with CTS allows Baby Fox flexibility in bringing its ever evolving
range of designs and diversified styles quickly to the market.

Marketing & Branding

Our advertising and direct marketing initiatives have been
developed to elevate brand awareness, increase customer acquisition and
retention, and support key merchandising strategies. Our advertising promotes
brand awareness and supports numerous product line expansion opportunities. For
fiscal year 2010, we increased our marketing expenditures. A large portion of
these expenditures will support the launch of our new marketing initiatives. We
plan to build brand awareness through targeted advertising campaigns that focus
specifically on our core customers.

From its inception, Baby Fox has been positioned in China as an
international brand with Italian roots as the brand was originally trademarked
in Italy. Foreign apparel brands from France, Italy, the U.S, Japan, and the U.K
have dominated the high-end fashion scene in China. As a foreign owned U.S.
retailer with operations in China, Baby Fox has unique branding and operating
advantages.

We have been able to build a strong international image in
China by using multi-cultural and international models. We have been able to
generate an enormous amount of free publicity through intelligent brand
positioning and leveraging key media contacts. Baby Fox has ties to the fashion
industry and leading womens fashion magazines. Our latest lines are often
featured in articles which generate substantial store traffic, and prove to be
much more effective than traditional purchased advertising campaigns.

In addition to advertising we also rely on our agency marketing
system to market our brand. We formally adopted an agency marketing system in
2008. A regional agent is an individual or trading company who we contract to
have exclusive and nontransferable rights to sell and promote our products in
designated areas such as a city or province. The contract term is usually for a
year and renewable 60 days prior to expiration. The agent is selected from our
target area and responsible for determining store locations within the area
(contingent upon our approval), setting up our corporate stores in that area,
hiring store staff, and managing all stores day to day operation in the area.
The agent does not have the authority to raise the standard prices of our
products or to offer discounts without our approval, nor can they sell products
of other brand names in the stores. In return for their services, a sales agent
is paid a commission called an agency fee ranging from 5% to 38% of the stores
sales revenue. As our regional agent is selected for local expertise in sales
and marketing in the area, such a marketing system helps us penetrate a target
market more rapidly and provides a proper incentive for the agent to increase
our market share in that area.

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Product Management

Overview

Baby Fox consistently maintains and strengthens its brand
recognition by offering all of our modern and classical merchandise under its
proprietary Baby Fox label. Our product offering includes a range of fashion
separates, tops, dresses, and accessories for career, evening, and casual style.
Baby Fox designs its clothes and colors with the goal of allowing items to be
mixed and matched. This allows customers the interchangeability to present
different styles for various occasions.

Design Approach

Baby Fox continuously updates its fashions and clothing designs
to stay in sync with the latest fashion designs and trends from around the
world. Our design concepts follow the market trend in Italy, France, Japan and
China. This prevents any one business from dominating a specific design or
style. This is what Baby Fox calls its three-in-one design concept as they use
multiple designers to develop current fashions that can be mixed and matched. As
a result of the joint effort, we are able to choose from between about 1,500 to
3,000 newly designed pieces every year to put into the stores.

Existing Product Lines

Every season Baby Fox strives to bring its customers unlimited
surprises by offering fashionable evening wear, business suits, casual wear and
accessories. Baby Fox offers its customers the latest fashions with
exceptionally low prices. Baby Foxs designs break free from traditional styles
and bring out youth and passion. We are committed to providing exciting fashion
options and constantly updating our product lines.

Casual Wear

One of Baby Foxs most popular design categories is Stylish
Casual, which is appropriate for Fridays in the office or weekends. As peoples
life styles change, the market for casual wear has great development potential.
The market demand for casual wear is also increasing every year.

Evening Wear

Baby Fox designs elegant suits and dresses appropriate for
elegant yet fashionable special occasions such as dinner parties, banquets,
weddings and other important occasions.

Business Wear

Our business wear category is appropriate for formal occasions
such as negotiations, business talks, or meeting customers in the office. As
working environments and the nature of business change, plain, stiff business
suits can no longer fulfill consumers needs. More people will choose
appropriate but also comfortable and natural clothes in their daily work. Some
of the domestic business suit brands have started to change positioning moving
towards business casual style.

Accessories

Accessories consist primarily of jewelry, belts and handbags
intended to complement our sportswear and dress selections.

12

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The most effective strategy for penetrating the Chinese market
thus far has been to position oneself at the mid-high to premium segments as
they enter the market. As a foreign retailer, Baby Fox has the unique advantage
to enter a market that has a high desire for high quality products at affordable
prices. Based on our initial success and managements assessment of future
opportunities, Baby Fox is positioned for continued growth over the next several
years.

Inventory Monitoring & Management

Merchandise is received, inspected, processed, warehoused and
distributed through our distribution center based in Jiangsu Province. Our
distribution center located in Changzhou city in Jiangsu province is segregated
both physically and operationally from our related party Changzhou CTS which is
our major supplier. We rent a separate warehouse and office from Changzhou CTS
and have our own personnel, from management to staff, to manage and operate the
distribution center. Any product in a Baby Fox corporate owned store that is not
sold in more than two or three weeks is sent back to our distribution center or
immediately discounted for clearance. Similarly, non-corporate owned stores are
encouraged to follow similar pricing strategies and inventory procedures. This
strategy succeeds because of our outstanding supply-chain management and the
application of point of sale monitoring systems. Management responds quickly to
whats occurring in each region, and more importantly at each store. The
merchandise planning and allocation team works closely with both corporate and
non-corporate store personnel to meet the requirements of individual stores. As
of June 30, 2010 and 2009, approximately 52% and 60% of our total inventory was
at our distribution center compared to our store locations and, for inventory at
our distribution center, approximately 13% and 57% were returned merchandise,
respectively.

Current Retail Locations

Overview

Baby Fox retail stores are located predominantly in
well-positioned mall locations within spaces that average approximately 1,000
square feet. The stores are designed to create an environment that accentuates
Baby Foxs fashions, breadth, and value of merchandise selection.

Both corporate owned stores and non-corporate owned stores use
bold, exaggerated colors, such as eye-catching gold, noble black or passionate
red. The use of settings and decorations create a sense of nobility. The key is
to achieve the unity and balance between color and material. Our merchandise
planning and allocation team works closely with both corporate and non-corporate
store personnel to meet the requirements of individual stores for appropriate
merchandise in sufficient quantities. This team is also responsible for managing
inventory levels, allocating merchandise to stores, and replenishing inventory.

Our management team monitors and tracks the store sales via our
Enterprise Resource Planning (ERP) computer system store by store on both daily
and monthly basis. In addition, the ERP system can also sort our sales and
inventory geographically, city by city and province by province, on both a
monthly and yearly base. A typical sales metric is included in Exhibit 99.1
attached hereto, which can track the monthly sales by store and by per square
meter.

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Baby Fox Store Footprint  As of June 30, 2010



Since the launch of its first retail mall store in July of
2006, Baby Fox has been a success story in Chinas fashion industry. The brand
has gained exposure in leading womens magazines. We currently have 165 store
locations as of June 30, 2010, of which 131 are corporate stores and 34
non-corporate stores.

Corporate Owned Stores

As of June 30, 2010, Baby Fox had 131 corporate stores in
China. We also test new markets with seasonal stores in additional locations
during peak apparel shopping months. Baby Fox seeks to instill enthusiasm and
dedication in its corporate owned store management personnel and sales
associates through incentive programs and regular communication with the stores.
Sales associates receive commissions on sales with a guaranteed minimum hourly
compensation. Store managers receive base compensation plus incentive
compensation based on sales and inventory control.

Non-Corporate Stores

As of June 30, 2010, we had 34 non-corporate stores in China.
Currently, we are able to use our point-of-sale systems to track non-corporate
owned store sales.

Typically, all licensed non-corporate retail stores may only
carry Baby Fox brand merchandise, the store floor must be designed according to
corporate standards, and all employees must represent the Baby Fox brand image
via their customer service attitude, attire, and other relevant procedures. This
is a separate business entity from us. With respect to non-corporate stores,
Baby Fox maintains authority and approval rights with respect to store
locations, store designs, license renewals, merchandise orders, and the right to
conduct random store audits and monitoring.

Upon agreeing to open a non-corporate Baby Fox store the
licensee must open the store within a limited time frame, otherwise the contract
will terminate immediately. The licensee must agree to comply with our policies
with non-corporate stores, including, but not limited to, having the same
computer management software, using our set prices, maintaining a set number of
employees, and hiring employees with the required qualifications. Without our
permission, the licensee cannot transfer the license to a third party or sell
products of other brand names in the licensed store. If the licensee violates
any of our regulations, it shall be fined, and we reserve the right to cancel
the contract which can also be terminated if necessary.

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The term of the license with non-corporate stores is normally
two years, which is renewable 60 days prior to expiration. Non-corporate store
owners pay 30% down payment to order our products, and the balance of 70%
anytime before we ship our products to them. We do not collect any license fee
from non-corporate store owners. Upon signing the contract, we charge the
non-corporate store a one-time non-refundable alliance fee of RMB 20,000
(approximately US$2,918) for using our brand name. The fee is accounted as
revenue from non-corporate stores.

Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, and no other significant obligations of us exist and collectability
is reasonably assured. Non-corporate stores have the right to return unsold
merchandise for up to sixty days after receipt of the merchandise for exchange.
Reserves are established to reflect anticipated losses resulting from the return
of unsold merchandise based on historical information. Currently we estimate
returns to be 20% of our sales to non-corporate stores and relevant reserves
have been made accordingly each reporting period.

Growth Plan

Overview

Based on our initial success and the assessment of the future
opportunity, we are positioned for continued growth over the next several years.
We plan to continue to grow retail store locations over the next few years; but
due to a liquidity constraint, we will be more focused on location selection. We
will also increase our efforts to improve sales at current stores and remove
non-performing store locations in a timely fashion. Corporate stores will
primarily be opened in major metropolitan areas and non-corporate or licensed
stores will be established in suburban communities.

Specialty stores are popular in China because they have good
control over operations, store decorations, and the products and services
offered. Furthermore, smaller focused stores can well adapt to Chinas growing
demand for fast fashion and changing fashion trends (i.e. shorter product
lifecycles and shifting demand for designs). Baby Fox is currently focusing on
expanding in larger cities via corporate owned stores; smaller cities are ideal
targets for non-corporate or licensed stores. There is huge market potential
for women's apparel in less developed cities in China. Owner operated stores in
less developed cities are ideal as local managers have a good understanding of
malls and locations with high foot traffic patterns and are highly incentivized
to capture the still less tapped market of emerging cities while also benefiting
from the lower operating costs of these areas.

While Baby Fox could scale non-corporate stores with minimal
capital, managements preference is to expand via corporate owned stores in
major cities and use licensed stores in less metropolitan areas. The economics
of this strategy help us better manage overall cash flow and inventory levels
and scale the business in a measured manner. We have kept abundant inventory to
support our store expansion plan.

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Corporate Owned Stores

|Pros:                                                                                                                                       |  | Cons:                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Gross margins figures per store are substantially better.                                                                                   |  | Higher working capital and administrative costs due to
      inventory, store set up, and operating costs.                                           
|                                                                                                                                            |  |                                                                                                                                                      
|Greater flexibility in experimenting with displays,
      promotions, and new marketing concepts.                                           |  | Initial store opening costs, fixtures, etc. are absorbed
      by us.                                                                                
|                                                                                                                                            |  |                                                                                                                                                      
|Non-Corporate Owned Stores                                                                                                                  |  |                                                                                                                                                      
|                                                                                                                                            |  |                                                                                                                                                      
|Pros:                                                                                                                                       |  | Cons:                                                                                                                                                
|No working capital required, instantly profitable
      (inventory and fixture purchases are made by independent owners /
      licensees). |  | Careful screening and consistent monitoring of stores are
      needed to insure Baby Fox standards and policies are being adhered to
      properly.
|                                                                                                                                            |  |                                                                                                                                                      
|Minimal risk with respect to expanding in less urban
      markets and improves inventory turnover.                                         |  |                                                                                                                                                      
|                                                                                                                                            |  |                                                                                                                                                      
|Allows for growth with minimal investment capital.                                                                                          |  |                                                                                                                                                      

Additional Growth Initiatives

In addition to expanding store locations, Baby Fox is
developing several initiatives to further accelerate sales, increase margins,
and widen its customer base throughout mainland China. These initiatives include
discount outlets, and a line of Baby Fox Active Sport stores.

Discount Outlets

A discount outlet is a store in which excess inventory can be
sold to the public at a fraction of its original retail prices. This form of
venue for businesses is becoming increasingly popular and lucrative. Discount
stores provide an effective means to generate revenues from otherwise outdated
fashion apparel. There is a consensus that this newly emerging apparel
distribution channel has been successful throughout China. It comes as no
surprise that many Chinese women relish the concept of purchasing last years
trend for a lower purchase price. Discount outlets are classified as Class B
corporate stores. As of June 30, 2010, we had 143 Class A and 22 Class B stores.
Our Class B stores are carefully selected to target different market segments
from Class A stores. We made careful consideration when choosing the locations
of Class B stores. Our Class A stores are located in the major cities, such as
Beijing, Shanghai and Shenzhen while our Class B stores are located in secondary
cities and non-mainstream shopping area of those tier-1 cities. We believe that
our Class B stores will not cannibalize our current Class A store sales. The
product style and design at our Class B stores are more or less out of season
and target areas where customers have both fashion sense and economic
consideration. For the same reason, we believe that our Class A brand, price and
discount expectation will not be affected by Class B stores because they target
different market segments both economically and geographically.

Active Wear Stores

Long term aspirations include the launch of a Baby Fox Active
Sport wear line of boutique stores. We have not launched any Baby Fox Active
Sport stores as of the filing of this report.

Where You Can Find Us

We presently maintain our principal office at Minhang District,
89 Xinbang Road, Suite 305-B5, Shanghai, P.R. China. Our telephone number is +86
21 5415 3855. We maintain a website at www.babyfoxstyle.com.

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Employees

As of June 30, 2010, we have 608 full-time employees, and no
part-time employees.

ITEM 1A. RISK FACTORS.

Risks Relating to Our Business

WE MUST SUCCESSFULLY GAUGE FASHION TRENDS AND CHANGING
CONSUMER PREFERENCES, AND PROVIDE MERCHANDISE THAT SATISFIES CUSTOMER DEMAND IN
A TIMELY MANNER TO INCREASE OUR SALES VOLUME AND IMPROVE OUR OPERATING
RESULTS.

Our success is largely dependent upon our ability to gauge the
fashion tastes of our customers and to provide merchandise that satisfies
customer demand in a timely manner. The global specialty retail business
fluctuates according to changes in consumer preferences dictated, in part, by
fashion and season. To the extent we misjudge the market for our merchandise or
the products suitable for local markets, our sales will be adversely affected
and the markdowns required to move the resulting excess inventory will adversely
affect our operating results. Some of our past product offerings have not been
well received by our broad and diverse customer base. Merchandise misjudgments
could have a material adverse effect on our operating results.

Our ability to anticipate and effectively respond to changing
fashion trends depends in part on our ability to attract and retain key
personnel in our design, merchandising, marketing and other functions.
Competition for this personnel is intense, and we cannot be sure that we will be
able to attract and retain a sufficient number of qualified personnel in future
periods.

Fluctuations in the global specialty retail business especially
affect the inventory owned by apparel retailers, since merchandise usually must
be ordered well in advance of the season and frequently before fashion trends
are evidenced by customer purchases. In addition, the cyclical nature of the
global specialty retail business requires us to carry a significant amount of
inventory, especially prior to peak back-to-school and holiday selling seasons
when we build up our inventory levels. We must enter into contracts for the
purchase and manufacture of merchandise well in advance of the applicable
selling season. As a result, we are vulnerable to demand and pricing shifts and
to suboptimal selection and timing of merchandise purchases. In the past, we
have not always predicted our customers preferences and acceptance levels of
our fashion items with accuracy. In addition, lead times for many of our
purchases are long, which may make it more difficult for us to respond to new or
changing fashion trends or consumer acceptance for our products. If sales do not
meet expectations, too much inventory may cause excessive markdowns and,
therefore, lower than planned margins.

OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON
CONSUMER SPENDING PATTERNS. THE INTERNATIONAL AND CHINESE DOMESTIC ECONOMIC
DOWNTURN MAY CAUSE DECLINES IN CONSUMER SPENDING ON APPAREL AND ACCESSORIES,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.

The global specialty apparel retail industry is highly
competitive. In the Chinese market, we compete with Chinas national and local
department stores, specialty and discount store chains, independent retail
stores and internet businesses that market similar lines of merchandise. We face
a variety of competitive challenges including:

- anticipating and quickly responding to changing consumer demands;
- maintaining favorable brand recognition and effectively marketing our
  products to consumers in several diverse market segments;
- developing innovative, high-quality products in sizes, colors and styles
  that appeal to consumers of
  varying age groups and tastes;

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- sourcing merchandise efficiently;
- competitively pricing our products and achieving customer perception of
    value;
- providing strong and effective marketing support; and
- attracting consumer traffic.

Our business is sensitive to a number of factors that influence
the levels of consumer spending, including political and economic conditions
such as recessionary environments, the levels of disposable consumer income,
consumer debt, interest rates and consumer confidence. Declines in consumer
spending on apparel and accessories could have a material adverse effect on our
operating results. The short-term sector outlook in China is becoming more
promising with faster income growth and better consumer sentiment. Both urban
and rural household income showed faster growth in the first six months of 2010.
The per capita disposable income of urban households grew by 7.5% year-over-year
in real terms during this period. The per capita disposable income of rural
households gained 9.5% year-over-year in real terms during this period. In
addition to macroeconomic conditions, an improvement in the Chinese property and
stock markets has improved consumer confidence. In 2010, Chinas consumer
confidence index has seen a mild increase from 104.7 in January 2010, to 107.9
in March 2010, and then to 108.9 in June 2010. [Source: Li & Fung China
Trade Quarterly August 2010 Issue 19.]

We also face competition with European, American, Japanese and
Canadian manufacturers with established regional and national chains in China.
Meanwhile, softer global demand has posed huge challenges to clothing exporters
within China. An increasing number of export-oriented clothing enterprises now
attempt to engage in China domestic sales. Our success in Chinas domestic
markets depends on our ability to determine a sustainable profit formula to
build brand loyalty and gain market share in these challenging retail
environments. If we cannot effectively take advantage of both domestic and
international growth opportunities, our results of operations could be adversely
affected.

EXISTING AND INCREASED COMPETITION IN THE SPECIALTY
RETAIL, DIRECT-TO-CONSUMER AND WHOLESALE APPAREL BUSINESS MAY REDUCE OUR NET
REVENUES, PROFITS AND MARKET SHARE.

The specialty retail, direct-to-consumer and the wholesale
apparel businesses are each highly competitive. Our retail stores compete on the
basis of, among other things, the location of our stores, the breadth, quality,
style, and availability of merchandise, the level of customer service offered
and merchandise price. Many of our competitors have substantially greater name
recognition as well as financial, marketing and other resources. We cannot
assure you that we will continue to be able to compete successfully against
existing or future competitors. Our competitors may force a markdown or
promotional sales environment which could hurt our ability to achieve our
historical profit margins. Our expansion into markets served by our competitors
and entry of new competitors or expansion of existing competitors into our
markets could have a material adverse effect on our business, financial
condition and results of operations.

WE EXPECT THAT STORE OPENING COSTS WILL REDUCE NET INCOME
IN FUTURE PERIODS.

Due to the initial term of the leases with mall operators and
the cancellation provisions in the store leases, the cost of leasehold
improvements and store fixtures averaging $21,750 per store are charged to
expense as incurred. The effect of store openings could potentially reduce
reported net income in the period of store openings.

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OUR NEW STORES MAY NOT BE SUCCESSFUL AND WILL EXPOSE US
TO ADDITIONAL RISK AND COULD NEGATIVELY AFFECT OUR BUSINESS.

Opening new retail stores will lead to an increase in fixed
costs and operating expenses. These investments expose us to the additional risk
that some of the chosen locations may turn out to be inadequate because of
changes in the areas demographic profile or the location of shopping districts.
Failure or changes in any areas in which we have stores could have a material
adverse effect on our business and results of operations.

WE NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR
POTENTIAL GROWTH AND ACHIEVE OUR EXPECTED REVENUES AND OUR FAILURE TO MANAGE
GROWTH WILL CAUSE A DISRUPTION OF OUR OPERATIONS RESULTING IN THE FAILURE TO
GENERATE REVENUE.

In order to maximize potential growth in our current and
potential markets, we believe that we must expand our sourcing of apparel and
accessories and marketing operations. This expansion will place a significant
strain on our management and our operational, accounting, and information
systems. We expect that we will need to continue to improve our financial
controls, operating procedures, and management information systems. We will also
need to effectively train, motivate, and manage our employees. Our failure to
manage our growth could disrupt our operations and ultimately prevent us from
generating the revenues we expect.

In order to achieve the above mentioned targets, our general
strategies are to maintain and search for hardworking employees who have
innovative initiatives; on the other hand, we will also keep a close eye on
expanding opportunities, for example, acquisition of state-owned enterprises.

WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR BUSINESS AND
OPENING NEW RETAIL STORES.

Our growth strategy depends on our ability to open and operate
new retail stores on a profitable basis. Our operating complexity will increase
as our store base grows, and we may face challenges in managing our future
growth. Such growth will require that we continue to expand and improve our
operating capabilities, and expand, train and manage our employee base. We may
be unable to hire and train a sufficient number of qualified personnel or
successfully manage our growth. Our expansion prospects also depend on a number
of other factors, many of which are beyond our control, including, among other
things, competition, the availability of financing for capital expenditures and
working capital requirements, the availability of suitable sites for new stores
locations on acceptable lease terms, and the availability of inventory. There
can be no assurance that we will be able to achieve our store expansion goals,
nor can there be any assurance that our newly opened stores will achieve revenue
or profitability levels comparable to those of our existing stores in the time
periods estimated by us, or at all. If our stores fail to achieve, or are unable
to sustain, acceptable revenue and profitability levels, we may incur
significant costs associated with closing those stores.

OUR INDEPENDENT AUDITORS HAVE EXPRESSED THEIR CONCERN AS
TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our independent auditors, Friedman LLP, have expressed
substantial doubt concerning our ability to continue as a going concern in its
audit report on our financial statements for the fiscal year ended June 30,
2010. As of June 30, 2010, we had a stockholders deficiency of $7,035,715, a
working capital deficit of $6,483,693 and a net loss of $435,531 for the year
ended June 30, 2010. We will continue incurring additional expenses as we
implement our growth and expansion plan for the remainder of fiscal year 2011,
which will reduce our net income in 2011. If we are not able to achieve profit,
then we likely will be forced to cease operations and investors will likely lose
their entire investment.

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WE PLAN TO MAKE PAYMENTS OF THE UNPAID DIVIDEND THAT WAS
DECLARED BY OUR WHOLLY OWNED SUBSIDIARY, SHANGHAI BABY FOX, IN 2007. THIS
PAYMENT WILL SUBSTANTIALLY DECREASE OUR CASH POSITION.

Our wholly owned subsidiary, Shanghai Baby Fox, declared cash
dividends on August 8, 2007 and December 10, 2007 in the amount of $405,570 at
$4.06 per share, and $437,134, at $4.37 per share, respectively, to Fengling
Wang, its sole shareholder of record on the dates the dividends were declared.
The dividends have not been paid as of the date of this report. We plan to pay
these dividends only when our net income exceeds the total amount due and when
the payment will not have a significant impact on our financial position. The
payment of the dividends will substantially decrease our cash position, and may
consequently reduce the number of corporate stores that we plan to open in the
future.

WE MAINTAIN VARIOUS BUSINESS RELATIONSHIPS WITH RELATED
PARTIES.

We entered into various material agreements with our
shareholders, our officers and directors, the family members of our shareholders
or officers and directors, and enterprises in which one or more of our
shareholders or officers and directors hold substantial interests. Our business
operations and development rely upon the belief that our counterparties to these
agreements will execute their responsibilities and obligations as set forth in
these agreements. A substantial portion of our purchases also derive from our
transactions with related parties.

It is possible that in the future, we will not be able to
generate revenues with related parties at the current level or at all. If and to
the extent such related party transactions also occur in the future, they could
result in a conflict of interests between their duties as our shareholders or
members of our executive group, and their interests as representatives and/or
shareholders of parties that benefit from business relationships with us. Such
conflicts of interest could have a material adverse effect on our business,
financial condition and results of operations.

WE SOURCED 100% OF OUR PRODUCT MANUFACTURING FROM A
RELATED PARTY, CHANGZHOU CTS FASHION CO., LTD, PURSUANT TO A PURCHASE AGREEMENT.
IF THE RELATED PARTY CANCELS THE PURCHASE AGREEMENT, IT WILL TAKE US
CONSIDERABLE TIME AND EFFORT TO LOCATE NEW QUALIFIED SUPPLIERS.

As of June 30, 2010, we sourced 100% of our products from a
related party, Changzhou CTS Fashion Co., Ltd. (Changzhou CTS). Pursuant to
the purchase agreement with Changzhou CTS, we pay 30% of the total price of the
value as down payment upon placing an order, pay 60% upon our receipt of the
order, and pay the remaining balance within 25 days following the receipt of the
products. Besides delivery time and location, the agreement specifies that the
products must be manufactured strictly as confirmed samples and in accordance
with national standards and should be shipped only upon approval of our quality
control director. Should such purchase agreement be cancelled, it will take us
considerable time and effort to locate new qualified suppliers.

OUR AGREEMENTS WITH RELATED PARTIES COULD CREATE
CONFLICTS OF INTEREST AND ADVERSELY AFFECT US.

We believe that the transactions and agreements that we have
entered into with related parties are on terms that are at least as favorable as
could reasonably have been obtained at such time from third parties. However,
the relationship could create, or appear to create, potential conflicts of
interest when our board of directors is faced with decisions that could have
different implications for us and our related parties or their affiliates. The
appearance of conflicts, even if such conflicts do not materialize, might
adversely affect the public's perception of us, as well as our relationship with
other companies and our ability to enter into new relationships in the future,
which could have a material adverse effect on our ability to do business. In
addition, conflicts of interest may arise between us and our related parties and
their affiliates. Our related parties may favor their own interests over our and
your interests.

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SUBSTANTIALLY ALL OF OUR BUSINESS, ASSETS AND OPERATIONS
ARE LOCATED IN CHINA. THE CHINESE GOVERNMENT MAY TAKE MEASURES THAT BENEFIT THE
OVERALL ECONOMY OF CHINA, WHICH MAY HAVE ADVERSE EFFECTS ON OUR
OPERATIONS.

Substantially all of our business, assets and operations are
located in China. The economy of China differs from the economies of most
developed countries in many respects. The economy of China has been
transitioning from a planned economy to a market-oriented economy. Although in
recent years the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry by imposing
industrial policies. It also exercises significant control over China's economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Some of these
measures benefit the overall economy of China, but may have a negative effect on
us.

WE CANNOT ASSURE YOU THAT WE CAN SUCCEED IN OUR STRATEGY
TO GROW ORGANICALLY THROUGH INCREASING THE DISTRIBUTION AND SALES OF OUR
PRODUCTS BY PENETRATING EXISTING MARKETS IN PRC AND ENTERING NEW GEOGRAPHIC
MARKETS IN PRC AS WELL AS OTHER PARTS OF ASIA AND THE UNITED STATES. OUR FAILURE
TO IMPLEMENT THIS STRATEGY MAY RESULT IN A NEGATIVE IMPACT ON OUR GROWTH,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW.

One of our strategies is to grow organically through increasing
the distribution and sales of our products by penetrating existing markets in
PRC and entering new geographic markets in PRC as well as other parts of Asia
and the United States. However, many obstacles to entering such new markets
exist, including, but not limited to, international trade and tariff barriers,
shipping and delivery costs, costs associated with marketing efforts abroad and
maintaining attractive foreign exchange ratios. We cannot, therefore, assure you
that we will be able to successfully overcome such obstacles and establish our
products in any additional markets. Our inability to implement this organic
growth strategy successfully may have a negative impact on our growth, future
financial condition, results of operations or cash flows.

IF WE NEED ADDITIONAL CAPITAL TO FUND OUR GROWING
OPERATIONS, WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL ON TERMS ACCEPTABLE
TO US AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR OPERATIONS.

If adequate additional financing is not available on acceptable
terms, we may not be able to undertake store expansion and we would have to
modify our business plans accordingly. There is no assurance that additional
financing will be available to us.

In connection with our growth strategies, we may experience
increased capital needs and accordingly, we may not have sufficient capital to
fund our future operations without additional capital investments. Our capital
needs will depend on numerous factors, including (i) our profitability; (ii)
competitive conditions in our industry; and (iii) the amount of our capital
expenditures, including acquisitions. We cannot assure you that we will be able
to obtain capital in the future to meet our needs.

In recent years, the securities markets in the United States
have experienced a high level of price and volume volatility, and the market
price of securities of many companies has experienced wide fluctuations that
have not necessarily been related to the operations, performances, underlying
asset values or prospects of such companies. For these reasons, our shares of
common stock can also be expected to be subject to volatility resulting from
purely market forces over which we will have no control. If we need additional
funding, the market fluctuations affecting our stock price could limit our
ability to obtain equity financing.

If we cannot obtain additional funding, we may be required to:
(i) limit our store expansion; (ii) limit our marketing efforts; and (iii)
decrease or eliminate capital expenditures.

Such reductions could materially adversely affect our business
and our ability to compete.

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Even if we do find a source of additional capital, we may not
be able to negotiate terms and conditions for receiving the additional capital
that are acceptable to us. Any future capital investments could dilute or
otherwise materially and adversely affect the holdings or rights of our existing
shareholders. In addition, new equity or convertible debt securities issued by
us to obtain financing could have rights, preferences and privileges senior to
our common stock. We cannot give you any assurance that any additional financing
will be available to us, or if available, will be on terms favorable to us.

BABY FOX LIMITED IS OUR PARENT COMPANY AND COULD TAKE
ACTIONS THAT ARE DETRIMENTAL TO YOUR INVESTMENT FOR WHICH YOU WOULD HAVE NO
REMEDY.

Baby Fox Limited beneficially owns the majority of our
outstanding common stock as of the date of this filing. It has the ability to
substantially influence our management, policies, and business operations. It
will have the ability to control all matters submitted to the stockholders for
approval, including the election and removal of directors and the approval of
any merger and consolidation, or sale of all or substantially all of our assets.
It could take actions detrimental to your investment in the future for which you
would have no remedy.

WE DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN
OR REPLACE THESE EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD
HARM OUR BUSINESS.

Our future success also depends upon our continuing ability to
attract and retain highly qualified personnel. Our business expansion,
management and operation will require additional managers and employees with
industry experience, and our success will be highly dependent on our ability to
attract and retain skilled management personnel and other employees. Competition
for such personnel is intense. There can be no assurance that we will be able to
attract or retain highly qualified personnel. Competition for skilled personnel
in the fashion industry is significant. This competition may make it more
difficult and expensive to attract, hire and retain qualified managers and
employees. Our inability to attract skilled management personnel and other
employees as needed could have a material adverse effect on our business,
operating results and financial condition. Our arrangement with our current
employees is at will, meaning its employees may voluntarily terminate their
employment at any time. We anticipate that the use of stock options, restricted
stock grants, stock appreciation rights, and phantom stock awards will be
valuable in attracting and retaining qualified personnel. However, there is no
assurance that this plan can achieve such effect.

OUR INTERNATIONAL OPERATIONS REQUIRE US TO COMPLY WITH A
NUMBER OF UNITED STATES AND INTERNATIONAL REGULATIONS WHICH MAY INCREASE OUR
OPERATING COSTS, LIMIT THE SCOPE OF OUR TRANSACTIONS AND REDUCE OUR ABILITY TO
CONTINUOUSLY INCREASE OUR PROFITS.

We are required to comply with a number of international
regulations in countries outside of the United States, which may increase our
operating costs. In addition, we must comply with the Foreign Corrupt Practices
Act, or FCPA, which prohibits U.S. companies or their agents and employees from
providing anything of value to a foreign official for the purposes of
influencing any act or decision of these individuals in their official capacity
to help obtain or retain business, direct business to any person or corporate
entity or obtain any unfair advantage. Any failure by us to adopt appropriate
compliance procedures and ensure that our employees and agents comply with the
FCPA and applicable laws and regulations in foreign jurisdictions could result
in substantial penalties and/or restrictions in our ability to conduct business
in certain foreign jurisdictions. We believe we are currently in compliance with
such regulations. The U.S. Department of The Treasury's Office of Foreign Asset
Control, or OFAC, administers and enforces economic and trade sanctions against
targeted foreign countries, entities and individuals based on U.S. foreign
policy and national security goals. As a result, we are restricted from entering
into transactions with certain targeted foreign countries, entities and
individuals except as permitted by OFAC which may reduce our ability to increase
our profits.

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WE MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH
UNITED STATES CORPORATE GOVERNANCE AND ACCOUNTING REQUIREMENTS.

We may incur significant costs associated with our public
company reporting requirements, costs associated with newly applicable corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002 and other rules implemented by the U.S. Securities and Exchange Commission.
We expect all of these applicable rules and regulations to significantly
increase our legal and financial compliance costs and to make some activities
more time consuming and costly. We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors or
as executive officers. We are currently evaluating and monitoring developments
with respect to these newly applicable rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such costs.

Risks Relating to the People's Republic of China

THE PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD
LIMIT THE LEGAL PROTECTIONS AVAILABLE TO YOU AND US.

Unlike common law systems, the PRC legal system is based on
written statutes and decided legal cases have little precedential value. In
1979, the PRC government began to promulgate a comprehensive system of laws and
regulations governing economic matters in general. The overall effect of
legislation since then has been to significantly enhance the protections
afforded to various forms of foreign investment in China. Our PRC operating
subsidiary is subject to laws and regulations applicable to foreign investment
in China. Our PRC affiliated entity is subject to laws and regulations governing
the formation and conduct of domestic PRC companies. Relevant PRC laws,
regulations and legal requirements may change frequently, and their
interpretation and enforcement involve uncertainties. For example, we may have
to resort to administrative and court proceedings to enforce the legal
protection that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than under more developed legal systems. Such
uncertainties, including the inability to enforce our contracts and intellectual
property rights, could materially and adversely affect our business and
operations. Accordingly, we cannot predict the effect of future developments in
the PRC legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of
local regulations by national laws. These uncertainties could limit the legal
protections available to us and other foreign investors.

FAILURE TO COMPLY WITH PRC REGULATIONS RELATED TO THE
ESTABLISHMENT OF OFFSHORE SPECIAL PURPOSE COMPANIES BY PRC RESIDENTS MAY SUBJECT
OUR PRC RESIDENT STOCKHOLDERS TO PERSONAL LIABILITY, LIMIT OUR ABILITY TO
ACQUIRE PRC COMPANIES OR TO INJECT CAPITAL INTO OUR PRC SUBSIDIARIES, AND LIMIT
OUR PRC SUBSIDIARIES ABILITY TO DISTRIBUTE PROFITS TO US.

The PRC State Administration of Foreign Exchange, or SAFE, has
promulgated several regulations, including Circular 75 issued in November 2005
and implementation rules issued in May 2007, requiring registrations with, and
approvals from, PRC government authorities in connection with direct or indirect
offshore investment activities by PRC residents. These regulations apply to our
shareholders and beneficial owners who are PRC residents.

The SAFE regulations require registration of direct or indirect
investments made by PRC residents in offshore companies. In the event that a PRC
shareholder with a direct or indirect stake in an offshore parent company fails
to make the required SAFE registration, the PRC subsidiaries of that offshore
parent company may be prohibited from making distributions of profit to the
offshore parent and from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Further, failure to
comply with the various SAFE registration requirements described above could
result in liability under PRC law for foreign exchange evasion.

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We believe our controlling stockholder, Hitoshi Yoshida, a
Japanese national, who is not a PRC resident as defined in Circular 75 is not
required to register with the relevant branch of SAFE, in connection with his
equity interests in us and our acquisitions of equity interests in our PRC
subsidiary.

However, we cannot provide any assurances that our PRC resident
shareholders, their existing registrations, and their amendments to their
registrations have fully complied with all applicable registrations or approvals
required by Circular 75. Moreover, because of uncertainty over how Circular 75
will be interpreted and implemented, and how or whether SAFE will apply it to
us, we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries ability
to conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with
Circular 75 by our PRC resident beneficial holders. In addition, such PRC
residents may not always be able to complete the necessary registration
procedures required by Circular 75. We also have little control over either our
present or prospective direct or indirect stockholders or the outcome of such
registration procedures. A failure by our PRC resident beneficial holders or
future PRC resident stockholders to comply with Circular 75, if SAFE requires
it, could subject these PRC resident beneficial holders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiaries ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and prospects.

WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT,
LEGAL AND FINANCIAL CONTROLS IN THE PEOPLES REPUBLIC OF CHINA.

The PRC historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in the PRC. As
a result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.

EVEN THOUGH WE HAVE OBTAINED THE GOVERNMENTAL APPROVALS
WHICH ALLOW US TO CHANGE OUR ENTITY FROM A CHINESE DOMESTIC ENTERPRISE TO A
WHOLLY FOREIGN OWNED ENTERPRISE AND TO CONTINUE OUR BUSINESS IN THE CHINESE
WOMENS APPAREL INDUSTRY AS A WHOLLY FOREIGN OWNED ENTERPRISE WITHOUT ANY
RESTRICTIONS, THERE IS SUBSTANTIAL UNCERTAINTY WITH RESPECT TO THE FUTURE
INTERPRETATION AND APPLICATION OF THE RELEVANT LAWS AND REGULATIONS.

Under PRC laws and regulations, an industry is considered a
key industry if the acquisition of the industry by an foreign entity may have
an impact on national economic security or result in a transfer of actual
control of a domestic enterprise that owns a well-known trademark or historic
Chinese brand name. The women's apparel industry is not considered as a key
industry in China. Accordingly, PRC laws and regulations do not restrict
foreign investment in Chinas womens apparel industry.

When we acquired Shanghai Baby Fox on September 20, 2007, we
received the Certificate of Approval from the Shanghai Foreign Economic Relation
& Trade Commission and the approval from the SAFE Shanghai local branch. The
approvals gave us the permission to change our entity from a domestic enterprise
to a WFOE, and to continue our business in the womens apparel industry in China
as a WFOE without being subject to any restrictions.

Although we believe that our operations are in compliance with
current, applicable PRC regulations in all material aspects, many PRC laws and
regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial
uncertainty regarding the future interpretation and application of these laws or
regulations.

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CERTAIN POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO
THE PRC COULD ADVERSELY AFFECT OUR OPERATIONS. OUR OPERATING RESULTS MAY BE
ADVERSELY AFFECTED BY CHANGES IN THE PRCS ECONOMIC AND SOCIAL CONDITIONS AS
WELL AS BY CHANGES IN THE POLICES OF THE PRC GOVERNMENT.

The PRC is transitioning from a planned economy to a market
economy. While the PRC government has pursued economic reforms since its
adoption of the open-door policy in 1978, a large portion of the PRC economy is
still operating under five-year plans and annual state plans. Through these
plans and other economic measures, such as control on foreign exchange, taxation
and restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence
on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved.
Other political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
necessarily have a positive effect on our operations or future business
development. Our operating results may be adversely affected by changes in the
PRC's economic and social conditions as well as by changes in the policies of
the PRC government, such as changes in laws and regulations (or the official
interpretation thereof), measures which may be introduced to control inflation,
changes in the interest rate or method of taxation, and the imposition of
additional restrictions on currency conversion.

Chinas economy grew by 11.1% year-over-year to reach $2.55
trillion US Dollars during the first six months of 2010, while GDP growth slowed
to 10.3% in the second quarter of 2010 from 11.9% growth in the first quarter of
2010, according to the Chinese National Bureau of Statistics. The spokesman of
the Bureau said the slowdown in the growth rate will benefit the economy
because it will prevent it from growing too fast and overheating. Following the
announcement of the 4 trillion Yuan (approximately $588 billion in USD) stimulus
plan in November 2008, China announced a series of packages to boost the
economy, especially, the support plans for ten key industries, that had been
severely harmed by the global recession, including auto & steel, textile,
equipment manufacturing, non-ferrous metal, petrochemical, shipbuilding,
electronics & information, logistics and light industries. Those policies
have played a critical role to mitigate the impact of a global recession and
quickly turned around Chinas economy. However, there is no assurance on whether
Chinas economic recovery is sustainable due to fears of asset bubbles and
uncertainty in interest rate and exchange rate changes. Our operations will be
adversely affected if Chinas economic recovery is not sustainable and the
growth rate starts to decline again.

THE RECENT NATURE AND UNCERTAIN APPLICATION OF MANY PRC
LAWS APPLICABLE TO US CREATE AN UNCERTAIN ENVIRONMENT FOR BUSINESS OPERATIONS
AND THEY COULD HAVE A NEGATIVE EFFECT ON US.

The PRC legal system is a civil law system. Unlike the common
law system, the civil law system is based on written statutes in which decided
legal cases have little value as precedents. In 1979, the PRC began to
promulgate a comprehensive system of laws and has since introduced many laws and
regulations to provide general guidance on economic and business practices in
the PRC and to regulate foreign investment. Progress has been made in the
promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. The promulgation of new laws, changes of existing laws and the
abrogation of local regulations by national laws could have a negative impact on
our business and business prospects.

CURRENCY CONVERSION AND EXCHANGE RATE VOLATILITY COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.

The PRC government imposes control over the conversion of
Renminbi into foreign currencies. Under the current unified floating exchange
rate system, the People's Bank of China publishes an exchange rate, which we
refer to as the PBOC exchange rate, based on the previous day's dealings in the
inter-bank foreign exchange market. Financial institutions authorized to deal in
foreign currency may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.

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Pursuant to the Foreign Exchange Control Regulations of the PRC
issued by the State Council which came into effect on April 1, 1996, and the
Regulations on the Administration of Foreign Exchange Settlement, Sale and
Payment of the PRC which came into effect on July 1, 1996, regarding foreign
exchange control, conversion of Renminbi into foreign exchange by Foreign
Investment Enterprises, or FIEs, for use on current account items, including the
distribution of dividends and profits to foreign investors, is permissible. FIEs
are permitted to convert their after-tax dividends and profits to foreign
exchange and remit such foreign exchange to their foreign exchange bank accounts
in the PRC. Conversion of Renminbi into foreign currencies for capital account
items, including direct investment, loans, and security investment, is still
under certain restrictions. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account items.

Enterprises in the PRC (including FIEs) which require foreign
exchange for transactions relating to current account items, may, without
approval of the SAFE, effect payment from their foreign exchange account or
convert and pay at the designated foreign exchange banks by providing valid
receipts and proofs.

Convertibility of foreign exchange in respect of capital
account items, such as direct investment and capital contribution, is still
subject to certain restrictions, and prior approval from the SAFE or its
relevant branches must be sought.

Furthermore, the Renminbi is not freely convertible into
foreign currencies nor can be freely remitted abroad. Under the PRCs Foreign
Exchange Control Regulations and the Administration of Settlement, Sales and
Payment of Foreign Exchange Regulations, foreign invested enterprises are
permitted either to repatriate or distribute its profits or dividends in foreign
currencies out of its foreign exchange accounts, or exchange Renminbi for
foreign currencies through banks authorized to conduct foreign exchange
business. The conversion of Renminbi into foreign currencies for capital items,
such as direct investment, loans and security investment, is subject, however,
to more stringent controls.

Since 1994, the exchange rate for Renminbi against the United
States dollar has remained relatively stable, most of the time in the region of
approximately RMB8.28 to $1.00. However, in 2005, the Chinese government
announced that it would begin pegging the exchange rate of the Chinese Renminbi
against a number of currencies, rather than just the U.S. dollar and, the
exchange rate for the Renminbi against the U.S. dollar became RMB8.02 to $1.00.
As our operations are primarily in PRC, any significant revaluation or
devaluation of the Chinese Renminbi may materially and adversely affect our cash
flows, revenues and financial condition. We may not be able to hedge effectively
against in any such case. For example, to the extent that we need to convert
United States dollars into Chinese Renminbi for our operations, appreciation of
this currency against the United States dollar could have a material adverse
effect on our business, financial condition and results of operations.
Conversely, if we decide to convert Chinese Renminbi into United States dollars
for other business purposes and the United States dollar appreciates against
this currency, the United States dollar equivalent of the Chinese Renminbi we
convert would be reduced. There can be no assurance that future movements in the
exchange rate of Renminbi and other currencies will not have an adverse effect
on our financial condition. Our operating companies are FIEs to which the
Foreign Exchange Control Regulations are applicable. There can be no assurance
that we will be able to obtain sufficient foreign exchange to pay dividends or
satisfy other foreign exchange requirements in the future.

IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND
ENFORCEMENT OF LEGAL JUDGMENTS UPON US AND OUR OFFICERS AND DIRECTORS BECAUSE
THEY RESIDE OUTSIDE THE UNITED STATES.

As our operations are presently based in PRC and a majority of
our directors and all of our officers reside in PRC, service of process upon us
and such directors and officers may be difficult to effect within the United States. Also, our main assets are located in PRC and any
judgment obtained in the United States against us may not be enforceable outside
the United States.

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SINCE ALL OF OUR OPERATIONS ARE IN PRC, ANY FUTURE
OUTBREAK OF PATHOGENIC ASIAN BIRD FLU IN CHICKENS AND DUCKS, OR ANY OTHER
EPIDEMIC IN PRC COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS OPERATIONS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Since mid-December 2003, a number of Asian countries have
reported outbreaks of highly pathogenic avian bird flu in chickens and ducks.
Since all of our operations are in PRC, an outbreak of the Asian Bird Flu in PRC
in the future may disrupt our business operations and have a material adverse
effect on our financial condition and results of operations. For example, a new
outbreak of Asian Bird Flu, or any other epidemic, may reduce the level of
economic activity in affected areas, which may lead to a reduction in our
revenue if our customers defer future expenditures. In addition, health or other
government regulations may require temporary closure of our offices or stores,
or the offices of our suppliers or partners, which will severely disrupt our
business operations and have a material adverse effect on our financial
condition and results of operations.

WE MAY EXPERIENCE CURRENCY FLUCTUATION AND LONGER
EXCHANGE RATE PAYMENT CYCLES WHICH WILL NEGATIVELY AFFECT THE COSTS OF OUR
PRODUCTS SOLD AND THE VALUE OF OUR LOCAL CURRENCY.

The local currencies in the countries in which we sell our
products may fluctuate in value in relation to other currencies. Such
fluctuations may affect the costs of our products sold and the value of our
local currency profits. While we are not conducting any meaningful operations in
countries other than PRC at the present time, we may expand to other countries
and may then have an increased risk of exposure of our business to currency
fluctuation.

WE HAVE NO PLAN TO DECLARE ANY DIVIDENDS TO SHAREHOLDERS
IN THE NEAR FUTURE.

We currently intend to retain our future earnings, if any, to
support our operations and to finance expansion. However, we plan to make
payments of the unpaid dividend declared by our wholly-owned subsidiary,
Shanghai Baby Fox on August 8, 2007 and December 10, 2007 in the amount of
$405,570 and $437,134, respectively, to Fengling Wang, its sole shareholder of
record at that time, when our net income exceeds the total amount due. The
declaration, and amount of any future dividends will be made at the discretion
of the board of directors, and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating and capital
requirements, and other factors as the board of directors considers relevant.
There is no assurance that future dividends will be paid, and, if dividends are
paid, there is no assurance with respect to the amount of any such dividend.

SINCE MOST OF OUR ASSETS ARE LOCATED IN PRC, ANY
DIVIDENDS OR PROCEEDS FROM LIQUIDATION IS SUBJECT TO THE APPROVAL OF THE
RELEVANT CHINESE GOVERNMENT AGENCIES.

Our assets are predominantly located inside PRC. Under the laws
governing foreign invested enterprises in PRC, dividend distribution and
liquidation are allowed but subject to special procedures under the relevant
laws and rules. Any dividend payment will be subject to the decision of the
board of directors and subject to foreign exchange rules governing such
repatriation. Any liquidation is subject to the relevant government agency's
approval and supervision as well as the foreign exchange control. This may
generate additional risk for our investors in case of dividend payment and
liquidation.

27

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Risks Associated with Our Shares of Common Stock

YOU MAY NOT BE ABLE TO LIQUIDATE YOUR INVESTMENT SINCE
THERE IS NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP FOR OUR COMMON STOCK OR THAT OUR COMMON STOCK WILL EVER BE APPROVED FOR TRADING
ON A RECOGNIZED EXCHANGE.

There is no established public trading market for our
securities. We are currently in the process of applying for a quotation on the
OTC Bulletin Board in the United States. Our shares are not and have not been
listed or quoted on any exchange or quotation system. We cannot assure you that
our application for quotation will be approved or that a regular trading market
will develop or that if developed, will be sustained. In the absence of a
trading market, an investor may be unable to liquidate its investment, which
will result in the loss of your investment.

FUTURE SALES BY OUR STOCKHOLDERS MAY NEGATIVELY AFFECT
OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.

Sales of our common stock in the public market could lower the
market price of our common stock. Sales may also make it more difficult for us
to sell equity securities or equity-related securities in the future at a time
and price that our management deems acceptable or at all. Of the 40,427,500
shares of common stock outstanding as of September 17, 2010, 868,262 shares are,
or will be, freely tradable without restriction upon the filing date of this
report, unless held by our affiliates. The remaining 39,559,238 shares of
common stock are restricted securities and may be resold in the public market
only if registered or pursuant to an exemption from registration. Some of these
shares may be resold under Rule 144.

PENNY STOCK RULES MAY MAKE BUYING OR SELLING OUR COMMON
STOCK DIFFICULT.

Trading in our securities will be subject to the penny stock
rules. The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. These rules require that any broker-dealer who
recommends our securities to persons other than prior customers and accredited
investors, must, prior to the sale, make a special written suitability
determination for the purchaser and receive the purchasers written agreement to
execute the transaction. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated
with trading in the penny stock market. In addition, broker-dealers must
disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker- dealers by such requirements may
discourage broker-dealers from effecting transactions in our securities, which
could severely limit the market price and liquidity of our securities.
Broker-dealers who sell penny stocks to certain types of investors are required
to comply with the Commissions regulations concerning the transfer of penny
stocks. These regulations require broker- dealers to:

- Make a suitability determination prior to selling a penny stock to the
  purchaser;
- Receive the purchasers written consent to the transaction; and
- Provide certain written disclosures to the purchaser.

These requirements may restrict the ability of broker-dealers
to sell our common stock and may affect your ability to resell our common stock.

28

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ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

Our executive office is located at Minhang District, 89 Xinbang
Road, Suite 305-B5, Shanghai, P.R.China, and consists of approximately 3,340
square feet (310 square meters). The owner of this office is a member of our
board directors, Fengling Wang. The lease term is from January 1, 2008 to
December 31, 2012 for five years. The lease is provided to us at an annual
rental of RMB 60,000 (approximately US$8,809), which is at a market level of
monthly rent of RMB 15 per square meter in this area close to Shanghai.

We also have a 41,979 square foot (3,900 square meter)
warehouse located in Jiafang Yuan, Building 7, 3rd floor, No.88 North
Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The lease is
between Shanghai Baby Fox Fashion Co., Ltd. and a related party, Changzhou CTS
Fashion Co., Ltd. The original lease term was from January 1, 2007 to December
30, 2009 for three years, with rent of approximately $22,022 (RMB 150,000) per
year, which approximates a market rate at RMB 3.20 per square meter per month,
payable every six months in Changzhou. On January 1, 2010, the lease term was
extended to December 31, 2010 on the same terms as the original lease agreement.
Changzhou CTS Fashion Co., Ltd. is owned by our chief executive officer, Jieming
Huang.

In addition, we have a 16,146 square foot (1,500 square meter)
office space at Jiafang Yuan, Building 5, 1st floor, No.88 North
Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The lease is
between Shanghai Baby Fox Fashion Co., Ltd. and a related party, Changzhou CTS
Fashion Co., Ltd. The original lease term was from January 1, 2007 to December
31, 2009 for three years, with rent of approximately $11,745 (RMB 80,000) per
year payable every six months which approximates the market rate at RMB 4.50 per
square meter per month in this area of Changzhou. On January 1, 2010, the lease
term was extended to December 31, 2010 on the same terms as the original lease
agreement.

We do not own any other properties. We lease our store space
from mall operators. Instead of paying the mall operators rent at a fixed rate,
the mall operators are entitled to a percentage of our gross sales as
compensation for the store space provided, and other facilities and services.
The percentage ranges from 10% to 29%, dependent upon the specific condition of
each store. At any time, some mall operators have the right to terminate the
lease unilaterally if our gross sales fail to meet their expectations.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits
and legal proceedings which may arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result
in these or other matters may arise from time to time that may harm our
business. We are currently not aware of any such legal proceedings or claims
that we believe will have a material adverse affect on our business, financial
condition or operating results.

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

No Public Market for Common Stock

There is presently no public market for our common stock. We
are currently applying for trading of our common stock on the Over the Counter
Bulletin Board. However, we can provide no assurance that our shares will be
traded on the Bulletin Board or, if traded, that a public market will
materialize or be maintained.

29

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Holders of Our Common Stock

As of September 17, 2010, we had 42 registered
shareholders.

Dividend Policy

The holders of our common stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds
legally available therefore. To date, we have not declared nor paid any cash
dividends. The board of directors does not intend to declare any dividends in
the foreseeable future, but instead intends to retain all earnings, if any, for
use in our business operations. Our wholly-owned subsidiary, Shanghai Baby Fox,
however, declared dividends on August 8, 2007 and December 10, 2007 in the
amount of $405,570 and $437,134 respectively, to Fengling Wang, its sole
shareholder of record at that time. We plan to pay these dividends only when our
net income exceeds the total amount due and when the payment will not have a
significant impact on our financial position. The payment may have a significant
impact on our financial position and reduce our cash position, and may
consequently reduce the number of corporate stores we plan to open in the
future.

Securities Authorized for Issuance Under Equity Compensation
Plans

We currently do not have any equity compensation plans.

Recent sales of unregistered securities

Not applicable.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

The following discussion and analysis of the results of
operations and financial condition of Baby Fox International, Inc. (Baby Fox)
for the years ended June 30, 2010 and 2009 should be read in conjunction with
Baby Fox consolidated financial statements, and the notes to those financial
statements that are included elsewhere in this annual report. Our discussion
includes forward-looking statements based upon current expectations that involve
risks and uncertainties, such as our plans, objectives, expectations and
intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors and Business sections
in this annual report. We use words such as anticipate, estimate, plan,
project, continuing, ongoing, expect, believe, intend, may,
will, should, could, and similar expressions to identify forward-looking
statements.

Our Company

Baby Fox International Inc., a Nevada corporation organized on
August 13, 2007, is a holding company whose primary business operations are
conducted through our wholly-owned China subsidiary Shanghai Baby Fox Fashion
Co., Ltd. (together Baby Fox or the Company). Shanghai Baby Fox Fashion Co.,
Ltd. (Shanghai Baby Fox) was originally founded by our board director,
Fengling Wang, under Chinese law in March of 2006. On September 20, 2007, we
entered into an Equity Share Acquisition Agreement with Fengling Wang in which
we purchased 100% of the equity shares of Shanghai Baby Fox in exchange for RMB
5.72 million (approximately US$806,608). The acquisition was consummated on
November 26, 2007 when we received the Certificate of Approval from the Shanghai
Foreign Economic Relation & Trade Commission.

30

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Shanghai Baby Fox is a China-based specialty retailer,
developer, and designer of fashionable, value-priced womens apparel and
accessories. The companys products are aimed to target women aged 18 to 40 in
China. It continuously updates its fashions and clothing designs to stay in sync
with the latest fashions and trends in Korea, Japan, & Europe. Since the
launch of its first retail mall store in July 2006, the brand has gained
exposure in leading womens magazines and the company has 165 stores in over 30
cities as of June 30, 2010.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect
our financial performance:

Continued growth of Chinese womens apparel industry.
While China has one of the most promising apparel markets in the world, ladies
wear remains the largest sub-sector of this market. According to surveys
conducted by China National Commercial Information Center (CNCIC) to over 260
major department stores across China, ladies wear continued to be the largest
contributor to total apparel sales. Ladies wear accounted for 27.4% in first
half of 2009 and 28.5% in 2008 (the most recent available data from Li &
Fung Research Centers research report Latest Developments of Chinas Apparel
Market, (Issue Number 15 in December 2009). We believe our strong knowledge of
local markets, media contacts and brand image we have built, and award winning
design experience give the organization significant competitive advantages in
this rapidly growing market.

Experienced management and design team. Women in China
have become increasingly selective in their choice of clothing and the Chinese
fashion industry is trending towards shorter product life cycles and better
designs and development. The ability to respond to instantaneous fashion trends
is a key attribute to the success of an apparel company. Baby Fox is at the
forefront of trends by having an experienced management and designer team to
launch a garment from design to production, and finally to distribution in just
weeks. The Company brings together a complimentary mix of industry expertise,
management knowhow, and product innovation. Collectively, the management team
has strong fashion design, operations, and apparel sales experience. Through the
Companys extensive relationships with leading fashion magazines, apparel
manufacturers, and related industry leaders, the Company also has access to a
large pool of experienced managers and knowledgeable advisors.

Store expansion plan. Since inception in 2006, the
Company has 165 corporate and non-corporate stores in over 30 cities as of June
30, 2010. Corporate stores are primarily opened in major metropolitan areas and
non-corporate or licensed stores are mostly established in suburban
communities. We plan to continue growing retail store locations over next few
years but due to liquidity constraint, we will be more focused on location
selections. We will also increase our efforts to improve sales at current stores
and remove non-performing store locations in a timely fashion.

While Baby Fox could rapidly scale non-corporate stores with
minimal capital requirement, managements preference is to expand via corporate
owned stores in major cities and use licensed non-corporate stores in the
2nd and 3rd tier cities. The economics of this strategy
help the Company better manage overall cash flow and inventory levels and
rapidly scale the business in a measured manner. By covering greater
geographical regions, the store expansion plan will increase our sales and add
to the reach of our brand image.

PRC Taxation

Our subsidiary Shanghai Baby Fox is governed by the Income Tax
Law of the Peoples Republic of China concerning Foreign Investment Enterprises
(FIE) and Foreign Enterprises and various local income tax laws (the Income
Tax Laws).

On March 16, 2007, the National Peoples Congress of the PRC
passed the new EIT Law, which took effect as of January 1, 2008. The new EIT Law
imposes a unified income tax rate of 25.0% on all domestic-invested enterprises
and FIEs, such as our PRC operating subsidiary, unless they qualify under
certain limited exceptions. The previous tax rate was 33.0%. In addition, under
the new EIT Law, dividends from our PRC subsidiary to us will be subject to a withholding tax.
The rate of the withholding tax is 10%. Furthermore, the ultimate tax rate will
be determined by treaty between the PRC and the tax residence of the holder of
the PRC subsidiary.

31

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Results of Operations

The following table sets forth key components of our results of
operations for the periods indicated, in US dollars:

|                                             |   | Year Ended June 30 |  
|-------------------------------------------- | - | ------------------ | -
|                                             |   | 2010               |  
|Total sales                                  | $ | 25,199,660         |  
|Cost of goods sold                           |   | 12,341,034         |  
|                                             |   |                    |  
|Gross profit                                 |   | 12,858,626         |  
|                                             |   |                    |  
|Selling, general and administrative expenses |   | 13,023,825         |  
|                                             |   |                    |  
|Loss before provision for income taxes       |   | (235,626           | )
|Income taxes                                 |   | 199,905            |  
|                                             |   |                    |  
|Net loss                                     | $ | (435,531           | )

The following table sets forth the results of our operations
for the periods indicated as a percentage of total sales:

|                                                |  | Year Ended June 30, | 
|----------------------------------------------- |  | ------------------- | 
|As a percentage of Revenue                      |  | 2010                | 
|Total sales                                     |  | 100.0%              | 
|Cost of goods sold                              |  | 49.0%               | 
|Gross profit                                    |  | 51.0%               | 
|                                                |  |                     | 
|Selling, general and administrative expenses    |  | 51.7%               | 
|                                                |  |                     | 
|Income (loss) before provision for income taxes |  | -0.9%               | 
|Income taxes (benefits)                         |  | -0.8%               | 
|                                                |  |                     | 
|Net income (loss)                               |  | -1.9%               | 

Fewer stores were opened than closed during current year as
compared to last year because the Company has adjusted its strategy to slow down
the new store openings and focus on digesting inventory of past seasons and
improving revenue and margin from existing stores in the fiscal year 2010. The
Company has successfully established a tiered inventory digesting structure
through Class A stores, Class B stores and warehouse sales. Class A stores sell
current season products at full price, Class B stores sell one-year-old products
at a 30-50% discount while warehouse sales digest products aged more than one
year at a 80-90% discount. Class A stores are expected to sell 70% of products
of each season with the rest sold through Class B stores and warehouse sales.
The tiered structure would ensure that most, if not all of the inventory can be
digested within 24 months after production. Also based on the Class A and B
stores system formally adopted in fiscal 2009 to better match price and product
demand by different target market segments, a Class A store that does not meet
our sales expectation will first be downgraded to Class B store which are being used to provide discounted merchandise that did not sell
well during the season at Class A stores. When the lease with mall operator
expires, we will evaluate again and if a Class B stores sales performance still
doesnt improve, we will close the store instead of renewing the lease. In
fiscal year 2010, many of our leases with malls expired and after evaluations,
we decided not to renew leases for some of the Class B stores that kept missing
expected sales performance. We will continue to monitor individual store
performance for downgrading or closure decision in order to improve our overall
store sales performance.

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Sales.Our sales are generated from sales of products to
end customers in our corporate stores and sales to non-corporate store owners.
For the years ended June 30, 2010 and 2009, the Company generated revenues of
$25,199,660 and $24,251,143, respectively, reflecting an increase of 3.9%.
Sales at corporate stores increased 7.0% and sales to non-corporate stores
declined 15.5%. The increase in corporate store sales is mainly due to the
increase in average number of stores during the year. The warehouse sales
introduced in fiscal year 2010 to liquidate ageing inventories also contributed
to the increase. The decline in non-corporate store sales is mainly due to fewer
stores partially offset by an increase in sales of 2007 and 2008 products
because of significant discounts offered on cash purchases. For the year ended
June 30, 2010, sales at corporate stores contributed 88.8% of total sales, while
sales to non-corporate stores contributed 11.2%, compared to 86.2% and 13.8%,
respectively, in fiscal year 2009.

The following table shows changes in our sales at existing
stores, changes in sales due to stores opened during the years ended June 30,
2010 and 2009, and the effect of change in rate used for the currency conversion
in 2010 and 2009:

|                                           |   |             |   |   | Corporate  |   |   | Non-Corporate |  
|------------------------------------------ | - | ----------- | - | - | ---------- | - | - | ------------- | -
|                                           |   | Total Sales |   |   | Stores     |   |   | Stores        |  
|Decrease in sales at existing
      stores | $ | (1,782,284  | ) | $ | (1,138,848 | ) | $ | (643,436      | )
|Sales at new stores opened in FY2010       |   | 2,677,014   |   |   | 2,556,936  |   |   | 120,078       |  
|Effect of currency conversion              |   | 53,787      |   |   | 47,771     |   |   | 6,016         |  
|Total increase (decrease) in sales         | $ | 948,517     |   | $ | 1,465,859  |   | $ | (517,342      | )

Comparable Store Sales.The percentage change in
comparable store sales by stores type for the years ended June 30, 2010 as
compared to 2009 is as follows:

2010Corporate stores
    9%Non-corporate stores
    23%


A store is included in comparable store sales (Comp) when it
has been open for at least 12 months and the square footage has not changed by
15 percent or more within the past year. A store is included in Comp on the
first day it has comparable prior year sales. Stores in which square footage has
changed by 15 percent or more as a result of a remodel, expansion, or reduction
are excluded from Comp until the first day they have comparable prior year
sales. Current year foreign exchange rates are applied to both current year and
prior year Comp store sales to achieve a consistent basis for comparison.

A store is considered non-comparable (Non-comp) when it has
been open for less than 12 months or it has changed its square footage by 15
percent or more within the past year. Non-store sales such as online revenues
are also considered Non-comp.

A store is considered Closed if it is temporarily closed for
15 more full consecutive days or is permanently closed. When a temporarily
closed store reopens, the store will be placed in the Comp/Non-comp status it
was in prior to its closure. If a store was in Closed status for 15 or more days
in the prior year then the store will be in Non-comp status for the same days in
the following year.

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Sales per average square foot is as follows:

| |                                         |   | 2010 |  |   | 2009 | 
| | --------------------------------------- | - | ---- |  | - | ---- | 
| | Sales per average square foot
      (1) | $ | 149  |  | $ | 142  | 
| |                                         |   |      |  |   |      | 

(1) Sales per average square foot is calculated based on the
total sales divided by the average total store area of stores in existence
throughout the period.

Store count, openings and closings for our stores are as
follows:

|                               |  |           |  |  | FY2010    |  |  |       |  |  |           |  |  | FY2009    |  |  |       | 
|------------------------------ |  | --------- |  |  | --------- |  |  | ----- |  |  | --------- |  |  | --------- |  |  | ----- | 
|                               |  |           |  |  | Non-      |  |  |       |  |  |           |  |  | Non-      |  |  |       | 
|                               |  | Corporate |  |  | corporate |  |  |       |  |  | Corporate |  |  | corporate |  |  |       | 
|                               |  | Stores    |  |  | Stores    |  |  | Total |  |  | Stores    |  |  | Stores    |  |  | Total | 
|Number of stores as of July 1  |  | 127       |  |  | 53        |  |  | 180   |  |  | 106       |  |  | 47        |  |  | 153   | 
|Number of stores opened        |  | 45        |  |  | 12        |  |  | 57    |  |  | 56        |  |  | 24        |  |  | 80    | 
|Number of stores closed        |  | 41        |  |  | 31        |  |  | 72    |  |  | 35        |  |  | 18        |  |  | 53    | 
|Number of stores as of June 30 |  | 131       |  |  | 34        |  |  | 165   |  |  | 127       |  |  | 53        |  |  | 180   | 

Cost of Goods Sold and Gross Margin

Cost of goods sold was $12,341,034 for the year ended June 30,
2010 as compared to $17,372,064 for the year ended June 30, 2009, a decrease of
29.0% while the gross margin increased from 28.4% to 51.0%. Cost of goods sold
at corporate stores declined 32.0% in spite of increase in sales at corporate
stores mainly because of a reversal of $659,844 inventory markdown in fiscal
year 2010 as compared to an increase of $4,655,595 in inventory reserve in
fiscal year 2009 due to better inventory management and the
liquidation of 2007 and 2008 products through a series of warehouse sales
between December 2009 and May 2010.  Cost of goods sold to non-corporate stores decreased 2.4% as
compared to the year ended June 30, 2009, which is less than the change in sales
at non-corporate stores mainly because of the significant discount the Company
offered on cash purchase of 2007 and 2008 products. As a result, the gross
margin from sales at non-corporate stores declined by 8.4% as compared to
FY2009.

Warehouse sales, as an integral part of the Companys newly
established tiered sales system, will be held on a seasonal basis going forward.
As a result, we do not expect that the margin will return to the historical
level. Neither do we expect that the margin will stay at the current level
because it benefited from the onetime reversal of the write-down as a result of
the better than expected warehouse sales result. We do not have enough
historical data to predict the future margin, but as the new system is
implemented, we should improve our estimates of inventory mark-downs and we
expect the future margin to stabilize around somewhere between the old margin
and the current margin.

Selling, General and Administrative
Expenses.

Selling, general and administrative expenses consist of store
rent, agency fees, maintenance and new store opening expenses, freight,
advertising and marketing costs, office rent and expenses, costs associated with
store staff and support personnel who manage our business activities, and
professional and legal fees paid to third parties.

For the year ended June 30, 2010, the Company incurred selling,
general and administrative expenses of $13,023,825, an increase of 15.7% as
compared to $11,258,984 for FY2009.

Our general and administrative expenses increased 199% as
compared to last year mainly because of additional bad debt allowance provided
for the increase in the balance of accounts receivable. The Company in general
has arranged 60-day collection terms with shopping malls if not otherwise
specified. As of June 30, 2009, we saw some increase in the overdue amount and
to be prudent, $176,803 was provided as allowance for doubtful accounts, about
5% of the total accounts receivable balance as of June 30, 2009. Despite most of our accounts receivable balances
being current (within 60 days), we have seen an increase in the percentage of
balances aged more than 90 days. A full allowance of 100% of the amount of such
balances aged more than 90 days is being provided. For the year ended June 30,
2010, the additional allowance provided was $744,400. The balance of bad debt
allowance was $921,203, representing 24.3% of the total accounts receivable
balance, as of June 30, 2010 as a result of an increase in balances aged over 90
days. The Company was founded not long ago and has a short operation history. In
view of the rapid expansion of our business since inception, we believe that we
have been very prudent in providing sufficient allowance for ageing accounts
receivable balances although we have never had any actual bad debt losses so
far.

34

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We incurred selling expenses of $11,767,869 for the year ended
June 30, 2010, an increase of 8.6% as compared to $10,839,079 for the year ended
June 30, 2009. Of all the selling expenses, store rent in the amount of
$4,663,359 constituted 39.6% and increased 3.7% compared to last year due to
increase in corporate store sales. Agency fees constituted 24.1% of total
selling expenses for FY2010 and increased 38.3% when compared to FY2009 mainly
because the Company formally adopted its agency marketing system in October
2008. In addition, starting in the first quarter of FY2010, the agency fee the
Company paid covers the store staff salary in the region, which also contributed
to the increase in agency fees. The arrangement shifts the management
responsibility of the store staff to the local agents, who will hire and train
the store staff and set up appropriate incentive plans on a performance basis
for them. As a result, salaries and benefits, which constituted 11.8% of total
selling expenses for FY2010, decreased 23.5% as compared to FY2009. Other
selling expenses constituted 24.5% of total selling expenses, of which
$1,242,403 was spent on store charges and promotion and $1,063,533 was spent on
new store opening / build-out and existing stores maintenance / decoration. The
rest of other selling expenses included utilities, phone, supplies and mall
maintenance charges for opened stores.

Other Expenses

We had the same interest-bearing loans for the years ended June
30, 2010 and 2009, therefore, interest expense for fiscal year 2010 amounted to
$124,191 as compared to $124,013 for fiscal year 2009.

Provision for Income Taxes

The Company recognized $199,905 income tax expense for the year
ended June 30, 2010, while in fiscal year 2009 no provision for income taxes was
recorded because of the valuation allowance the Company set up for deferred tax
assets in fiscal year 2009.

For the year ended June 30, 2009, the Company recognized
$183,296 of net deferred tax assets after valuation allowance. In the year ended
June 30, 2010, management concluded that it was more likely than not that
additional deferred tax assets would be realized. This determination was based
upon actual and projected future operating results in our business. Accordingly,
the Company recorded a non-cash income tax benefit of $262,495 in the year ended
June 30, 2010 resulting from the recognition of the valuation allowance on the
deferred tax assets.

Net Loss

We had a net loss of $435,531 for the year ended June 30, 2010
as compared to a net loss of $4,482,629 for the year ended June 30, 2009. Our
net margin improved mainly because of better-than-expected revenue recovered
from the liquidation of the inventory of prior seasons as well as better managed
inventory level through the newly established tiered system and growth of stores
in a more measured manner.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents of
$180,476 and negative working capital of $6,483,693. The following table
provides detailed information about our net cash flows for the financial
statement periods presented in this annual report:

35

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|Cash Flow                                                           |   | Year Ended June 30, |  
|------------------------------------------------------------------- | - | ------------------- | -
|                                                                    |   | 2010                |  
|                                                                    |   |                     |  
|Net cash  used in operating activities                              | $ | (2,052,057          | )
|Net cash used in investing activities                               |   | (10,111             | )
|Net cash provided by (used in) financing activities                 |   | 1,929,137           |  
|Effect of foreign currency translation on cash and cash equivalents |   | 1,110               |  
|Net increase (decrease) in cash and cash equivalent                 | $ | (131,921            | )

Our principal demands for liquidity are for expansion and
opening new stores, working capital and general corporate purposes.

Net Cash Used in Operating
Activities. Net cash used in operating activities totaled $2,052,057 for
the year ended June 30, 2010 as compared to net cash used in operating
activities of $2,601,362 for the year ended June 30, 2009. The decrease in net
cash used in operating activities was primarily due to the settlement of accounts
payable to third party suppliers as the Company shifted all the purchases from
third party suppliers to a related party supplier.  The impact of the decline of our accounts payable balances on the
operating cash flow was partially offset by a reduction in net loss for fiscal
year 2010 versus fiscal year 2009.

Our accounts receivable increased from $2,919,822 at June 30,
2009 to $3,784,745 at June 30, 2010 mainly due to business expansion and sales
increases. Sales increases contributed to the larger amount of outstanding
accounts receivable to be collected from shopping malls, with which we generally
have established 60-day collection terms. In view of the rapid expansion of our
business since inception, the Company has put in place a very rigorous review
process of outstanding accounts receivable balances. At June 30, 2010, we had
$1,204,393 in accounts receivable aged in excess of 60 days, among which
$985,067 was aged over 90 days, compared to $421,803 in excess of 60 days
including $252,541 over 90 days at June 30, 2009. Excluding the amount that can
be offset against the agent fees payable, full allowance has been provided for
the balance over 90 days and not subsequently settled. As a result, allowance
for doubtful accounts increased from $176,803 as of June 30, 2009 to $921,203 as
of June 30, 2010 as a result of an increase in balances aged over 90 days.
Considering that the accounts receivable balances aged between 60 days and 90
days at June 30, 2010 was not material, and was subsequently settled, no bad
debt allowance was accrued with respect to such balances. We believe that we
have been very prudent and have provided sufficient allowance for ageing
accounts receivable balances although we have never had any actual bad debt
losses so far.

Net Cash Used in Investing Activities. Net cash
used in investing activities was $10,111 for FY2010 and $26,828 for FY2009.

Net Cash Provided by  Financing
Activities. Net cash provided by financing activities totaled $1,929,137
for the year ended June 30, 2010, compared to $2,830,113 provided by financing
activities for the year ended June 30, 2009. The decrease of net cash provided
by financing activities was mainly because we had managed a more healthy
inventory turnover as well as a better control of our store expansion for the
year ended June 30, 2010, which in turn resulted in slower growth of our
accounts payable to our affiliate company and inventory balances. During the year
ended June 30, 2010, we also borrowed a new loan of
RMB5,000,000, which will be due on January 31, 2011.
During the year ended June 30, 2009, net cash used in financing activities to
pay down some short-term loans totaled $74,502.

Cash.At June 30, 2010, we had cash of
$180,476, as compared to $312,397 as of June 30, 2009. Although cash used in
operating activities decreased for the year ended June 30, 2010 as compared to
that for the year ended June 30, 2009, we also had managed to slow down the
growth of our payable to our affiliate company, which resulted in a significantly
lower amount of net cash provided by financing activities for the year ended
June 30, 2010, as compared to the same period for fiscal year 2009. As a result,
the company had a net cash outflow of $131,921 for the year ended June 30, 2010
compared to a net cash inflow of $202,257 for fiscal year 2009.

36

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As of June 30, 2010, the Companys current liabilities exceeded
its current assets by $6,483,693 and the Companys total liabilities exceeded
its total assets by $7,035,715. The Companys cash position on June 30, 2010 was
$180,476. Our auditor has expressed their concern as to our ability to continue
as a going concern in the audit opinion of our financial statements for the year
ended June 30, 2010.

We believe that we can satisfy our cash requirements during the
next 12 months through reduction of expenses associated with retail store
openings, better management of our inventory and realization of our accounts
receivables. We have experienced a rapid growth in both sales and store numbers
since 2008. The Company has adjusted its strategy to slow down the new store
openings and focus on digesting inventory of past seasons and improving revenue
and margin from existing stores in the fiscal year 2010, which is expected to
continue in fiscal year 2011. The Company has successfully established a tiered
inventory digesting structure through Class A stores, Class B stores and
warehouse sales. Class A stores sell current season products at full price,
Class B stores sell one-year-old products at a 30-50% discount while warehouse
sales digest products aged more than one year at a 80-90% discount. Class A
stores are expected to sell 70% of products of each season with the rest sold
through Class B stores and warehouse sales. The tiered structure would ensure
that most, if not all of the inventory can be digested within 24 months after
production. From December 2009 to May 2010, the Company held a series of large
warehouse sales and cleared the entire 2007 inventory and realized the majority
of the 2008 inventory and generated around $1.5 million in cash. Additional
warehouse sales scheduled in the next twelve months are expected to generate
similar amount of revenue and sales from Class A and Class B stores are expected
to be around $24 million. We believe that cash generated from the stores and
warehouse sales in the next 12 months will be sufficient to cover payment for
inventory purchases and SG&A expenses of around $21 million. Concurrent with
the establishment of a tiered inventory digesting structure to increase sales
and liquidate the inventory in a timely fashion, the Company is also striving to
encourage cash purchases from non-corporate store owners, settle long-aged
account balances and maintain the realization of new accounts receivable from
shopping malls within 60 days.

Our accounts payable are mainly due to our related party which
we have negotiated and have established a favorable six-month payment term with
additional extension if the payment would materially impact the Companys
liquidity profile. This policy will effectively prevent further deterioration of
the Companys cash position.

The Company has successfully amended its loans due in March and
June, 2010 and extended the term with the lenders to January and June 2011,
respectively. Those loans are borrowed externally from third parties.

In addition, the Company believes it can meet its liquidity
requirements for working capital and general corporate purposes during the 2011
fiscal year from a variety of other sources. These sources include renewal of
outstanding debts when due, new short or long-term borrowings from both related
and unrelated parties and financial institutions, and future equity financings
although there is no assurance that additional financings, whether debt or
equity, will be available.

Loan Facilities

At June 30, 2010, we had $810,160 in long-term debts. The
long-term debts consisted of the following:

|                                                                                                       |   | June 30, 2010 |  |   | June 30, 2009 | 
|------------------------------------------------------------------------------------------------------ | - | ------------- |  | - | ------------- | 
|Amount borrowed from shareholder, bearing
      interest at 5% per annum and due February 17, 2013     | $ | 810,160       |  | $ | 810,160       | 
|Amount borrowed from an unrelated party, bearing interest
      at 10% per annum and due June 16, 2011 |   | 839,359       |  |   | 835,050       | 
|Amount borrowed from Changzhou Tianfa,
      bearing zero interest and due January 31, 2011            |   | 736,279       |  |   | -             | 
|Subtotal                                                                                               |   | 2,385,798     |  |   | 1,645,210     | 
|Less: current portion                                                                                  |   | 1,575,638     |  |   | 835,050       | 
|Total                                                                                                  | $ | 810,160       |  | $ | 810,160       | 

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Long-term debts mature as follows:

|Fiscal year ended June 30, 2011 |  | 1,575,638 | 
|------------------------------- |  | --------- | 
|2012                            |  | -         | 
|2013                            |  | 810,160   | 

Total interest expense on loans amounted to $124,191 for the
year ended June 30, 2010 and $124,013 for the fiscal year ended June 30,
2009.

Obligations Under Material Contracts

Below is a table setting forth our contractual obligations as
of June 30, 2010:

|                                                             |   |           |  |   | Payment
      due in year ended June 30, | 
|------------------------------------------------------------ | - | --------- |  | - | ---------------------------------------- | 
|                                                             |   | Total     |  |   | 2011                                     | 
|Long term debt obligations (including current
      portion) | $ | 2,385,798 |  | $ | 1,575,638                                | 
|Operating lease obligations                                  |   | 1,391,152 |  |   | 1,369,064                                | 
|Purchase obligations                                         |   | -         |  |   | -                                        | 
|Total                                                        | $ | 3,776,950 |  | $ | 2,944,702                                | 

Seasonality

Since we are in fashion clothing retail industry, store traffic
is usually heavier at calendar year ends shopping season and various public
holidays in China throughout the year, especially the Chinese spring festival
which usually falls in February, the Labor Day holidays around May
1st and National Day holidays during the week around October
1st.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements include the
financial statements of Baby Fox International and its wholly owned subsidiary
Shanghai Baby Fox. All significant inter-company transactions and balances have
been eliminated in consolidation. Baby Fox International and its subsidiary
Shanghai Baby Fox together are referred to as the Company.

Our management's discussion and analysis of our financial
condition and results of operations are based on the consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us 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 as well as the
reported net sales and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and assumptions. We base our estimates on
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements included , we
believe that the following accounting policies are the most critical to aid you
in fully understanding and evaluating this management discussion and analysis:

Revenue Recognition and Return Policy. Our
revenues are generated from sales at our company-owned retail stores and from
sales of merchandise to licensed non-corporate owned stores. Revenues from sales
at company owned retail stores are recognized when the ultimate customer
purchases the merchandise in the store and pays for it at the cash register.
Customers have the right to return merchandise for credit, exchange or refunds according to department stores policy for
up to fourteen days after purchase. The return policy is set by corporate
headquarters and consistent among all our corporate stores. Period allowed for
return is short (two weeks) and based on historical experience, actual returns
by end consumers have been rare and immaterial across all retail stores.
Management will keep monitoring returns by end consumers at our corporate stores
as we open more stores each period.

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Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, and no other significant
obligations of the Company exist and collectability is reasonably assured.
According to the contract, non-corporate stores have the right to return
defected merchandise within ten days of receipt. Return of unsold merchandise
for current style is determined by our headquarters and full cooperation from
non-corporate stores is required. Reserves are established to reflect actual and
anticipated returns of defected and unsold merchandise based on historical
information. Currently we estimate returns to be 20% of our sales to
non-corporate stores and relevant reserves have been made accordingly each
reporting period. Since fashion clothing is trending towards shorter product
life cycles and the return period we allow for non-corporate stores is
relatively long, current reserves already take into the effect of introducing
new products on expected return of previous products. The return reserve based
on this percentage of sales has been consistent with actual returns in our
operating history. As we continue to open more non-corporate stores, we will
closely monitor returns for existing and new stores and adjust reserve for
returns if necessary. We do not offer early payment discounts, incentive
discounts based on volume or credit for products that do not sell well at
non-corporate stores. Shipping and handling of merchandise sold to non-corporate
stores is not separately billed to customers or paid directly by the customer.

Marketing Expenses. Due to the short
initial term of the leases with mall operators and the cancellation provisions
contained in the store leases, the initial costs of store opening expenses are
typically accounted as marketing expenses and are charged to expense as
incurred. The cost of leasehold improvements and store fixtures averaging
$21,750 are charged to expense as incurred. The effect of store openings could
potentially reduce our reported net income in the period of store openings.

Inventories. Inventories, consisting of finished
goods and accessories, are valued at the lower of cost as determined by the
average cost or market. Cost includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable condition. Due to the
high style nature of the Companys merchandise, slow moving, out of season and
broken style merchandise is sometimes sold at warehouse sales below cost.
Reserves are created to reduce the carrying value of these items to market
value.

The company maintains a perpetual inventory and sales report,
by store location. This is updated daily based upon shipping and sales reports.
A weekly review is made by the merchandising group and management to identify
slow moving merchandise. Merchandise which is slow moving during the first month
at a store is reported to the head office, and is sometimes moved to other
stores, due to varying style demand in the diverse markets in China. Unsold
merchandise is then marked down, and if not sold within 90 days of receipt, it
is shipped back to the warehouse. The company then has periodic discount
warehouse sales and uses certain liquidators.

The company maintains a reserve for inventory markdowns. This
encompasses current goods held for liquidation and markdown, and application of
historical percentages of current inventory which is anticipated to be marked
down and /or liquidated. Currently this percentage stands at 42% of ending
inventory level based on historical experience and current goods held for
liquidation, and reserves are made accordingly at each reporting period. The
company periodically adjusts the percentage based on a review of changing ratios
and the percentage of selling prices recovered through liquidation.

Off Balance Sheet Treatment for Store Opening and Rent
Expenses

Because mall operators can terminate our leases any time and
have no obligation for renewal of our leases, we did not capitalize our
leasehold improvements and store fixtures.

39

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Consolidated Financial Statements

The full text of our audited consolidated financial statements
as of June 30, 2010 and 2009 begins on page F-1 of this Report.

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------------

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal
executive officer and principal financial officer, Mr. Huang and Ms. Chen,
respectively, evaluated the effectiveness of our disclosure controls and
procedures. The term disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this report, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, Mr. Huang and Ms. Chen concluded that as of June 30,
2010, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.

(b) Managements annual report on internal control over
financial reporting

This annual report does not include a report of managements
assessment regarding internal control over financial reporting or an attestation
report of the companys registered public accounting firm due to a transition
period established by rules of the Securities and Exchange Commission for newly
public companies.

(c) Changes in internal control over financial reporting

During the year ended June 30, 2010, there were no changes in
our internal control over financial reporting identified in connection with the
evaluation performed during the fiscal year covered by this report that has
materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.

Executive Officers and Directors

The following table sets forth the names, ages and positions of
our current executive offices and directors. The directors will hold such office
until the next annual meeting of shareholders and until his or her successor has
been elected and qualified.

|Name          | Age | Position                                                                     
|------------- | --- | -----------------------------------------------------------------------------
|Jieming Huang | 31  | Chief Executive
      Officer, President & Chairman of the Board of Directors
|Fengling Wang | 58  | Director                                                                     
|Jieping Huang | 32  | Director                                                                     
|Ping Chen     | 63  | Vice President of Finance and
      Controller                               
|Liling Zhong  | 32  | Vice President of
      Public and Media Relations                           
|Lingdi Wu     | 31  | Vice President of Promotions
      & Strategic Planning                      
|Jianwei Shen  | 35  | Vice President of
      Retail Store Sales                                   
|Yang Liu      | 34  | Vice President of Marketing                                                  

Business Experience

The following summarizes the occupation and business experience
for our officers, directors, key employees and consultants

Jieming Huang, Chief Executive Officer, President and
Chairman of the BoardMr. Huang has been the CEO, President and Chairman
of the Board of Directors of Baby Fox International, Inc. since 2007. Mr. Huang
is the innovator behind the development and success of the emerging Baby Fox
brand. He has over 7 years of executive experience in fashion design, apparel
manufacturing, marketing and logistics. Mr. Huang worked in Japan from 1994 to
2000 with leading apparel companies. He returned to China in 2000 to co-found
CTS, a leading clothing manufacturer. From 2000 to present, Jieming Huang was
Chief Executive Officer, President and Chairman of the Board, Changzhou CTS
Fashion Co., Ltd. and Changzhou E.I.S. Fashion Co., Ltd. He has been CEO of
Shanghai Baby Fox Fashion Co., Ltd. since March 2006.

Fengling Wang, Lead Designer & Member of Board of
Directors Ms. Wang has been a director of Baby Fox International, Inc.
since 2007. Ms. Wang is a leading and highly recognized fashion designer and
apparel industry executive, with over 35 years of experience in the fashion and
apparel industry. Ms. Wang is the recipient of several prestigious fashion
design awards in China, Japan and Europe, including Chinas National Golden
Scissors Award, and Japans Fashion & Garment Award for Best Suit-Dress
Cut. Ms. Wang is often featured as a leading fashion industry expert in
magazines, news, TV shows and radio programs. Since 2008, Ms. Wang has been our
Lead Designer at Baby Fox International, Inc. From March 2006 to the present,
Ms. Wang has been on the board of directors of Shanghai Baby Fox Fashion Co.,
Ltd., Changzhou CTS and Changzhou E.I.S. Fashion Co., Ltd. From May 1999 to
February 2006, Ms. Wang served as General Manager at Changzhou Diamond Garments
Co., Ltd.

Jieping Huang, Supervisor & Board Member From
1994 to 2000, Mr. Huang was engaged in Japanese apparel industry. He came back
to China in the year 2000. He has great knowledge about the apparel
manufacturing and good sense of the fashion trend. From 2000 to present, Jieping
Huang has been our Deputy General Manager at Shanghai Baby Fox Fashion Co., Ltd.
From 2000 to February 2006, Jieping Huang was a Board of Director and Deputy
General Manager at Changzhou CTS Fashion Co., Ltd. and at Changzhou E.I.S.
Fashion Co., Ltd.

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Ping Chen, Vice President of Finance From February
2006 to Present, Ms. Chen has been our Vice President of Finance. Ms. Chen is
the former Senior Vice President of Finance for Jiangsu Changzhou Citys E.I.S
Fashion Clothing Company. Ms. Chen is the previous Senior Financial Department
Manager for Changzhou Industry Investment Company, and the prior Financial
Department Manager for Jiangsu Changzhou Citys Corduroy Corporation. Ms. Chen
was the Chief Accountant for Jiangsu Wujin Electrical Machinery Financial
Department from 1971 to 1980, and the former Committee Member of the Tenth
Annual Chinese Peoples Political Consultative Committee (CPPCC). Ms. Chen has a
Bachelors Degree in Enterprise Economy Management from Jiangsu TV Broadcast
University. From April 2001 to February 2006, Ms. Chen was Vice President of
Finance at Changzhou CTS Fashion Co., Ltd.

Liling Zhong, Vice President of Public and Media
Relations Ms. Zhong has been our Vice President of Public and Media
Relations since May 2006. Ms. Zhong is the former Editor and Fashion Expert for
Beijing Ruili Magazine Societys Clothing Design magazine, and a previous
Manager at Jean-Louis Scherrer, a leading French fashion company. Ms. Zhong has
a strong knowledge of floor-plan design, employee training, and media relations.
Ms. Zhong has a Bachelors Degree in Fashion Design from Beijing Clothing
Technology Institute; design study at the Theater & Arts School. From
January 2004 to May 2006, Ms. Zhong was Senior Editor at Beijing Ruilie Magazine
House.

Lingdi Wu, Vice President of Promotions & Strategic
Planning Ms. Wu has been our Vice President of Promotions &
Strategic Planning since March 2006. Ms. Wu is skilled in the development and
planning of new product releases, promotional events, press conferences, and
fashion exhibition shows. Ms. Wu is the former Director of Client Relations
Department for Diamond Fashion Company, Ltd. From 2001 to 2006, Ms. Wu was
President of the Planning department at Changzhou Diamond Garments Co., Ltd.

Jianwei Shen, VP of Retail Store Sales Mr. Shen has
been the Marketing Manager of Shanghai Baby Fox Fashion Co., Ltd. since 2006. He
has great experience in marketing, and has brilliant marketing strategy in the
apparel industry. He was the marketing manager of Diamond Apparel Co., Ltd. from
1999 to 2006. He has been at his current position since March 2006.

Yang Liu, Vice President of MarketingFrom April 2007 to the present, Ms. Liu has been our Vice President of Marketing.
  Ms. Liu was the former IT Manager with Baby Fox, responsible for development
  of ERP systems and supply chain management. She is also the former Marketing
  Manager of Beijing Oubosi Product Co., a leading China fashion magazine publisher,
  and the previous Assistant to the General Manager at Beijing Bilingual Advertising
  Times Company, Ltd. Ms. Liu has a Bachelors Degree in Computer Science
  and Technology from Northeast University, Qinghuangdao Campus. From March 2005
  to April 2006, she was Executive Marketing Manager at Beijing OPUS Productions
  Co., Ltd. From May 2002 to March 2005, she was an Assistant to General Manager
  at Beijing Bilingual Time Advertising Co., Ltd. From May 2006 to April 2007,
  she was Vice President of IT at Shanghai Baby Fox Fashion Co., Ltd.

Employment Agreements/ Terms of Office

None of the members of the Board of Directors or members of the
management team presently have employment agreements with us.

Option Plan

On January 18, 2008, we issued a total of 37,957,487shares of
our common stock, $.001 par value per share, to Baby Fox Limited, a British
Virgin Islands entity controlled by Hitoshi Yoshida, our founder and former
officer and director, as founders shares.

42

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On May 6, 2008, Hitoshi Yodshida entered into stock option
agreements with our directors, Jieming Huang, Jieping Huang and Linyin Wang, to
purchase all of the shares of Baby Fox Limited. The option agreements were entered into to permit the acquisition of
equity in Baby Fox Limited over time by Jieming Huang, Jieping Huang and Linyin
Wang under the PRC merger and acquisition, or M&A, related regulations.
These M&A regulations were promulgated on August 8, 2006 by six Chinese
regulatory agencies (including the PRC Ministry of Commerce, or MOFCOM, and
China Securities Regulatory Commission, or CSRC). The jointly issued M&A
regulations, known as Circular 10, were captioned Regulation on Mergers and
Acquisition of Domestic Enterprises by Foreign Investors and they became
effective on September 6, 2006. Under Circular 10, an offshore special purpose
vehicle, or SPV, formed for purposes of overseas listing of equity interests in
China-based companies and controlled directly or indirectly by Chinese companies
or individuals must obtain the approval of the CSRC prior to the listing of such
SPVs securities on an overseas stock exchange. Circular 10 also requires
approval from MOFCOM for round-trip investment transactions in which a
China-based company or a PRC resident, or Acquirer, using an offshore entity
controlled by the Acquirer, acquires any PRC local company that is an affiliate
of the Acquirer. Mr. Yoshida is not a Chinese resident and is not subject to the
PRC merger and acquisition related regulations which applies only to Chinese
residents; therefore, no approval will be or was required by either CSRC or
MOFCOM in connection with the listing of our stock on the OTCBB or the business
combination transaction among Baby Fox, Shanghai Baby Fox and Baby Fox Limited.
In addition, there is no registration requirement of the stockownership of Mr.
Yoshida. The options granted pursuant to the three stock option agreements were
originally exercisable until December 31, 2018 upon the Company achieving
certain milestones as set out in the Exercise Schedule attached to each
agreement. Mr. Yoshida is the owner of 10,000 shares of Baby Fox Limited which
represent 100% of the issued and outstanding common stock of Baby Fox
Limited.

Five of the seven milestones set out in the option agreements
were not achieved and it was not clear if the achievement of such milestones was
practicable, and it appeared that the options might never vest. Furthermore, the
option arrangements might have triggered certain unintended accounting issues
for the Company. As a result of these factors, on June 17, 2010, Mr. Yoshida
entered into rescission agreements with Jieming Huang, Jieping Huang, and Linyin
Wang rescinding the stock option agreements. No options had been exercised by
Jieming Huang, Jieping Huang, or Linyin Wang as of the effective date of the
rescission agreements.

The parties to the option agreements are close family members
and by nature of their familial relationships, they will continue to have
control over the underlying equity interest. As such, we believe the management
will continue to be motivated despite the rescission of the option
agreements.

The option agreements were not rescinded in response to any
government inquiries and will not impact our business and the current resale
offering of our common stock.

Family relationships

Fengling Wang, our director, is the mother of Jieming Huang,
our Chief Executive Officer, President and Chairman of the Board, and Jieping
Huang, Supervisor and Board Member. Jieming Huang and Jieping Huang are
brothers. Therefore, none of our directors are independent. Hitoshi Yoshida, the
majority shareholder of Baby Fox Limited which holds a majority of the
outstanding shares of common stock of our Company was married to Fengling Wang
but divorced in October 2008.

Involvement in certain legal proceedings

To the best of our knowledge, none of our directors, executive
officers or control persons has been convicted in a criminal proceeding,
excluding traffic violations or similar misdemeanors, or has been a party to any
judicial or administrative proceeding during the past ten years that resulted in
a judgment, decree or final order enjoining the person from future violations
of, or prohibiting activities subject to, federal or state securities laws
(except where not subsequently dismissed without sanction or settlement), or
from engaging in any type of business practice, or a finding of any violation of
federal or state securities laws. To the best of our knowledge, no petition
under the federal bankruptcy laws or any state insolvency law was filed by or
against, or a receiver, fiscal agent or similar officer was appointed by a court
for the business or property of any of our directors, officers or control
persons, or any partnership in which any of our directors, officers or control persons was a general
partner at or within two years before the time of such filing, or any
corporation or business association of which any of our directors, officers or
control persons was an executive officer at or within two years before the time
of such filing.

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Audit Committee and Audit Committee Financial Expert

Our board of directors functions as an audit committee and
performs some of the same functions as an audit committee including: (1)
selection and oversight of our independent accountant; (2) establishing
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls and auditing matters; and (3) engaging outside
advisors. We are not a "listed company" under SEC rules and is therefore not
required to have an audit committee comprised of independent directors. Our
board of directors has determined that its members do not include a person who
is an "audit committee financial expert" within the meaning of the rules and
regulations of the SEC. Our board of directors has determined that each of its
members is able to read and understand fundamental financial statements and has
substantial business experience that results in that member's financial
sophistication. Accordingly, the board of directors believes that each of its
members have the sufficient knowledge and experience necessary to fulfill the
duties and obligations that an audit committee would have.

Code of Ethics

A code of ethics relates to written standards that are
reasonably designed to deter wrongdoing and to promote:

- Honest and ethical conduct, including the ethical handling of actual or
  apparent conflicts of interest between personal and professional
  relationships;
- Full, fair, accurate, timely and understandable disclosure in reports and
  documents that are filed with, or submitted to, the SEC and in other public
  communications made by the company;
- Compliance with applicable governmental laws, rules and regulations;
- The prompt internal reporting of violations of the code to an appropriate
  person or persons identified in the code; and
- Accountability for adherence to the code.

We have adopted a corporate code of ethics that applies to our
principal executive officer, principal accounting officer, and persons
performing similar functions, as set forth in Exhibit 14.1 hereto. We are in the
process of making our code of ethics available on our website, which is located
at www.babyfoxstyle.com. Once the code of
ethics is available on our website, any amendments or waivers to the code of
ethics will be posted on our website within four business days of such amendment
or waiver. Until such time, any amendments or waivers to our code of ethics will
be filed with the SEC in a Current Report on Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION.

Executive Compensation

The following table sets forth all compensation awarded to,
earned by or paid to our named executive officers and directors. We do not
anticipate adjusting our compensations to executive officers and directors in
the foreseeable future.

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SUMMARY COMPENSATION TABLE

|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  | Nonqualified |  |              |  |                  
|------------------------------------------------------------------ |  | -------------------- |  | ----------------------------- |  | ----- |  | ------ |  | ------ |  | -------------- |  | ------------ |  | ------------ |  | -----------------
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  | Non-Equity     |  | Deferred     |  |              |  |                  
|                                                                   |  |                      |  |                               |  |       |  | Stock  |  | Option |  | Incentive Plan |  | Compensation |  | All Other    |  |                  
|Name and                                                           |  |                      |  | Salary                        |  | Bonus |  | Awards |  | Awards |  | Compensation   |  | Earnings     |  | Compensation |  | Total            
|principal position                                                 |  | Year                 |  | ($)                           |  | ($)   |  | ($)    |  | ($)    |  | ($)            |  | ($)          |  | ($)          |  | ($)              
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Jieming Huang, Chief
      Executive Officer, President (1)        |  | 2010 2009
      2008 |  | 5,143
      5,143
      5,143 |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143 5,143
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Fengling Wang, Director
      (1)                                  |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143      
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Jieping Huang Director
      (1)                                   |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143 5,143
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Ping Chen, Vice President
      of Finance                         |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143      
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Liling Zhong, Vice
      President of Public and Media Relations   |  | 2010 2009
      2008 |  | 6,857 6,857 6,857             |  |       |  |        |  |        |  |                |  |              |  |              |  | 6,857 6,857      
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Lingdi Wu, Vice President
      of Promotions & Strategic Planning |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143      
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Jianwei Shen, Vice
      President of Retails Store Sales          |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143      
|                                                                   |  |                      |  |                               |  |       |  |        |  |        |  |                |  |              |  |              |  |                  
|Yang Liu, Vice President
      of Marketing                        |  | 2010 2009
      2008 |  | 5,143 5,143 5,143             |  |       |  |        |  |        |  |                |  |              |  |              |  | 5,143 5,143      

(1)Jieming Huang, Fengling Wang and Jieping Huang,
each received compensation in the amount of RMB 3,000 from Shanghai Baby Fox and
RMB 4,800 from Changzhou CTS for services rendered to the Company in 2009 and
2008.

Employment Agreements

None of the members of the Board of Directors or members of the
management team presently has employment agreements with us. We do not
anticipate entering into employment agreements with the members of the Board of
Directors in the foreseeable future.

Outstanding Equity Awards at Fiscal Year End

There were no unexercised options, stock that has not vested or
equity incentive plan awards for any named executive officer outstanding as of
June 30, 2010.

45

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Director Compensation

Our directors receive salary compensation as disclosed in the
Summary Compensation Table above. Our directors will not receive a fee for
attending each board of directors meeting or meeting of a committee of the board
of directors. All directors will be reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attending board of director
and committee meetings.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
      AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------------

The following table sets forth, as of September 17, 2010,
certain information regarding the beneficial ownership of Common Stock by (i)
each person who is known by us to own beneficially more than five percent of the
outstanding Common Stock, (ii) each of our directors and executive officers, and
(iii) all directors and executive officers as a group. Unless otherwise
specified, the address of each of the persons set forth below is in care of the
Company, Minhang District, 89 Xinbang Road, Suite 305-B, Shanghai, P.R. China.

|                             | Name and Address of                                                          | Amount and Nature of |                     
|---------------------------- | ---------------------------------------------------------------------------- | -------------------- | --------------------
|Title of Class               | Beneficial Owner                                                             | Beneficial Owner     | Percent of Class (1)
|Officers and
      Directors |                                                                              |                      |                     
|Common Stock                 | Jieming Huang (2) Chief
      Executive Officer                              | 286,313              | 0.71%               
|Common Stock                 | Fengling Wang
      Director                                                 | 0                    | 0%                  
|Common Stock                 | Jieping Huang Director                                                       |                      | 0%                  
|Common Stock                 | Ping Chen
      Vice President of Finance                                    | 0                    | 0%                  
|Common Stock                 | Liling Zhong Vice President
      of Public and Media Relations              | 0                    | 0%                  
|Common Stock                 | Lingdi Wu
      Vice President of Promotions and Strategic Planning          | 0                    | 0%                  
|Common Stock                 | Jianwei Shen Vice President
      of Retail Store Sales                      | 0                    | 0%                  
|Common Stock                 | Yang Liu Vice
      President of Marketing                                   | 0                    | 0%                  
|Common Stock                 | All executive officers and
      directors (8) as a group                    | 286,313              | 0.71%               
|5% Beneficial
      Owners   |                                                                              |                      |                     
|Common Stock                 | Baby Fox Limited (3) No.
      22-23, 5 Chome Nakano, Nakanoku, Tokyo, Japan | 37,957,487           | 93.89%              

(1) Based on 40,427,500 outstanding as of September 14,
2010.

(2) 286,313 shares are held in the name of Favor Jumbo
Enterprises Limited, controlled by Qian Wang. Qian Wang is wife of Chief
Executive Officer, Jieming Huang.

(3) Baby Fox Limited is under the sole control of Hitoshi
Yoshida, No. 22-23, 5 Chome Nakano, Nakanoku, Tokyo, Japan.

46

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Change in Control

On May 6, 2008, Hitoshi Yoshida, the owner of 10,000 shares of
Baby Fox Limited representing 100% of the issued and outstanding common stock of
Baby Fox Limited, entered into stock option agreements with two of our
directors, Jieming Huang and Jieping Huang, and Linyin Wang, respectively, to
purchase all of the shares of Baby Fox Limited. The options granted pursuant to
the three stock option agreements were exercisable until December 31, 2018 in
accordance with the Exercise Schedule attached to each agreement. On June 17,
2010, Mr. Yoshida entered into rescission agreements with Jieming Huang, Jieping
Huang, and Linyin Wang rescinding the stock option agreements. No options had
been exercised by Jieming Huang, Jieping Huang, or Linyin Wang as of the
effective date of the rescission agreements.

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE.
|-------- | --------------------------------------------------------------------------------

Transactions with Related Persons

We lease office and warehouse space from our board director,
Fengling Wang and Changzhou CTS Fashion Co., Ltd. Changzhou CTS Fashion Co.,
Ltd. is owned by our chief executive officer, Jieming Huang.

Our executive office is located at Minhang District, 89 Xinbang
Road, Suite 305-B5, Shanghai, P.R.China, and consists of approximately
3,340square feet (310 square meters). The owner of this office is one of our
board directors, Fengling Wang. The lease term is from January 1, 2008 to
December 31, 2012 for five years. The lease is provided to us at annual rate of
RMB 60,000, approximately $8,809, which is at a market rate of monthly rent of
RMB 15 per square meter in an area close to Shanghai.

We also have a 41,979 square feet (3,900 square meters)
warehouse located in Jiafang Yuan, Building 7, 3rdfloor, No.88 North
Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The lease is
between Shanghai Baby Fox Fashion Co., Ltd. and a related party, Changzhou CTS
Fashion Co., Ltd. The leasing term is from January 1, 2007 to December 31, 2010
for four years. The rent is RMB 150,000 per year, approximately $22,022, payable
every six months, which approximates a market rate at RMB 3.20 per square meter
per month for warehouse in Changzhou. Changzhou CTS Fashion Co., Ltd. is owned
by our chief executive officer, Jieming Huang. The rent is at a market rate.

In addition, we have a 16,146 square feet (1,500 square meters)
office space at Jiafang Yuan, Building 5, 1stfloor, No.88 North
Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The lease is
between Shanghai Baby Fox Fashion Co., Ltd. and a related party, Changzhou CTS
Fashion Co., Ltd. The leasing term is from January 1, 2007 to December 31, 2010
for four years. The rent is approximately $11,745 (RMB 80,000) per year payable
every six months, which approximates the market rate at RMB 4.50 per square
meters per month in this area of Changzhou.

We purchase a significant portion of our merchandise from
Changzhou CTS which is owned by our CEO. Products we buy from Changzhou include
overcoats, wind coats, jackets, shirts, trousers, skirts and knitwear, etc.
Products and designs ordered by Baby Fox are manufactured exclusively for us and
not allowed to be sold to third parties. The quantity of purchases is based upon
orders from Baby Fox stores and price is based on cost of production confirmed
by our supervisors plus 10-15% markup covering general & administrative
expenses. Other materials terms such as delivery time are determined by our
purchasing managers based on market condition and store demand. Changzhou CTS
cannot modify purchase terms without our prior approval. Total purchases from
Changzhou CTS for the years ended June 30, 2010 and 2009 approximated
$13,170,782 and $13,327,797, respectively. Total accounts payable to Changzhou
CTS as of June 30, 2010 and 2009 aggregated $9,510,853 and $8,281,174,
respectively. This amount is non-interest bearing and due on demand.

47

---

Total payment we made to Changzhou CTS for the years ended June
30, 2010 and 2009 were $13,724,785 and $7,947,146, respectively.

On February 18, 2008, we entered into a loan agreement with our
CEO, Jieming Huang, pursuant to which, we borrowed $810,160. The amount
outstanding under the loan was $810,160 as of September 17, 2010. The loan
agreement is subject to a five-year term with five percent annual interest (5%).
Interest expense accrued for the loan was $40,508 and $40,508 in each of
fiscal 2010 and 2009, respectively. We have not made any payments of such
accrued interest so far. Pursuant to the loan agreement, we covenant, among
others, that during the term of the loan, we will (i) not sell, transfer,
mortgage, dispose of in any other way, or create other security interest on, any
of our legal right of equity or equity interest without Mr. Huangs prior
written consent, (ii) not sell, transfer, mortgage, dispose of in any other way,
or to create other security interest on, any of Mr. Huangs legal right of
equity or equity interest without Mr. Huangs prior written consent, except that
the counterparty is Mr. Huang or those designated by Mr. Huang; and (iii) not
agree to merge or combine with, buy or invest in, any person without Mr. Huangs
prior consent. The loan agreement is filed as Exhibit 10.8 to this annual
report.

Our board of directors approved these transactions listed
above. We have no disinterested board members.

On January 18, 2007, we and Qian Wang, the spouse of our CEO,
Jieming Huang, entered into a consulting agreement. Qian Wang and our CEO,
Jieming Huang, were not married yet at that time. There was no family
relationship between Qian Wang and Jieming Huang then. On January 18, 2007, we
entered into a consulting agreement with Qian Wang. Among other things, Qian
Wang agreed to introduce and supervise Beijing Allstar Business Consulting,
Inc., provide both verbal and written translation between English and Chinese
for our executives, and provide strategic consulting and advice to Baby Foxs
executives regarding U.S. capital markets and related issues regarding our
private placement and application for quotation of the common stock on the OTC
Bulletin Board. Qian Wangs services were valued at $96,263 as defined in her
agreement with us. Among her total compensation, approximate 40% or $39,000 is
in cash payment and the remaining 60% was in common shares. We paid Qian Wang
$9,750 on May 21, 2007 and $11,250 on May 29, 2008. We will owe Qian Wang $7,500
cash upon our common stock being quoted on the OTC Bulletin Board. On January
18, 2008, we awarded Qian Wang 286,313 shares as compensation for her services
rendered. Qian Wang designated Favor Jumbo Enterprises Limited as the holder of
the 286,313 shares. These shares are valued at $.20 per share, the same
valuation as in our private placement in March 2008.

In addition, as of the date hereof, we have entered into over
100 purchase agreements with related parties in the ordinary course of business.
Products we buy from related parties include overcoats, wind coats, jackets,
shirts, trousers, skirts and knitwear, etc. Products and designs ordered by Baby
Fox are manufactured exclusively for us and not allowed to be sold to third
parties. The quantity of purchases is based upon orders from Baby Fox stores and
price is based on cost of production confirmed by our supervisors plus 10-15%
markup covering general & administrative expenses. Other materials terms
such as delivery time are determined by our purchasing managers based on market
condition and store demand. The supplier cannot modify purchase terms without
our prior approval. As all of the purchase agreements are in essentially the
same form which we have filed as Exhibit 10.3 to this annual report. We do not
have any master agreement which governs the relationship between the parties
generally.

Other than our officers and directors, we have not had a
promoter at any time since inception. Therefore, we have never entered into
transactions with a promoter.

Besides related party transaction stated above, none of the
following persons has any direct or indirect material interest in any
transaction to which we are a party since July 1, 2008 or in any proposed
transaction to which we are proposed to be a party:

| | (A) | Any of our directors or officers;                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                    
| | (B) | Any proposed nominee for election as our
  director;                                                                                               
| |     |                                                                                                                                                    
| | (C) | Any person who beneficially owns, directly or indirectly,
      shares carrying more than 10% of the voting rights attached to our Common Stock; or

48

---

| | (D) | Any relative or spouse of any of the foregoing persons,
      or any relative of such spouse, who has the same house as such person or
      who is a director or officer of any parent or subsidiary of
  us.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37,957,487, or 93.9%, of the outstanding shares of common stock
of Baby Fox International, Inc., are held by Baby Fox Limited, a British Virgin
Islands entity controlled by Hitoshi Yoshida.

Director Independence

We currently do not have any independent directors, as the term
independent is defined by the rules of the Nasdaq Stock Market.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Paritz & Company, P.A. served as our independent
accountants for the fiscal year ended June 30, 2009 and Friedman LLP served as
our independent accountants for the fiscal year ended June 30, 2010.

During the fiscal years ended June 30, 2010 and June 30, 2009,
fees for services billed by Friedman LLP and Paritz & Company, P.A.,
respectively, were as follows:

| |                    |   | 2010   |  |   | 2009   | 
| | ------------------ | - | ------ |  | - | ------ | 
| | Audit fees(1)      | $ | 64,181 |  | $ | 38,599 | 
| | Audit-related fees |   | -      |  |   | -      | 
| | Tax fees(2)        |   | 1,256  |  |   | -      | 
| | All other fees     |   | -      |  |   | -      | 
| | Total              |   | 65,437 |  |   | 38,599 | 

|(1) | Consists of fees billed for the audit of our annual
      financial statements, review of financial statements included in our
      Quarterly Reports on Form 10-Q and services that are normally provided by
      the accountant in connection with statutory and regulatory filings or
      engagements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                              
|(2) | Tax Fees consisted of fees billed for professional
      services rendered by the principal accountant for tax compliance, tax
      advice, and tax planning.                                                                                                                                             

Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit
services performed by our auditors must be approved in advance by our Board to
assure that such services do not impair the auditors independence from us. In
accordance with its policies and procedures, our Board pre-approved the audit
service performed by Friedman LLP for our consolidated financial statements as
of and for the year ended June 30, 2010.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.

|I. | Listing of Documents     
|-- | -------------------------
|   |                          
|   | (1) Financial
Statements.

| | Reports
      of Independent Registered Public Accounting Firms                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                               
| | Consolidated
      Balance Sheets as of June 30, 2010 and 2009                                                                
| |                                                                                                                               
| | Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for Years
      Ended June 30, 2010 and 2009

49

---

| | Consolidated
      Statement of Changes in Stockholders Deficiency for the Years Ended June
      30, 2010 and 2009
| | --------------------------------------------------------------------------------------------------------------------
| |                                                                                                                     
| | Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010 and 2009                              
| |                                                                                                                     
| | Notes
      to Consolidated Financial Statements                                                                    

(3) The following Exhibits are filed as part of this report on
Form 10-K:

|Exhibit |  |                                                                                                                                                                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description of Exhibit                                                                                                                                                                                                                                    
|3.1     |  | Articles of Incorporation of the Company (incorporated by
      reference to Exhibit 3.1 to the registrants Form S-1 filed with the SEC
      on May 12, 2008).                                                                                          
|        |  |                                                                                                                                                                                                                                                           
|3.2     |  | Bylaws of the Company (incorporated by reference to
      Exhibit 3.2 to the registrants Form S-1 filed with the SEC on May 12,
      2008).                                                                                                             
|        |  |                                                                                                                                                                                                                                                           
|10.1    |  | Share Acquisition Agreement between Fengling Wang and
      Baby Fox International, Inc. (incorporated by reference to Exhibit 10.1 to
      the registrants Form S-1 filed with the SEC on May 12, 2008).                                               
|        |  |                                                                                                                                                                                                                                                           
|10.2    |  | Supplementary Agreement to the Equity Share Acquisition
      Agreement between Fengling Wang and Baby Fox International, Inc.
      (incorporated by reference to Exhibit 10.2 to the registrants Form S-1/A
      filed with the SEC on July 10, 2009).
|        |  |                                                                                                                                                                                                                                                           
|10.3    |  | Shanghai Baby Fox Fashion Co., Ltd. and Changzhou CTS
      Fashion Co., Ltd. Purchase and Sales Contract (incorporated by reference
      to Exhibit 10.2 to the registrants Form S-1/A filed with the SEC on
      February 9, 2009).                  
|        |  |                                                                                                                                                                                                                                                           
|10.4    |  | Non-Corporate Store Sample Agreement (incorporated by
      reference to Exhibit 10.3 to the registrants Form S-1/A filed with the
      SEC on February 9, 2009).                                                                                       
|        |  |                                                                                                                                                                                                                                                           
|10.5    |  | Shanghai Office Lease between Fengling Wang and Shanghai
      Baby Fox Fashion Co., Ltd. (incorporated by reference to Exhibit 10.4 to
      the registrants Form S-1/A filed with the SEC on February 9, 2009).                                        
|        |  |                                                                                                                                                                                                                                                           
|10.6    |  | Changzhou Warehouse Lease between Changzhou CTS Fashion
      Co., Ltd. and Shanghai Baby Fox Fashion Co., Ltd. (incorporated by
      reference to Exhibit 10.6 to the registrants Form S-1/A filed with the
      SEC on July 10, 2009).               
|        |  |                                                                                                                                                                                                                                                           
|10.7    |  | Changzhou Office Space Lease between Changzhou CTS
      Fashion Co., Ltd. and Shanghai Baby Fox Fashion Co., Ltd. (incorporated by
      reference to Exhibit 10.6 to the registrants Form S-1/A filed with the
      SEC on February 9, 2009).         
|        |  |                                                                                                                                                                                                                                                           
|10.8    |  | Loan Agreement between Jieming Huang and Baby Fox
      International, Inc. effective February 18, 2008 (incorporated by reference
      to Exhibit 10.7 to the registrants Form S-1/A filed with the SEC on
      February 9, 2009).                    
|        |  |                                                                                                                                                                                                                                                           
|10.9    |  | Loan Agreement between Zengquan Yu and Shanghai Baby Fox
      Fashion Co., Inc. effective January 16, 2008 (incorporated by reference to
      Exhibit 10.8 to the registrants Form S-1/A filed with the SEC on February
      9, 2009).                
|        |  |                                                                                                                                                                                                                                                           
|10.10   |  | Consulting Agreement between Shanghai Baby Fox Fashion
      Co., Ltd. and Qian Wang Effective January 18, 2007(incorporated by
      reference to Exhibit 10.11 to the registrants Form S-1/A filed with the
      SEC on May 15, 2009).                

50

---

|10.11 | Amended and Restated Consulting Agreement
        between Baby Fox International, Inc. and Beijing AllStar Business Consulting,
        Inc. effective April 28, 2008 (incorporated by reference to Exhibit 10.12
        to the registrants Form S-1/A filed with the SEC on May 15, 2009).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                              
|10.12 | Revenue and Success Reward Sharing
        Agreement between Beijing AllStar Business Consulting, Inc. and Hongtao
        Shi effective January 18, 2007(incorporated by reference to Exhibit 10.13
        to the registrants Form S-1/A filed with the SEC on May 15, 2009).             
|      |                                                                                                                                                                                                                                                                                              
|10.13 | Revenue and Success Reward Sharing
        Agreement between Beijing AllStar Business Consulting, Inc. and Liuyi
        Zhang effective January 18, 2007(incorporated by reference to Exhibit
        10.14 to the registrants Form S-1/A filed with the SEC on May 15,
        2009).     
|      |                                                                                                                                                                                                                                                                                              
|10.14 | Share Interest Agreement between Beijing
        Allstar Business Consulting, Inc. and Avenndi, LLC effective October 16,
        2007 (incorporated by reference to Exhibit 10.15 to the registrants
        Form S-1/A filed with the SEC on May 15, 2009).                               
|      |                                                                                                                                                                                                                                                                                              
|10.15 | Advisor Agreement between Shanghai
        Baby Fox Fashion Co., Ltd. and Avenndi, LLC effective May 22, 2007(incorporated
        by reference to Exhibit 10.16 to the registrants Form S- 1/A filed
        with the SEC on May 15, 2009).                                                
|      |                                                                                                                                                                                                                                                                                              
|10.16 | Website Agreement between Shanghai
        Baby Fox Fashion Co, Ltd. and Avenndi, LLC effective September 06, 2007(incorporated
        by reference to Exhibit 10.17 to the registrants Form S-1/A filed
        with the SEC on May 15, 2009).                                            
|      |                                                                                                                                                                                                                                                                                              
|10.17 | Changzhou Warehouse Lease & Office
        Space Lease Extension between Changzhou CTS Fashion Co., Ltd. and Shanghai
        Baby Fox Fashion Co., Ltd. (incorporated by reference to Exhibit 10.18
        to the registrants Form S-1/A filed with the SEC on June 22, 2010).            
|      |                                                                                                                                                                                                                                                                                              
|14.1  | Code of Ethics (incorporated by reference
        to Exhibit 14.1 to the registrants Form S-1 filed with the SEC on
        May 12, 2008).                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                              
|21.1  | Subsidiaries of the registrant (incorporated
        by reference to Exhibit 21.1 to the registrants Form S-1 filed with
        the SEC on May 12, 2008).                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                              
|24.1  | Powers of Attorney
        (included on the signature page).                                                                                                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                                              
|31.1  | Certification
        of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-
        Oxley Act of 2002. *                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                              
|31.2  | Certification
        of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-
        Oxley Act of 2002.*                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                              
|32.1  | Certifications
        of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
        1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
        2002.*                                                                                                   
|      |                                                                                                                                                                                                                                                                                              
|32.2  | Certifications
        of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
        1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
        2002. *                                                                                                  

51

---

|99.1 | Shanghai
      Baby Fox Ltd. Store Sales Metrics.*
|---- | --------------------------------------------------

* Filed herewith. ** Represents management contract or
compensatory plan or arrangement.

52

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SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                         | BABY FOX INTERNATIONAL, INC.     
|------------------------ | ---------------------------------
|                         |                                  
|Date: September 28, 2010 | By:   /s/ Jieming Huang          
|                         | Jieming Huang                    
|                         | Chief
      Executive Officer    
|                         | Principal
      Executive Officer

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

Each
person whose signature appears below hereby authorizes Jieming Huang as
attorney-in-fact to sign on his behalf, individually, and in each capacity
stated below, and to file all amendments and/or supplements to this annual
report on Form 10-K.

|Signature                   |  | Capacity                                     |  | Date              
|--------------------------- |  | -------------------------------------------- |  | ------------------
|                            |  |                                              |  |                   
|By: /s/ Jieming
      Huang |  | Chief Executive Officer and Director         |  | September 28, 2010
|Jieming Huang               |  | (Principal Executive Officer)                |  |                   
|                            |  |                                              |  |                   
|By: /s/ Ping Chen           |  | Chief Financial Officer (Principal Financial |  | September 28, 2010
|Ping Chen                   |  | Officer and Principal Accounting Officer)    |  |                   
|                            |  |                                              |  |                   
|By: /s/ Fengling
      Wang |  | Director                                     |  | September 28, 2010
|Fengling
      Wang         |  |                                              |  |                   
|                            |  |                                              |  |                   
|By: /s/ Jieping
      Wang  |  | Director                                     |  | September 28, 2010
|Jieping
      Wang          |  |                                              |  |                   

53

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FINANCIAL STATEMENTS

Index to Financial Statements

|                                                                                                                                   | Page  
|---------------------------------------------------------------------------------------------------------------------------------- | ------
|                                                                                                                                   |       
|Reports
      of Independent Registered Public Accounting Firms                                                                    | F-1-2 
|                                                                                                                                   |       
|Consolidated
      Balance Sheets as of June 30, 2010 and 2009                                                                     | F-3   
|                                                                                                                                   |       
|Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      Years Ended June 30, 2010 and 2009 | F-4   
|                                                                                                                                   |       
|Consolidated
      Statement of Changes in Stockholders Equity (Deficiency) for the Years
      Ended June 30, 2010 and 2009      | F-5   
|                                                                                                                                   |       
|Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010 and 2009                                             | F-6   
|                                                                                                                                   |       
|Notes
      to Consolidated Financial Statements                                                                                   | F-7-17



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors 
Baby Fox International, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet
of Baby Fox International, Inc. and Subsidiary as of June 30, 2009 and the
related consolidated statement of operations and other comprehensive income
(loss), changes in stockholders equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown on the
accompanying balance sheet, the Companys current liabilities exceeded its
current assets by $6,133,153, the Companys total liabilities exceeded its total
assets by $6,569,462 and the Company generated a net loss for the year ended
June 30, 2009. These circumstances raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Baby Fox International, Inc. and Subsidiary as of June 30, 2009, and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

/s/Paritz & Company, P.A.

Hackensack, New Jersey 
October 23, 2009

F-1

---











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of 
Baby Fox International Inc. and subsidiary

We have audited the accompanying consolidated balance sheet
of Baby Fox International Inc. and subsidiary (the "Company") as of June 30,
2010 and the related consolidated statements of operations and other
comprehensive income (loss), changes in stockholders deficiency, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Baby Fox International Inc. and subsidiary as of June 30, 2010, and
the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, the Companys
losses, negative cash flows from operations and working capital deficiency raise
substantial doubt about its ability to continue as a going concern. Managements
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.

/s/ Friedman LLP 
Friedman LLP

Marlton, NJ

September 27, 2010

F-2

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS

|                                                                                                                                                 |   | As of June 30 |  
|------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | -
|                                                                                                                                                 |   | 2010          |  
|ASSETS                                                                                                                                           |  
|CURRENT ASSETS:                                                                                                                                  |   |               |  
|                                                                                                                                                 |   |               |  
|Cash and cash equivalents                                                                                                                        | $ | 180,476       |  
|Accounts receivable, net                                                                                                                         |   | 2,863,542     |  
|Inventory, net                                                                                                                                   |   | 6,808,309     |  
|Advance to vendors, net                                                                                                                          |   | -             |  
|Prepaid expenses and other current assets                                                                                                        |   | 158,536       |  
|                                                                                                                                                 |   |               |  
|TOTAL CURRENT ASSETS                                                                                                                             |   | 10,010,863    |  
|                                                                                                                                                 |   |               |  
|Property and equipment, net                                                                                                                      |   | 51,037        |  
|                                                                                                                                                 |   |               |  
|Deferred tax asset, net                                                                                                                          |   | -             |  
|                                                                                                                                                 |   |               |  
|Deposits                                                                                                                                         |   | 207,101       |  
|                                                                                                                                                 |   |               |  
|TOTAL ASSETS                                                                                                                                     | $ | 10,269,001    |  
|                                                                                                                                                 |   |               |  
|LIABILITIES AND STOCKHOLDERS'
      DEFICITS                                                                                                     |  
|                                                                                                                                                 |   |               |  
|CURRENT LIABILITIES:                                                                                                                             |   |               |  
|                                                                                                                                                 |   |               |  
|Accounts payable - trade                                                                                                                         | $ | 515,298       |  
|affiliated
      company                                                                                                                         |   | 9,510,853     |  
|Deposits payable & customer advances                                                                                                             |   | 1,263,502     |  
|Accrued expenses and other current liabilities                                                                                                   |   | 2,751,220     |  
|Loans payable - officer and stockholder                                                                                                          |   | 35,341        |  
|Current portion of long-term debt                                                                                                                |   | 1,575,638     |  
|Dividends payable                                                                                                                                |   | 842,704       |  
|                                                                                                                                                 |   |               |  
|TOTAL CURRENT LIABILITIES                                                                                                                        |   | 16,494,556    |  
|                                                                                                                                                 |   |               |  
|LONG-TERM DEBT                                                                                                                                   |   | 810,160       |  
|                                                                                                                                                 |   |               |  
|STOCKHOLDERS' DEFICIENCY                                                                                                                         |   |               |  
|Preferred Stock, $0.001 par value, 10,000,000 shares authorized,
      
      -0- shares issued and outstanding                                  |   | -             |  
|Common Stock, $0.001 par value, 90,000,000
      shares authorized, 
      40,427,500 shares issued and outstanding as of June 30, 2010 and 2009 |   | 40,427        |  
|Accumulated deficits                                                                                                                             |   | (7,095,053    | )
|Accumulated other comprehensive income                                                                                                           |   | 18,911        |  
|                                                                                                                                                 |   |               |  
|TOTAL STOCKHOLDERS' DEFICIENCY                                                                                                                   |   | (7,035,715    | )
|                                                                                                                                                 |   |               |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                   | $ | 10,269,001    |  

See accompanying notes to consolidated financial
statements

F-3

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSAND OTHER COMPREHENSIVE INCOME (LOSS)

|                                                      |   | FOR THE YEARS ENDED JUNE 30 |  
|----------------------------------------------------- | - | --------------------------- | -
|                                                      |   | 2010                        |  
|SALES                                                 |   |                             |  
|Corporate stores                                      | $ | 22,375,661                  |  
|Non-corporate stores                                  |   | 2,823,999                   |  
|TOTAL SALES                                           |   | 25,199,660                  |  
|                                                      |   |                             |  
|COST OF GOODS SOLD                                    |   |                             |  
|Corporate stores                                      |   | 10,587,754                  |  
|Non-corporate stores                                  |   | 1,753,280                   |  
|TOTAL COST
      OF GOODS SOLD                        |   | 12,341,034                  |  
|                                                      |   |                             |  
|GROSS PROFIT                                          |   | 12,858,626                  |  
|                                                      |   |                             |  
|OPERATING EXPENSES:                                   |   |                             |  
|Selling Expenses                                      |   | 11,767,869                  |  
|General & Administrative Expenses                     |   | 1,255,956                   |  
|TOTAL OPERATING EXPENSES                              |   | 13,023,825                  |  
|                                                      |   |                             |  
|LOSS FROM OPERATIONS                                  |   | (165,199                    | )
|                                                      |   |                             |  
|OTHER INCOME (EXPENSE)                                |   |                             |  
|Other income                                          |   | 53,764                      |  
|Interest expense                                      |   | (124,191                    | )
|TOTAL OTHER INCOME (EXPENSE)                          |   | (70,427                     | )
|                                                      |   |                             |  
|LOSS BEFORE INCOME TAXES                              |   | (235,626                    | )
|                                                      |   |                             |  
|INCOME TAX PROVISION                                  |   |                             |  
|Current                                               |   | -                           |  
|Deferred                                              |   | 199,905                     |  
|TOTAL INCOME TAX PROVISION                            |   | 199,905                     |  
|                                                      |   |                             |  
|NET LOSS                                              | $ | (435,531                    | )
|                                                      |   |                             |  
|OTHER COMPREHENSIVE INCOME (LOSS):                    |   |                             |  
|Foreign currency translation loss                     |   | (30,722                     | )
|                                                      |   |                             |  
|COMPREHENSIVE LOSS                                    | $ | (466,253                    | )
|                                                      |   |                             |  
|BASIC AND DILUTED LOSS PER SHARE                      | $ | (0.01                       | )
|                                                      |   |                             |  
|BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |   | 40,427,500                  |  

See accompanying notes to consolidated financial statements

F-4

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYSTATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY

ACCUMULATEDOTHER
      
      
      TOTALPREFERRED STOCK
      
      
      COMMON STOCK
      
      
      ACCUMULATED
      
      
      COMPREHENSIVE
      
      
      STOCKHOLDERSShares
      
      
      Amount
      
      
      Shares
      
      
      Amount
      
      
      DEFICITS
      
      
      INCOME
      
      
      DEFICIENCYBALANCE - JUNE 30, 2008
      
      -
      
      $
      -
      
      
      40,427,500
      
      $
      40,427
      
      $
      (2,176,893
      )
      $
      54,451
      
      $
      (2,082,015
      )Net loss
      
      
      
      
      
      
      
      
      
      
      
      
      
      (4,482,629
      )
      
      
      
      
      (4,482,629
      )Foreign currency translation adjustment
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (4,818
      )
      
      (4,818
      )BALANCE - JUNE 30, 2009
      
      -
      
      $
      -
      
      
      40,427,500
      
      $
      40,427
      
      $
      (6,659,522
      )
      $
      49,633
      
      $
      (6,569,462
      )Net Loss
      
      
      
      
      
      
      
      
      
      
      
      
      
      (435,531
      )
      
      
      
      
      (435,531
      )Foreign currency translation adjustment
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (30,722
      )
      
      (30,722
      )BALANCE - JUNE 30, 2009
      
      -
      
      $
      -
      
      
      40,427,500
      
      $
      40,427
      
      $
      (7,095,053
      )
      $
      18,911
      
      $
      (7,035,715
      )


See accompanying notes to consolidated financial statements

F-5

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                   |   | FOR THE YEARS ENDED JUNE 30 |  
|---------------------------------------------------------------------------------- | - | --------------------------- | -
|                                                                                   |   | 2010                        |  
|OPERATING ACTIVITIES:                                                              |   |                             |  
|Net loss                                                                           | $ | (435,531                    | )
|Adjustments to reconcile net loss to net cash

      used in operating activities: |   |                             |  
|Depreciation expense                                                               |   | 16,008                      |  
|Bad debt allowance                                                                 |   | 763,243                     |  
|Accrual (Reversal) of inventory reserve                                            |   | (686,275                    | )
|Increase of valuation allowance
      on deferred tax assets                       |   | 174,618                     |  
|                                                                                   |   |                             |  
|Decrease (increase) in current assets                                              |   |                             |  
|Accounts receivable                                                                |   | (847,300                    | )
|Inventory                                                                          |   | 134,733                     |  
|Advance to vendors                                                                 |   | 4,404                       |  
|Deposit                                                                            |   | (72,295                     | )
|Prepaid expenses and other current assets                                          |   | 237,541                     |  
|Deferred tax                                                                       |   | 9,070                       |  
|Increase (decrease) in current assets                                              |   |                             |  
|Accounts payable-trade                                                             |   | (2,383,843                  | )
|Accrued expenses, taxes
      and sundry current liabilities                       |   | 1,296,094                   |  
|Customer deposits and advances                                                     |   | (262,524                    | )
|NET CASH  USED IN OPERATING ACTIVITIES                                             |   | (2,052,057                  | )
|                                                                                   |   |                             |  
|INVESTING ACTIVITIES:                                                              |   |                             |  
|Acquisition of property and equipment                                              |   | (10,111                     | )
|NET CASH USED IN INVESTING ACTIVITIES                                              |   | (10,111                     | )
|                                                                                   |   |                             |  
|FINANCING ACTIVITIES:                                                              |   |                             |  
|Accounts payable -
    affiliate company                                           |   | 1,183,379                   |  
|Proceeds from related party loans                                                  |   | -                           |  
|Proceeds of stockholder
      loan                                                 |   | 11,695                      |  
|Proceeds from long-term debt                                                       |   | 734,063                     |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                          |   | 1,929,137                   |  
|                                                                                   |   |                             |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                              |   | 1,110                       |  
|                                                                                   |   |                             |  
|INCREASE ( DECREASE ) IN CASH                                                      |   | (131,921                    | )
|                                                                                   |   |                             |  
|CASH - BEGINNING OF THE YEAR                                                       |   | 312,397                     |  
|                                                                                   |   |                             |  
|CASH - END OF THE YEAR                                                             | $ | 180,476                     |  
|                                                                                   |   |                             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
      INFORMATION                             |   |                             |  
|Income tax paid                                                                    | $ | 16,216                      |  
|Interest expense paid                                                              | $ | -                           |  

See accompanying notes to consolidated financial statements

F-6

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

Business description

Baby Fox International, Inc. (the Company), through its
wholly-owned subsidiary Shanghai Baby Fox Fashion Co., Ltd. (Shanghai Baby
Fox) is a specialty retailer, developer and designer of fashionable,
value-priced womens apparel and accessories. The Company primarily sells
merchandise through its corporate-owned stores located within upscale shopping
malls across China. The mall operator collects the proceeds of sales from
customers and remits the proceeds, net of rent and other charges, to the
Company.

In addition, the Company sells merchandise to licensed
non-corporate owned stores which only carry the Baby Fox brand merchandise.

Basis of presentation

The Companys accounting policies used in the preparation of
the accompanying consolidated financial statements conform to accounting
principles generally accepted in the United States of America ("US GAAP") and
have been consistently applied.

Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principal of consolidation

The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Shanghai Baby Fox. All significant
inter-company balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during each
reporting period. The Companys significant estimates include estimates for
reserves for inventory markdowns, allowance for doubtful accounts and useful
lives of property and equipment. Actual results could differ from those
estimates.

Foreign currency translation

The reporting currency of the Company is the US dollar. The
functional currency of Baby Fox International is the US dollar. Shanghai Baby
Fox uses its local currency, the Chinese Renminbi (RMB) as its functional
currency. In accordance with accounting standards regarding foreign currency
translation, results of operations and cash flows are translated at the average
exchange rates during the period, assets and liabilities are translated at the
exchange rates at the balance sheet dates, and equity is translated at the
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheets.

Translation 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. Gains and losses
from foreign currency transactions are included in the results of operations.
The Company did not have any material transaction gain or loss for years ended
June 30, 2010 and 2009.

F-7

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition and return policy

The Company recognizes revenue in accordance with accounting
standards regarding revenue recognition, which specifies that revenue is
realized or realizable and earned when four criteria are met:

|• | Persuasive evidence of an arrangement exists;                      
|- | -------------------------------------------------------------------
|• | Delivery has occurred or services have been
    rendered;          
|• | The sellers price to the buyer is fixed or determinable;
      and
|• | Collectability of payment is reasonably
  assured.                 

The Companys revenues are generated from sales at its
company-owned retail stores and from sales of merchandise to licensed
non-corporate owned stores.

Revenues from sales at company owned retail stores are
recognized when the ultimate customer purchases the merchandise in the store and
pays for it at the cash register. Customers have the right to return merchandise
for credit, exchange or refunds for up to fourteen days after purchase. The
return policy is set by corporate headquarters and consistent among all our
corporate stores. Period allowed for return is short (two weeks) and based on
historical experience, actual returns by end consumers have been rare and
immaterial across all retail stores. Management will keep monitoring returns by
end consumers at our corporate stores as we open more stores each period.

Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, and no other significant
obligations of the Company exist and collectability is reasonably assured.
According to the contract, non-corporate stores have the right to return
defected merchandise within ten days of receipt. Return of unsold merchandise
for current style is determined by our headquarters and full cooperation from
non-corporate stores is required. Reserves are established to reflect actual and
anticipated losses resulting from the returns of defected and unsold merchandise
based on historical information. Currently we estimate returns to be 20% of our
sales to non-corporate stores and relevant reserves have been made accordingly
each reporting period. Since fashion clothing is trending towards shorter
product life cycle and the return period we allow for non-corporate stores is
relatively long, the current reserve already takes into the effect of
introducing new products on expected return of previous products. The return
reserve based on this percentage of sales has been consistent with actual
returns in our operating history. The balances of the return reserve for the
years ended June 30, 2010 and 2009 were $136,362 and $352,881, respectively. We
will closely monitor returns for existing and new stores and adjust reserve for
returns if necessary. We do not offer early payment discounts, incentive
discounts based on volume or credit for products that do not sell well at
non-corporate stores.

Shipping and handling of merchandise sold to non-corporate
stores is included in revenue and not separately billed to customers or paid
directly by the customer.

Cost of sales

Cost of sales includes the cost of merchandise sold and related
costs including purchasing, receiving, warehousing and related costs.

Marketing expenses

Due to the short initial term of the leases with mall operators
and the cancellation provisions contained in the store leases, the initial costs
of store opening expenses are typically accounted as marketing expenses and are
charged to expense as incurred.

F-8

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Advertising expense

Advertising expense is charged to operations as incurred and
totaled approximately $40,521 and $20,717 for the years ended June 30, 2010 and
2009, respectively.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards
Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820
clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in
measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other then quoted prices
that are observable, and inputs derived from or corroborated by observable
market data.

Level 3-Inputs are unobservable inputs which reflect the
reporting entitys own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available
information.

The carrying amounts reported in the balance sheets for cash,
accounts receivable, loan receivables, other receivables, advance to suppliers,
short-term loan, accounts payable, advance from customers, other payables and
accrued expenses, approximate their fair market value based on the short-term
maturity of these instruments. The carrying value of the long-term debt
approximates fair value based on market rates and terms currently available to
the Company. The Company did not identify any other assets or liabilities that
are required to be presented on the consolidated balance sheets at fair value in
accordance with ASC 820.

Cash and cash equivalents

The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within three months of their
acquisition date. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts and liquidity funds with financial
institutions and are stated at cost, which approximates fair value.

The Company maintains cash with financial institutions in the
Peoples Republic of China (PRC) which are not insured or otherwise protected.
Should any of these institutions holding the Companys cash become insolvent, or
if the Company is unable to withdraw funds for any reason, the Company could
lose the cash on deposit with that institution.

Accounts receivable

Accounts receivable consist of amounts due from mall operators
which are generally received within sixty days and amounts due from sales to
non-corporate stores. The risk of credit loss in the Companys trade receivables
is substantially mitigated by the Companys credit evaluation process, short
collection terms from mall operators and deposits required from non-corporate
store operators. Allowances for potential credit losses are determined based on
historical experience and current evaluation of the composition of accounts
receivable. Historically, credit losses have been within managements
expectations. On June 30, 2010 and 2009, the balances of bad debt allowance
represented 24.3% and 6.1% of the outstanding accounts receivable balances,
respectively. The increase is mainly due to an increase in the balances aged
over 90 days, for which full allowance has been provided.

F-9

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories

Inventories, consisting of finished goods and accessories, are
valued at the lower of cost as determined by the average cost or market. Cost
includes all expenditures incurred in bringing the goods to the point of sale
and putting them in a saleable condition. Due to the high style nature of the
Companys merchandise, slow moving, out of season and broken style merchandise
is sold to discount stores substantially below cost. Reserves are created to
reduce the carrying value of these items to market value.

The company maintains a perpetual inventory and sales report,
by store location. This is updated daily based upon shipping and sales reports.
A weekly review is made by the merchandising group and management to identify
slow moving merchandise. Merchandise, which is slow moving during the first
month at a store is reported to the head office, and is sometimes moved to other
stores, due to varying style demand in the diverse markets in China. Unsold
merchandise is then marked down, and if not sold within 90 days of receipt, it
is shipped back to the warehouse. The company then has periodic discount
warehouse sales and uses certain liquidators.

The company values inventory at the lower of cost or market,
and maintains a reserve for inventory markdowns. This encompasses current goods
held for liquidation and markdown, and application of historical percentages of
current inventory which is anticipated to be marked down and /or liquidated.
Currently this percentage stands at 42% of ending inventory level based on
historical experience and current goods held for liquidation, and reserves are
made accordingly at each reporting period. The company periodically adjusts the
percentage based on a review of changing ratios and the percentage of selling
prices recovered through liquidation.

Property and equipment

Property and equipment are recorded at cost. Depreciation is
provided in amounts sufficient to amortize the cost of the related assets less
estimated residual value over their useful lives using the straight line method
for financial reporting purposes. Total depreciation for the years ended June
30, 2010 and 2009 were $16,008 and $12,737, respectively. The useful life and
estimated residual value are as follows:

Office equipmentUseful life
    5 yearsResidual value
    5%


Maintenance, repairs and minor renewals are charged to expense
when incurred. Replacements and major renewals are capitalized.

Income taxes

The Company accounts for income taxes in accordance with the
FASB Codification Topic 740-10-25 (ASC 740-10-25), which requires that
deferred tax assets and liabilities be recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, it
requires recognition of future tax benefits, such as carryforwards, to the
extent that realization of such benefits is more likely than not and that a
valuation allowance be provided when it is more likely than not that some
portion of the deferred tax asset will not be realized.

Earnings per share

Basic earnings per common share is computed on the basis of the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed on the basis of the weighted average number of
common shares and dilutive securities (such as warrants and convertible
preferred stock) outstanding. Dilutive securities having an anti-dilutive effect
on diluted earnings per share are excluded from the calculation.

F-10

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive income

Comprehensive income is defined to include all changes in
equity except those resulting from investments by shareholders and distributions
to shareholders. Among other disclosures, all items that are required to be
recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented
with the same prominence as other financial statements. Comprehensive income
includes net income and the foreign currency translation gain, net of tax.

Statement of cash flows

In accordance with FASB issued Accounting Standards cash flows
from the Companys operations are calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.

Segment reporting

The Company uses the management approach model for segment
reporting. The management approach model is based on the way a companys
management organized segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company. The Company consists of one
reportable business segment, the sale of merchandise.

Recent accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update
No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends
ASC Topic 820, adding new requirements for disclosures for Level 1 and 2,
separate disclosures of purchases, sales, issuance, and settlements relating to
Level 3 measurements and clarification of existing fair value disclosures. ASU
2010-06 is effective for interim and annual periods beginning after December 15,
2009, except for the requirement to provide Level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for
fiscal years beginning after December 15, 2010 (the Companys fiscal year 2011);
early adoption is permitted. The Company is currently evaluating the impact of
adopting ASU 2010-06 on its financial statements.

In February 2010, FASB issued new standards in ASC 855,
Subsequent Event. This amendment removes the requirement for an SEC filer to
disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of GAAP. All of the amendments are effective upon
issuance of the final update, except for the use of the issued date for conduit
debt obligors. That amendment is effective for interim or annual periods ending
after June 15, 2010. The Company does not expect the adoption of this amendment
to have a material impact on its consolidated financial statements.

3. GOING CONCERN

As of June 30, 2010, the Companys current liabilities exceeded
its current assets by $6,483,693 and the Companys total liabilities exceeded
its total assets by $7,035,715. The Companys cash position on June 30, 2010 was
$180,476. The Company has a limited operating history and continues to generate
net losses. Our auditor has expressed their concern as to our ability to
continue as a going concern in the audit opinion of our financial statements for
the year ended June 30, 2010.

The Company has taken steps to improve its cash position by
slowing down the rate of new store openings, selling inventory from prior
seasons at its discount stores and warehouse sales, negotiating longer payment
terms from a related party manufacturer and stepping up efforts in collecting
past due accounts receivables. In addition, the Company is seeking future equity
and debt financing, although there is no assurance that such financing will be
available or be available at terms acceptable to the Company.

F-11

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

4. ACCOUNTS RECEIVABLE

|                         |   | As of         |   |   | As of         |  
|------------------------ | - | ------------- | - | - | ------------- | -
|                         |   | June 30, 2010 |   |   | June 30, 2009 |  
|Accounts receivable      | $ | 3,784,745     |   | $ | 2,919,822     |  
|Less: bad debt allowance |   | (921,203      | ) |   | (176,803      | )
|Accounts receivable, net | $ | 2,863,542     |   | $ | 2,743,019     |  

5. ADVANCE TO VENDORS

|                         |   | As of         |   |   | As of         | 
|------------------------ | - | ------------- | - | - | ------------- | 
|                         |   | June 30, 2010 |   |   | June 30, 2009 | 
|Advance to vendors       | $ | 22,059        |   | $ | 26,341        | 
|Less: bad debt allowance |   | (22,059       | ) |   | -             | 
|Advance to vendors, net  | $ | -             |   | $ | 26,341        | 

6. INVENTORIES

|                                     |   | As of         |   |   | As of         |  
|------------------------------------ | - | ------------- | - | - | ------------- | -
|                                     |   | June 30, 2010 |   |   | June 30, 2009 |  
|Inventories                          | $ | 11,672,624    |   | $ | 11,747,152    |  
|Less: reserve for inventory markdown |   | (4,864,315    | ) |   | (5,524,159    | )
|Inventories, net                     | $ | 6,808,309     |   | $ | 6,222,993     |  

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the
following:

|                            |   | As of June 30, |  |   | As of June 30, | 
|--------------------------- | - | -------------- |  | - | -------------- | 
|                            |   | 2010           |  |   | 2009           | 
|Employee advance            | $ | 3,682          |  | $ | 4,656          | 
|Prepaid expenses            |   | 154,854        |  |   | 221,065        | 
|Value-added tax recoverable |   | -              |  |   | 169,036        | 
|                            |   |                |  |   |                | 
|Total                       | $ | 158,536        |  | $ | 394,757        | 

8. RELATED PARTY TRANSACTIONS

The Company purchased 100% of its merchandise for the year
ended June 30, 2010 from ChangZhou CTS Fashion Co., Ltd. (CTS) which is owned
by the majority shareholder and Chief Executive Officer (CEO) of the Company.
Total purchases from CTS amounted to $13,170,782 and $13,327,797 for the years
ended June 30, 2010 and 2009, respectively.

Total accounts payable to CTS as of June 30, 2010 and 2009 were
$9,510,853 and $8,281,174, respectively. These payables do not bear interest and
are due upon demand during the normal course of business operations.

The Company also rents warehouse and office space from CTS and
one of its board directors Ms. Fengling Wang. Total rent to CTS and Fengling
Wang, respectively, were $33,767 and $8,809 for the year ended June 30, 2010,
and $33,695 and $8,790 for the year ended June 30, 2009.

On February 18, 2008, The Company entered into a loan agreement
with its CEO, Jieming Huang, pursuant to which, the Company borrowed $810,160
from Mr. Jieming Huang. The loan agreement is subject to a five-year term with
five percent (5%) annual interest payable in arrears.

F-12

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

9.  DEPOSITS PAYABLE AND CUSTOMER ADVANCES

Customer deposits and advances consist of deposits and advances
from vendors for the purchase of merchandise and security deposits from licensed
non-corporate stores. Pursuant to the terms of the contracts with licensed
non-corporate stores, the security deposits are fully refundable at the end of
the contract term with no interest due.

10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the
following:

|                          |   | June 30,  |  |   | June 30,  | 
|------------------------- | - | --------- |  | - | --------- | 
|                          |   | 2010      |  |   | 2009      | 
|                          |   |           |  |   |           | 
|Employee benefits payable | $ | 101,971   |  | $ | 107,801   | 
|Salary payable            |   | 109,678   |  |   | 105,686   | 
|Store expense             |   | 67,171    |  |   | 77,563    | 
|Agency fee                |   | 1,607,950 |  |   | 982,880   | 
|Interest payable          |   | 273,198   |  |   | 148,273   | 
|Other current liabilities |   | 591,252   |  |   | 21,965    | 
|                          |   |           |  |   |           | 
|Total                     | $ | 2,751,220 |  | $ | 1,444,168 | 

We formally adopted an agency marketing system in October 2008.
Regional agents are an individual or a trading company who is contracted to have
exclusive and nontransferable rights to sell and promote our products in
designated areas such as a city or province. The contract term is usually for a
year and renewable 60 days prior to expiration. The agent is selected from our
target area and responsible for determining store locations within the area
(contingent upon Company approval), setting up the corporate stores in that
area, hiring store staff, and managing all stores day-to- day operation in the
area. The agent does not have authority to raise standard price of our products
or offer discount without our approval nor can they sell products of other brand
names in the stores. In return for their services on behalf of the Company,
sales agent is paid a commission called agency fee ranging from 5% to 38% of the
stores sales revenue. As our regional agent is selected based on his or her
local expertise in sales and marketing in the area, such marketing system helps
us penetrate a target market more rapidly and provides proper incentive for the
agent to increase our market share in that area. For the years ended June 30,
2010 and 2009, we incurred agency fee of $2,833,620 and $2,048,606,
respectively.

11. DIVIDENDS PAYABLE

The Companys wholly-owned subsidiary, Shanghai Baby Fox
Fashion Co., Ltd. declared dividends on August 8, 2007 and December 10, 2007 in
the amount of approximately $405,570 and $437,134, respectively, to Fengling
Wang, its sole shareholder on record on the dates the dividends were declared.

F-13

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

12. LONG-TERM DEBTS

Long-term debt consists of the following:

|                                                                                                                                   |   | June 30,  |  |   | June 30,  | 
|---------------------------------------------------------------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                                                                                                   |   | 2010      |  |   | 2009      | 
|Amount borrowed from our CEO, bearing
      interest at 5% per annum and due February 17, 2013                                     | $ | 810,160   |  | $ | 810,160   | 
|Amount borrowed from an unrelated party, bearing interest
      at 10% per annum and due June 16, 2011                             |   | 839,359   |  |   | 835,050   | 
|Amount borrowed from an unrelated party,
      bearing zero interest and due January 31, 2011, the loan is guaranteed by
      CTS |   | 736,279   |  |   | -         | 
|Subtotal                                                                                                                           |   | 2,385,798 |  |   | 1,645,210 | 
|Less: current portion                                                                                                              |   | 1,575,638 |  |   | 835,050   | 
|Total                                                                                                                              | $ | 810,610   |  | $ | 810,610   | 

Long-term debt matures as follows:

Fiscal year ended June 30,2011
    $
    1,575,6382013
    
    810,160


The total interest expense for the years ended June 30, 2010
and 2009 were $124,191 and $124,013, respectively.

13. INCOME TAXES

The Companys earnings from continuing operations before income
taxes are as follows:

|                                                               |   | June 30, 2010       |   |   | June 30, 2009       |  
|-------------------------------------------------------------- | - | ------------------- | - | - | ------------------- | -
|Loss from continuing operation before
      income taxes-China | $ | (194,686            | ) | $ | (4,440,006          | )
|Loss from continuing operation before income taxes-US          | $ | (40,940             | ) | $ | (42,623             | )
|                                                               |   |                     |   |   |                     |  
|The income tax expense are as follows:                         |   |                     |   |   |                     |  
|                                                               |   | June
      30, 2010 |   |   | June
      30, 2009 |  
|Current-China                                                  | $ | -                   |   | $ | -                   |  
|Deferred-China                                                 |   | 199,905             |   |   | -                   |  
|Subtotal-China                                                 |   | 199,905             |   |   | -                   |  
|                                                               |   |                     |   |   |                     |  
|Current-US                                                     |   | -                   |   |   | -                   |  
|Deferred-US                                                    |   | -                   |   |   | -                   |  
|Subtotal-US                                                    |   | -                   |   |   | -                   |  
|                                                               |   |                     |   |   |                     |  
|Current-Total                                                  |   | -                   |   |   | -                   |  
|Deferred-Total                                                 |   | 199,905             |   |   | -                   |  
|Total                                                          | $ | 199,905             |   | $ | -                   |  

F-14

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

13. INCOME TAXES (continued)

The Company periodically evaluates the likelihood of the
realization of deferred tax assets, and reduces the carrying amount of the
deferred tax assets by a valuation allowance to the extent it believes a portion
will not be realized. The Company considers many factors when assessing the
likelihood of future realization of the deferred tax assets, including its
recent cumulative earnings experience, expectation of future income, the
carryforward periods available for tax reporting purposes, and other relevant
factors. For the year ended June 30, 2009, the Company recognized $183,296 of
net deferred tax assets after valuation allowance. In the year ended June 30,
2010, management concluded that it was more likely than not that additional
deferred tax assets would be realized. This determination was based upon actual
and projected future operating results in our business. Accordingly, the Company
recorded a non-cash income tax benefit of $262,495 in the year ended June 30,
2010 resulting from the recognition of the valuation allowance on the deferred
tax assets.

Deferred tax asset at June 30, 2010 and June 30, 2009 amounted
to $-0- and $183,296, respectively, net of valuation allowance recorded. The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets at June 30, 2010 and 2009 are as follows:

|                               |   | June 30,   |   |   | June 30,   |  
|------------------------------ | - | ---------- | - | - | ---------- | -
|                               |   | 2010       |   |   | 2009       |  
|Deferred tax assets            |   |            |   |   |            |  
|Inventory provision            | $ | 1,216,079  |   | $ | 1,381,040  |  
|Bad debt allowance             |   | 235,815    |   |   | 44,201     |  
|Net loss carried forward-China |   | 258,644    |   |   | 268,526    |  
|Net loss carried forward-US    |   | 44,852     |   |   | 30,933     |  
|Total deferred tax assets      |   | 1,755,390  |   |   | 1,724,700  |  
|Valuation allowance            |   | (1,755,390 | ) |   | (1,541,404 | )
|                               |   |            |   |   |            |  
|Net deferred tax assets        | $ | -          |   | $ | 183,296    |  

The Companys subsidiary is governed by the Income Tax Laws of
the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws, which are subject to tax at a rate of 25% on
income reported in the statutory financial statements after appropriate tax
adjustments.

The reconciliation of income tax computed at the statutory
rates to the total income tax for the years ended June 30, 2010 and 2009 is as
follows:

|                                                             |   | 2010    |   |   | 2009       |  
|------------------------------------------------------------ | - | ------- | - | - | ---------- | -
|Income tax expense (benefit) at federal
      statutory rate | $ | (80,113 | ) | $ | (1,524,094 | )
|Adjustment due to:                                           |   |         |   |   |            |  
|Foreign rate differential                                    |   | 17,522  |   |   | 399,601    |  
|Other                                                        |   | 48,510  |   |   | 16,149     |  
|Increase (decrease) in valuation allowance                   |   | 213,986 |   |   | 1,108,344  |  
|Income tax expense (benefit)                                 | $ | 199,905 |   | $ | -          |  

F-15

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

14. COMMITMENTS AND CONTINGENCIES

Leases

The Company is obligated under operating leases for their
headquarters facilities, distribution center and certain stores located in
malls. Aggregate minimum annual rentals under non-cancelable leases are as
follows:

|Fiscal year |   |           | 
|----------- | - | --------- | 
|2011        | $ | 1,369,064 | 
|2012        |   | 8,835     | 
|2013        |   | 8,835     | 
|2014        |   | 4,418     | 
|2015        |   | -         | 
|Thereafter  |   | -         | 

Approximately 26% of our corporate stores in malls are required
to pay minimum annual rents for the spaces leased plus additional rents
calculated based on certain percentage of actual sales over minimum amount of
sales required. The remaining stores do not have minimum annual rent requirement
but are required to pay rents based on certain percentage of actual sales over
minimum sales required. These leases can be terminated if performance does not
meet certain predetermined levels stipulated by mall operators. Rental expense
charged to operations aggregated $4,663,359 and $4,517,038 for the years ended
June 30, 2010 and 2009, respectively.

15. RISKS AND UNCERTAINTIES

Vulnerability due to Operations in PRC

The Companys operations may be adversely affected by
significant political, economic and social uncertainties in the PRC. Although
the PRC government has been pursuing economic reform policies for more than 20
years, no assurance can be given that the PRC 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 the PRCs political, economic and social
conditions. There is also no guarantee that the PRC governments pursuit of
economic reforms will be consistent or effective.

Substantially all of the Companys businesses are transacted in
RMB, which is not freely convertible. The Peoples Bank of China or other banks
are authorized to buy and sell foreign currencies at the exchange rates quoted
by the Peoples Bank of China. Approval of foreign currency payments by the
Peoples Bank of China or other institutions requires submitting a payment
application form together with suppliers invoices, shipping documents and
signed contracts.

Since the Company has its primary operations in the PRC, the
majority of its revenues will be settled in RMB, not U.S. Dollars. Due to
certain restrictions on currency exchanges that exist in the PRC, the Companys
ability to use revenue generated in RMB to pay any dividend payments to its
shareholders may be limited.

F-16

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BABY FOX INTERNATIONAL, INC. AND SUBSIDIARYNOTES
TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2010 AND 2009

15. RISKS AND UNCERTAINTIES (continued)

Lack of Business Insurance

The Company is potentially exposed to risks of losses that may
result from business interruptions, injury to others (including employees) and
damage to property. These losses may be uninsured, especially due to the fact
that the Companys operations are in China, where business insurance is not
readily available. If: (i) information is available before the Companys
financial statements are issued or are available to be issued indicates that
such loss is probable and (ii) the amount of the loss can be reasonably
estimated, an estimated loss will be accrued by a charge to income. If such loss
is probable but the amount of loss cannot be reasonably estimated, the loss
shall be charged to the income of the period in which the loss can be reasonably
estimated and shall not be charged retroactively to an earlier period. As of
June 30, 2010, the Company has not experienced such loss.

Concentration of Vendors and Customers

For the years ended June 30, 2010 and 2009, the Company made
100% and 78% of its total purchase of merchandise from CTS, an affiliated
company and balance of payables to CTS represented 95% and 74% of the Companys
outstanding accounts payable at June 30, 2010 and 2009, respectively.

No single customer accounted for more than 10% for the total
sales for the years ended June 30, 2010 and 2009.

F-17

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