---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACTOF 1934

For the transition period from _________to
____________

Commission file number 333-150835

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

|Nevada                                           | 26-0775642                       
|------------------------------------------------ | ---------------------------------
|(State of other jurisdiction of incorporation or | (IRS Employer identification No.)
|organization)                                    |                                  

Shanghai Minhang District 89 Xinbang Road, Suite 305-B5The People's Republic of China(Address of
principal executive offices)

+ 86 21 5415 3855(Registrant's
telephone number, including area code)

Indicated by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]      No [  ]

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).

Yes [  ]      No [  ]

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

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

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

Yes [  ]      No [X]

Number of shares of common stock outstanding as of May 2, 2011:
40,447,500

---

INDEX

|                                   |                                                                                                                                                                 | Page
      No.
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|PART I FINANCIAL
      INFORMATION |                                                                                                                                                                
|Item 1.                            | Financial Statements                                                                                                                                            | 3             
|                                   | Consolidated Balance
      Sheets (unaudited) as of March 31, 2011 and as of June 30, 2010                                                                      | 3             
|                                   | Consolidated Statements of Operations and Other
      Comprehensive Income (Loss) for the Three and Nine Months Ended March 31,
      2011 and 2010 (unaudited) | 4             
|                                   | Consolidated Statement of
      Changes in Stockholders Deficit for the Nine Months Ended March 31, 2011
      (unaudited)                                     | 5             
|                                   | Consolidated Statements of Cash Flows for the
      Nine Months Ended March 31, 2011 and 2010 (unaudited)                                                       | 6             
|                                   | Notes to Consolidated
      Financial Statements (unaudited)                                                                                                    | 7             
|Item 2.                            | Management's Discussion and Analysis of
      Financial Condition And Results of Operations                                                                     | 19            
|Item 3.                            | Quantitative and
      Qualitative Disclosure About Market Risk                                                                                                 | 31            
|Item 4.                            | Controls and Procedures                                                                                                                                         | 31            
|PART II OTHER
      INFORMATION    |                                                                                                                                                                
|Item 1.                            | Legal Proceedings                                                                                                                                               | 32            
|Item 1A.                           | Risk
      Factors                                                                                                                                              | 32            
|Item 2.                            | Unregistered Sales of Equity Securities
      and Use of Proceeds                                                                                               | 32            
|Item 3.                            | Defaults Upon Senior
      Securities                                                                                                                           | 32            
|Item 5.                            | Other Information                                                                                                                                               | 32            
|Item 6.                            | Exhibits                                                                                                                                                        | 32            
|SIGNATURES                         |                                                                                                                                                                 | 33            

1

---

FORWARD LOOKING STATEMENTS

Information included or incorporated by reference in this
quarterly 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 quarterly 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", as well as in this quarterly 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" in our prior annual report
and matters described in this quarterly report generally. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this quarterly 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
described in the quarterly report, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
quarterly report.

2

---

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED
BALANCE SHEETS(UNAUDITED )

|                                                                                                                                                                                       |   | March 31,  |   |   | June 30,   |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                                                                                                                                       |   | 2011       |   |   | 2010       |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|ASSETS                                                                                                                                                                                 |  
|CURRENT ASSETS:                                                                                                                                                                        |   |            |   |   |            |  
|Cash                                                                                                                                                                                   | $ | 82,056     |   | $ | 180,476    |  
|Accounts receivable, net                                                                                                                                                               |   | 3,465,270  |   |   | 2,863,542  |  
|Inventory, net                                                                                                                                                                         |   | 8,803,917  |   |   | 6,808,309  |  
|Prepaid expenses and other current assets                                                                                                                                              |   | 333,158    |   |   | 158,536    |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL CURRENT ASSETS                                                                                                                                                                   |   | 12,684,401 |   |   | 10,010,863 |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|Property and equipment, net                                                                                                                                                            |   | 50,205     |   |   | 51,037     |  
|Deposits                                                                                                                                                                               |   | 208,204    |   |   | 207,101    |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL ASSETS                                                                                                                                                                           | $ | 12,942,810 |   | $ | 10,269,001 |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|LIABILITIES AND
      STOCKHOLDERS' DEFICIT                                                                                                                                            |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|CURRENT LIABILITIES:                                                                                                                                                                   |   |            |   |   |            |  
|Accounts payable - trade                                                                                                                                                               | $ | 615,732    |   | $ | 515,298    |  
|Advances from affiliated company                                                                                                                                                       |   | 12,508,424 |   |   | 9,510,853  |  
|Deposits payable and customer advances                                                                                                                                                 |   | 1,635,019  |   |   | 1,263,502  |  
|Accrued expenses and other current
      liabilities                                                                                                                                   |   | 2,727,268  |   |   | 2,751,220  |  
|Short-term loan                                                                                                                                                                        |   | 1,067,659  |   |   | -          |  
|Loans payable - officer and
      stockholder                                                                                                                                          |   | 43,469     |   |   | 35,341     |  
|Current portion of long-term debt                                                                                                                                                      |   | 762,614    |   |   | 1,575,638  |  
|Dividends payable                                                                                                                                                                      |   | 872,845    |   |   | 842,704    |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                              |   | 20,233,030 |   |   | 16,494,556 |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|LONG-TERM DEBT                                                                                                                                                                         |   | 810,160    |   |   | 810,160    |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL LIABILITIES                                                                                                                                                                      |   | 21,043,190 |   |   | 17,304,716 |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|STOCKHOLDERS' DEFICIT                                                                                                                                                                  |   |            |   |   |            |  
|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, 40,447,500 and 40,427,500 shares issued and outstanding
      as of March 31, 2011 and June 30, 2010, respectively |   | 40,447     |   |   | 40,427     |  
|Additional paid-in capital                                                                                                                                                             |   | 69,980     |   |   | -          |  
|Accumulated deficit                                                                                                                                                                    |   | (7,995,522 | ) |   | (7,095,053 | )
|Accumulated other comprehensive income (loss)                                                                                                                                          |   | (215,285   | ) |   | 18,911     |  
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL STOCKHOLDERS' DEFICIT                                                                                                                                                            |   | (8,100,380 | ) |   | (7,035,715 | )
|                                                                                                                                                                                       |   |            |   |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                            | $ | 12,942,810 |   | $ | 10,269,001 |  

See accompanying notes to unaudited consolidated financial
statements

3

---

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

|                                                      |   | FOR THREE MONTHS ENDED |   |   | FOR NINE MONTHS ENDED |  
|----------------------------------------------------- | - | ---------------------- | - | - | --------------------- | -
|                                                      |   | MARCH 31,              |   |   | MARCH 31,             |  
|                                                      |   | 2011                   |   |   | 2010                  |  
|                                                      |   |                        |   |   |                       |  
|SALES                                                 |   |                        |   |   |                       |  
|Corporate stores                                      | $ | 6,219,065              |   | $ | 6,475,430             |  
|Non-corporate stores                                  |   | 203,990                |   |   | 609,812               |  
|TOTAL SALES                                           |   | 6,423,055              |   |   | 7,085,242             |  
|                                                      |   |                        |   |   |                       |  
|COST OF GOODS SOLD                                    |   |                        |   |   |                       |  
|Corporate stores                                      |   | 3,897,450              |   |   | 2,399,152             |  
|Non-corporate stores                                  |   | 231,547                |   |   | 322,855               |  
|TOTAL COST OF GOODS SOLD                              |   | 4,128,997              |   |   | 2,722,007             |  
|                                                      |   |                        |   |   |                       |  
|GROSS PROFIT                                          |   | 2,294,058              |   |   | 4,363,235             |  
|                                                      |   |                        |   |   |                       |  
|                                                      |   |                        |   |   |                       |  
|OPERATING EXPENSES:                                   |   |                        |   |   |                       |  
|Selling expenses                                      |   | 2,603,276              |   |   | 3,030,093             |  
|General & administrative expenses                     |   | 1,662,563              |   |   | 486,279               |  
|TOTAL OPERATING EXPENSES                              |   | 4,265,839              |   |   | 3,516,372             |  
|                                                      |   |                        |   |   |                       |  
|INCOME (LOSS) FROM OPERATIONS                         |   | (1,971,781             | ) |   | 846,863               |  
|                                                      |   |                        |   |   |                       |  
|Other income (expense)                                |   | (1,021                 | ) |   | -                     |  
|Interest expense                                      |   | (23,949                | ) |   | (30,861               | )
|                                                      |   |                        |   |   |                       |  
|TOTAL OTHER EXPENSE                                   |   | (24,970                | ) |   | (30,861               | )
|                                                      |   |                        |   |   |                       |  
|INCOME (LOSS) BEFORE TAXES                            |   | (1,996,751             | ) |   | 816,002               |  
|                                                      |   |                        |   |   |                       |  
|INCOME TAX PROVISION                                  |   | 11,687                 |   |   | -                     |  
|                                                      |   |                        |   |   |                       |  
|NET INCOME (LOSS)                                     | $ | (2,008,438             | ) | $ | 816,002               |  
|                                                      |   |                        |   |   |                       |  
|OTHER COMPREHENSIVE INCOME (LOSS):                    |   |                        |   |   |                       |  
|Foreign currency
      translation gain (loss)        |   | (93,261                | ) |   | (1,319                | )
|                                                      |   |                        |   |   |                       |  
|COMPREHENSIVE INCOME (LOSS)                           | $ | (2,101,699             | ) | $ | 814,683               |  
|                                                      |   |                        |   |   |                       |  
|                                                      |   |                        |   |   |                       |  
|BASIC AND DILUTED INCOME (LOSS) PER SHARE             |   | (0.05                  | ) |   | 0.02                  |  
|                                                      |   |                        |   |   |                       |  
|BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |   | 40,447,500             |   |   | 40,427,500            |  

See accompanying notes to unaudited consolidated financial
statements

4

---

BABY FOXINTERNATIONAL,INC. ANDSUBSIDIARYCONSOLIDATEDSTATEMENTOFCHANGESINSTOCKHOLDERS'DEFICIT
(UNAUDITED)

|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   | ACCUMULATED |   |   |            |  
|--------------------------------------------- |  | ------------------------- |  | - | ------------ |  |  | ---------- |  | - | ----------- |  | - | --------------- |  | - | ------------- | - | - | ----------- | - | - | ---------- | -
|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   | OTHER       |   |   | TOTAL      |  
|                                              |  | **PREFERRED
      STOCK** |  |   | COMMON STOCK |  |  | ADDITIONAL |  |   | ACCUMULATED |  |   | COMPREHENSIVE   |  |   | STOCKHOLDERS' |  
|                                              |  | **Shares**                |  |   | Amount       |  |  | Shares     |  |   | Amount      |  |   | PAID-IN CAPITAL |  |   | DEFICIT       |   |   | INCOME      |   |   | DEFICIT    |  
|BALANCE- June 30, 2010                        |  | -                         |  | $ | -            |  |  | 40,427,500 |  | $ | 40,427      |  | $ | -               |  | $ | (7,095,053    | ) | $ | 18,911      |   | $ | (7,035,715 | )
|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   |             |   |   |            |  
|Common stock issued for legal
      services  |  |                           |  |   |              |  |  | 20,000     |  |   | 20          |  |   | 69,980          |  |   |               |   |   |             |   |   | 70,000     |  
|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   |             |   |   |            |  
|Net loss                                      |  |                           |  |   |              |  |  |            |  |   |             |  |   | -               |  |   | (900,469      | ) |   |             |   |   | (900,469   | )
|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   |             |   |   |            |  
|Foreign currency translation
      adjustment |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   | (234,196    | ) |   | (234,196   | )
|                                              |  |                           |  |   |              |  |  |            |  |   |             |  |   |                 |  |   |               |   |   |             |   |   |            |  
|BALANCE- March 31, 2011                       |  | -                         |  | $ | -            |  |  | 40,447,500 |  | $ | 40,447      |  | $ | 69,980          |  | $ | (7,995,522    | ) | $ | (215,285    | ) | $ | (8,100,380 | )

See accompanying notes to unaudited consolidated financial
statements

5

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED
STATEMENTS OF CASH FLOWS(UNAUDITED)

|                                                                                  |   | FOR THE NINE MONTHS ENDED
      MARCH 31, |  
|--------------------------------------------------------------------------------- | - | ----------------------------------------- | -
|                                                                                  |   | 2011                                      |  
|                                                                                  |   |                                           |  
|OPERATING ACTIVITIES:                                                             |   |                                           |  
|Net loss                                                                          | $ | (900,469                                  | )
|Adjustments to reconcile net loss to net
      cash used in operating activities: |   |                                           |  
|Depreciation expense                                                              |   | 13,567                                    |  
|Bad debt expense                                                                  |   | 1,182,867                                 |  
|Accrual (Reversal) of inventory reserve                                           |   | (465,013                                  | )
|(Decrease) increase of
      valuation allowance on deferred tax assets           |   | 265,894                                   |  
|Common stock issued for legal services                                            |   | 70,000                                    |  
|Change in operating
      assets and liabilities:                                 |   |                                           |  
|Accounts receivable                                                               |   | (1,673,403                                | )
|Inventory                                                                         |   | (1,256,302                                | )
|Advance to vendors                                                                |   | -                                         |  
|Prepaid expenses
      and other current assets                                   |   | (165,983                                  | )
|Deposits                                                                          |   | 6,193                                     |  
|Deferred tax                                                                      |   | (265,894                                  | )
|Accounts payable-trade                                                            |   | 80,563                                    |  
|Accrued
      expenses, taxes and other current liabilities                       |   | (116,309                                  | )
|Deposits payable and customer
      advances                                      |   | 320,593                                   |  
|                                                                                  |   |                                           |  
|NET CASH USED IN OPERATING ACTIVITIES                                             |   | (2,903,696                                | )
|                                                                                  |   |                                           |  
|INVESTING ACTIVITIES:                                                             |   |                                           |  
|Acquisition of property
      and equipment                                       |   | (10,956                                   | )
|                                                                                  |   |                                           |  
|NET CASH USED IN INVESTING
      ACTIVITIES                                       |   | (10,956                                   | )
|                                                                                  |   |                                           |  
|FINANCING ACTIVITIES:                                                             |   |                                           |  
|Advances from affiliated company                                                  |   | 2,610,712                                 |  
|Proceeds of stockholder
      loan                                                |   | 6,743                                     |  
|Proceeds from short-term loan                                                     |   | 1,048,901                                 |  
|Proceeds from long-term
      debt                                                |   | -                                         |  
|Repayment of long-term debt                                                       |   | (854,105                                  | )
|                                                                                  |   |                                           |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                         |   | 2,812,251                                 |  
|                                                                                  |   |                                           |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH
      EQUIVALENTS                       |   | 3,981                                     |  
|                                                                                  |   |                                           |  
|INCREASE ( DECREASE ) IN CASH                                                     |   | (98,420                                   | )
|                                                                                  |   |                                           |  
|CASH - BEGINNING OF THE PERIOD                                                    |   | 180,476                                   |  
|                                                                                  |   |                                           |  
|CASH - END OF THE PERIOD                                                          | $ | 82,056                                    |  
|                                                                                  |   |                                           |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
      INFORMATION                            |   |                                           |  
|Income tax paid                                                                   | $ | 11,687                                    |  
|Interest expense paid                                                             | $ | 236,967                                   |  

See accompanying notes to unaudited consolidated financial
statements

6

---

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

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 unaudited consolidated financial statements conform to
accounting principles generally accepted in the United States of America ("US
GAAP") and have been consistently applied.

In the opinion of management, the Companys unaudited
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) that are considered necessary for a fair presentation of
consolidated results of operations, financial position and cash flows as of and
for the periods present. Operating results for the three months and nine months
ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2011.

The balance sheet at June 30, 2010 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial
statements.

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.

7

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 the three
months and nine months ended March 31, 2011 and 2010.

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. The 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
defective 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 defective 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 a
shorter product life cycles and the return period we allow for non-corporate
stores is relatively long, the current reserve already takes into account the
effect of introducing new products on expected returns 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 as of March
31, 2011 and 2010 were $19,015 and $121,799, 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.

8

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition and return policy (continued)

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 goods sold

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

Advertising expense

Advertising expense is charged to operations as incurred and
totaled approximately $-0- and $16,434 for the three months ended March 31, 2011
and 2010 and $-0- and $38,513 for the nine months ended March 31, 2011 and 2010,
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
Peoples 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.

9

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 March 31, 2011 and June 30, 2010, the balances of bad debt
allowance represented 38% and 24%, respectively, of the outstanding accounts
receivable balances.

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 recorded to
reduce the carrying value of these items to market value and as additional cost
of sales.

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. The
percentage of inventory reserved was 34% and 42% of ending inventory level as of
March 31, 2011 and June 30, 2010, respectively, 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
the estimated residual value over their useful lives using the straight line
method for financial reporting purposes. Total depreciation for the nine months
ended March 31, 2011 and 2010 were $13,567 and $11,799, respectively. The useful
life and estimated residual value are as follows:

|               | Office equipment
|-------------- | ----------------
|Useful life    | 5 years         
|Residual value | 5%              

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

10

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

Deferred tax assets and liabilities are 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, the Company recognizes future tax benefits, such as
carryforwards, to the extent that realization of such benefits is more likely
than not and that a valuation allowance is 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.

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.

11

---

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In February 2010, FASB issued new standards in ASC 855,
Subsequent Events. 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 adoption of this amendment did not have a material
impact on its consolidated financial statements.

Subsequent events

The Company evaluated events subsequent to March 31, 2011
through the date the financial statements were issued and no items required
additional disclosure.

3. GOING CONCERN

As reflected in the accompanying financial statements, the
Company has an accumulated deficit of $8,100,380, and a net loss for the
three-month and nine-month periods ended March 31, 2011 of $2,008,438 and
$900,469, respectively. Also as of March 31, 2011, the Companys current
liabilities exceeded its current assets by $7,548,629 and the Companys total
liabilities exceeded its total assets by $8,100,380. These factors raise
substantial doubt about our ability to continue as a going concern. The
Companys ability to continue as a going concern is dependent on its ability to
raise additional capital and implement its business plan. These financial
statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.

Management believes that actions presently being taken to
obtain additional funding and implement its strategic plans provide the
opportunity for the Company to continue as a going concern.

4. ACCOUNTS RECEIVABLE

|                         |   | As of          |   |   | As of         |  
|------------------------ | - | -------------- | - | - | ------------- | -
|                         |   | March 31, 2011 |   |   | June 30, 2010 |  
|Accounts receivable      | $ | 5,623,441      |   | $ | 3,784,745     |  
|Less: bad debt allowance |   | (2,158,171     | ) |   | (921,203      | )
|Accounts receivable, net | $ | 3,465,270      |   | $ | 2,863,542     |  

5. INVENTORIES

|                                     |   | As of          |   |   | As of         |  
|------------------------------------ | - | -------------- | - | - | ------------- | -
|                                     |   | March 31, 2011 |   |   | June 30, 2010 |  
|Inventories                          | $ | 13,368,883     |   | $ | 11,672,624    |  
|Less: reserve for inventory markdown |   | (4,564,966     | ) |   | (4,864,315    | )
|Inventories, net                     | $ | 8,803,917      |   | $ | 6,808,309     |  

12

---

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

|                  |   | As of          |  |   | As of         | 
|----------------- | - | -------------- |  | - | ------------- | 
|                  |   | March 31, 2011 |  |   | June 30, 2010 | 
|Employee advances | $ | 3,813          |  | $ | 3,682         | 
|Prepaid expenses  |   | 329,345        |  |   | 154,854       | 
|Total             | $ | 333,158        |  | $ | 158,536       | 

7. RELATED PARTY TRANSACTIONS

The Company purchased 100% of its merchandise for the three and
nine months ended March 31, 2011 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 $4,241,219 and $2,125,464
for the three months and $15,793,770 and $8,852,195 for the nine months ended
March 31, 2011 and 2010, respectively.

Total advances payable to CTS as of March 31, 2011 and June 30,
2010 were $12,508,424 and $9,510,853, 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 $8,701 and $2,270 for the three months and $25,848 and
$6,743 for the nine months ended March 31, 2011, and $8,423 and $2,197 for the
three months and $25,260 and $6,589 for the nine months ended March 31, 2010.

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 with payment due at
maturity.

8. CUSTOMER DEPOSITS AND 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.

9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

|                          |   | As of          |  |   | As of         | 
|------------------------- | - | -------------- |  | - | ------------- | 
|                          |   | March 31, 2011 |  |   | June 30, 2010 | 
|Employee benefits payable | $ | 104,047        |  | $ | 101,971       | 
|Salary payable            |   | 102,764        |  |   | 109,678       | 
|Store expense             |   | 50,079         |  |   | 67,171        | 
|Agency fee                |   | 1,605,020      |  |   | 1,607,950     | 
|Interest payable          |   | 126,046        |  |   | 273,198       | 
|Other current liabilities |   | 739,312        |  |   | 591,252       | 
|Total                     | $ | 2,727,268      |  | $ | 2,751,220     | 

13

---

9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(continued)

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 the standard prices of our
products or offer discounts 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, 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 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 three
months ended March 31, 2011 and 2010, we incurred agency fees of $402,018 and
$584,774, respectively. For the nine months ended March 31, 2011 and 2010, we
incurred agency fees of $1,740,022 and $2,243,482, respectively.

10. 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 $420,076 and $452,769, respectively, to Fengling Wang, its sole
shareholder on record on the dates the dividends were declared.

11. SHORT-TERM LOAN

On January 12, 2011, the Company entered into a short-term loan
agreement with Industrial Bank Co., Ltd. to borrow RMB7,000,000 (USD1,067,659)
for the purpose of purchasing inventory from Changzhou CTS Fashion Co., Ltd. The
principal is due on January 11, 2012 with interest payable on a quarterly basis
at 1.2 times the standard borrowing rate published by Peoples Bank of China.

12. LONG-TERM DEBT

Long-term debt consists of the following:

|                                                                                                              |   | As of          |  |   | As of         | 
|------------------------------------------------------------------------------------------------------------- | - | -------------- |  | - | ------------- | 
|                                                                                                              |   | March 31, 2011 |  |   | June 30, 2010 | 
|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       | 
|Amount borrowed from an unrelated party,
      bearing zero interest and due June 30, 2011, guaranteed by CTS |   | 762,614        |  |   | 736,279       | 
|Subtotal                                                                                                      |   | 1,572,774      |  |   | 2,385,798     | 
|Less: current portion                                                                                         |   | 762,614        |  |   | 1,575,638     | 
|Total                                                                                                         | $ | 810,160        |  | $ | 810,160       | 

Long-term debt matures as follows:

|As of March 31, 2011 |   |         | 
|-------------------- | - | ------- | 
|                     |   |         | 
|2011                 | $ | 762,614 | 
|2012                 | $ | -       | 
|2013                 | $ | 810,160 | 

The total interest expense for the three months ended March 31,
2011 and 2010 were $23,949 and $30,861, respectively and were $86,697 and
$93,009 for the nine months ended March 31, 2011 and 2010, respectively.

14

---

13. INCOME TAXES

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

|                                                                          |  | For the three months
      ended March 31, |  
|------------------------------------------------------------------------- |  | ------------------------------------------ | -
|                                                                          |  | 2011                                       |  
|Earnings (loss) from continuing operation
      before income taxes-China |  | (1,985,812                                 | )
|Earnings (loss) from continuing operation before income
      taxes-US    |  | (10,939                                    | )

|                                                                          |  | For the nine months ended
      March 31, |  
|------------------------------------------------------------------------- |  | ----------------------------------------- | -
|                                                                          |  | 2011                                      |  
|Earnings (loss) from continuing operation
      before income taxes-China |  | (786,093                                  | )
|Earnings (loss) from continuing operation before income
      taxes-US    |  | (102,688                                  | )

The income tax expense (benefit) are as follows:

|               |   | For the three months
      ended March 31, |  |   | For the nine months ended
      March 31, | 
|-------------- | - | ------------------------------------------ |  | - | ----------------------------------------- | 
|               |   | 2011                                       |  |   | **2010**                                  | 
|Current-China  | $ | -                                          |  | $ | -                                         | 
|Deferred-China |   | 11,687                                     |  |   | -                                         | 
|Subtotal-China |   | 11,687                                     |  |   | -                                         | 
|               |   |                                            |  |   |                                           | 
|Current-US     |   | -                                          |  |   | -                                         | 
|Deferred-US    |   | -                                          |  |   | -                                         | 
|Subtotal-US    |   | -                                          |  |   | -                                         | 
|               |   |                                            |  |   |                                           | 
|Current-Total  |   | -                                          |  |   | -                                         | 
|Deferred-Total |   | 11,687                                     |  |   | -                                         | 
|Total          | $ | 11,687                                     |  | $ | -                                         | 

Deferred tax assets at March 31, 2011 and June 30, 2010
amounted to $-0- and $-0-, respectively, net of valuation allowance recorded.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2011 and June 30, 2010 are as follows:

|                               |   | As of          |   |   | As of         |  
|------------------------------ | - | -------------- | - | - | ------------- | -
|                               |   | March 31, 2011 |   |   | June 30, 2010 |  
|Bad debt allowance             | $ | 539,543        |   | $ | 235,815       |  
|Inventory provision            |   | 1,141,242      |   |   | 1,216,079     |  
|Net loss carried forward-China |   | 326,044        |   |   | 258,644       |  
|Net loss carried forward-US    |   | 79,765         |   |   | 44,852        |  
|Total deferred tax assets      |   | 2,086,594      |   |   | 1,755,390     |  
|Valuation allowance            |   | (2,086,594     | ) |   | (1,755,390    | )
|Net deferred tax assets        | $ | -              |   | $ | -             |  

15

---

13. INCOME TAXES (continued)

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 three and six months ended March 31, 2011
and 2010 is as follows:

|                                                             |  | For the three months
      ended March 31, |  
|------------------------------------------------------------ |  | ------------------------------------------ | -
|                                                             |  | 2011                                       |  
|Income tax expense (benefit) at
      federal statutory rate |  | (678,895                                   | )
|Adjustment due to:                                           |  |                                            |  
|Foreign rate differential                                    |  | 178,723                                    |  
|Other                                                        |  | (8,754                                     | )
|Usage of loss carried forward                                |  | -                                          |  
|Increase in valuation allowance                              |  | 520,613                                    |  
|Income tax expense                                           |  | 11,687                                     |  
|                                                             |  |                                            |  
|                                                             |  | For the
      nine months ended March 31,  |  
|                                                             |  | 2011                                       |  
|Income tax expense (benefit) at
      federal statutory rate |  | (302,186                                   | )
|Adjustment due to:                                           |  |                                            |  
|Foreign rate differential                                    |  | 70,748                                     |  
|Other                                                        |  | (22,769                                    | )
|Usage of loss carried forward                                |  | -                                          |  
|Increase in valuation allowance                              |  | 265,894                                    |  
|Income tax expense                                           |  | 11,687                                     |  

14. EARNINGS PER SHARE

Basic and diluted income (loss) per share is computed as net
income divided by the weighted-average number of common shares outstanding for
the period.

Weighted-average number of shares are as follows:

|                                                          |  | For the three months
      ended March 31, | 
|--------------------------------------------------------- |  | ------------------------------------------ | 
|                                                          |  | 2011                                       | 
|Weighted-average number of
      shares-basic and diluted |  | 40,447,500                                 | 
|                                                          |  |                                            | 
|                                                          |  | For the
      nine months ended March 31,  | 
|                                                          |  | 2011                                       | 
|Weighted-average number of
      shares-basic and diluted |  | 40,441,900                                 | 

On September 16, 2010, the Company issued 20,000 shares to The
Crone Law Group for legal services valued at $70,000. The shares consisted of
10,000 shares for the firms work on the registration statement on Form S-1 and
10,000 shares for the reduced hourly rate offered for the firms on-going work.

16

---

15. 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        | $ | 536,032 | 
|2012        |   | 871,366 | 
|2013        |   | 8,991   | 
|2014        |   | 4,495   | 
|2015        |   | -       | 
|Thereafter  |   | -       | 

Approximately 29% 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
requirements but are required to pay rents based on a 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 $1,284,062 and
$1,306,098 for the three months and $3,643,482 and $3,651,068 for the nine
months ended March 31, 2011 and 2010, respectively, and is included in selling
expenses.

16. 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.

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
March 31, 2011, the Company has not experienced such loss.

17

---

16. RISKS AND UNCERTAINTIES (continued)

Concentration of Vendors and Customers

For the three months ended March 31, 2011 and 2010, the Company
made 100% of its total purchases of merchandise from CTS, an affiliated company.
For the nine months ended March 31, 2011 and 2010, the Company purchased 100%
and 93% of its merchandise from CTS. The balance of payables to CTS represented
95% and 95% of the Companys outstanding accounts payable at March 31, 2011 and
June 30, 2010, respectively.

No single customer accounted for more than 10% for the total
sales for the three and nine months ended March 31, 2011 and 2010.

18

---

ITEM 2. 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 three and nine months ended March 31, 2011 and 2010 should be read in
conjunction with Baby Fox consolidated financial statements, and the notes to
those financial statements that are included elsewhere in this quarterly 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 our most recent 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.

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 and 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 148 stores in over 30 cities as of
March 31, 2011.

Listing on the OTC Bulletin Board

On August 6, 2010, the Companys registration statement on Form
S-1/A was declared effective by the SEC. On October 6, 2010, the Companys
common stock was approved by FINRA for trading on the OTC Bulletin Board under
the ticker symbol BBYF.OB, which was subsequently changed to BBFX.OB on
October 29, 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 the
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.

19

---

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 know-how, 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. The Company has 148 corporate and
non-corporate stores in over 30 cities as of March 31, 2011. 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 the next few years but due to liquidity
constraints, 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.

While Baby Fox could rapidly scale non-corporate stores with
minimal capital requirements, 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 should 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.

20

---

Results of Operations

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

|                                                      |   | For the three months
      ended March 31, |  
|----------------------------------------------------- | - | ------------------------------------------ | -
|                                                      |   | 2011                                       |  
|                                                      |   | (unaudited)                                |  
|Total sales                                           | $ | 6,423,055                                  |  
|Cost of goods sold                                    |   | 4,128,997                                  |  
|                                                      |   |                                            |  
|Gross profit                                          |   | 2,294,058                                  |  
|                                                      |   |                                            |  
|Selling, general and administrative expenses          |   | 4,265,839                                  |  
|                                                      |   |                                            |  
|Income (loss) before provision for income taxes       |   | (1,971,781                                 | )
|Income taxes                                          |   | 11,687                                     |  
|                                                      |   |                                            |  
|Net income (loss)                                     | $ | (2,008,438                                 | )
|                                                      |   |                                            |  
|                                                      |   |                                            |  
|                                                      |   |                                            |  
|                                                      |   | For the
      nine months ended March 31,  |  
|                                                      |   | 2011                                       |  
|                                                      |   | (unaudited)                                |  
|Total sales                                           | $ | 18,443,127                                 |  
|Cost of goods sold                                    |   | 9,099,027                                  |  
|                                                      |   |                                            |  
|Gross profit                                          |   | 9,344,100                                  |  
|                                                      |   |                                            |  
|Selling, general and administrative
      expenses    |   | 10,154,026                                 |  
|                                                      |   |                                            |  
|Income (loss) before provision for
      income taxes |   | (888,782                                   | )
|Income taxes                                          |   | 11,687                                     |  
|                                                      |   |                                            |  
|Net income (loss)                                     | $ | (900,469                                   | )

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

21

---

|                                                |  | For the three months
      ended March 31, | 
|----------------------------------------------- |  | ------------------------------------------ | 
|                                                |  | 2011                                       | 
|                                                |  | (unaudited)                                | 
|Total sales                                     |  | 100.0%                                     | 
|Cost of goods sold                              |  | 64.3%                                      | 
|                                                |  |                                            | 
|Gross profit                                    |  | 35.7%                                      | 
|                                                |  |                                            | 
|Selling, general and administrative expenses    |  | 66.4%                                      | 
|                                                |  |                                            | 
|Income (loss) before provision for income taxes |  | -30.7%                                     | 
|Income taxes                                    |  | 0.2%                                       | 
|                                                |  |                                            | 
|Net income (loss)                               |  | -31.3%                                     | 
|                                                |  |                                            | 
|                                                |  |                                            | 
|                                                |  | For the nine months ended
      March 31,  | 
|                                                |  | 2011                                       | 
|                                                |  | (unaudited)                                | 
|Total sales                                     |  | 100.0%                                     | 
|Cost of goods sold                              |  | 49.3%                                      | 
|                                                |  |                                            | 
|Gross profit                                    |  | 50.7%                                      | 
|                                                |  |                                            | 
|Selling, general and administrative expenses    |  | 55.1%                                      | 
|                                                |  |                                            | 
|Income (loss) before provision for income taxes |  | -4.8%                                      | 
|Income taxes                                    |  | 0.1%                                       | 
|                                                |  |                                            | 
|Net income (loss)                               |  | -4.9%                                      | 

22

---

Comparison of Three Months and Nine Months ended March
31, 2011

Starting from the beginning of FY2010, the Company has adjusted
its strategy to slow down new store openings and focus on digesting inventory of
past seasons and improving revenue and margin from existing stores. The Company
has also 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 an
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 is meant to 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 sell discounted merchandise that did not sell well during the season at
Class A stores. When the lease of such a store with the 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.

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 three months ended March 31, 2011 and 2010, the Company generated
revenues of $6,423,055 and $7,085,242, respectively, reflecting a decrease of
9.3% . Excluding exchange rate effects, sales at corporate stores decreased 4.0%
while sales to non-corporate stores declined 66.6% . The decline in sales from
corporate stores is generally in line with the decline in the number of
corporate stores. The company accelerated the consolidation of corporate stores
and as a result, 18 underperforming corporate stores were closed during the
period in 2011 as compared to 8 for the same period last year. A decline in the
number of non-corporate stores contributed to the decline in non-corporate store
sales in 2011. For the three months ended March 31, 2011, sales at corporate
stores contributed 96.8% of total sales, while sales to non-corporate stores
contributed 3.2%, compared to 91.4% and 8.6%, respectively, in fiscal year
2010.

For the nine months ended March 31, 2011 and 2010, the Company
generated revenues of $18,443,127 and $19,954,322, respectively, reflecting a
decrease of 7.6% . Excluding exchange rate effects, sales at corporate stores
decreased 2.1% while sales to non-corporate stores declined 52.5% . Besides a
fewer number of corporate and non-corporate stores as a result of store
consolidation, the stock replenishment issue caused by a nation-wide restriction
on power supply to achieve the energy saving and emission reduction target for
the Chinese government's "11th Five-Year Plan" affected both corporate and
non-corporate store sales. For the nine months ended March 31, 2011, sales at
corporate stores contributed 94.5% of total sales, while sales to non-corporate
stores contributed 5.5%, compared to 89.2% and 10.8%, respectively, in fiscal
year 2010.

The following table shows changes in our sales at existing
stores, changes in sales due to stores opened during the three and nine months
ended March 31, 2011 and 2010, and the effect of change in rate used for the
currency conversion in three and nine months ended March 31, 2011 and 2010:

|                                     |   | Three months ended March 31 |   |   | Nine months ended March 31 |  
|------------------------------------ | - | --------------------------- | - | - | -------------------------- | -
|                                     |   |                             |   |   | Corporate                  |  
|                                     |   | Total Sales                 |   |   | Stores                     |  
|Change in sales at existing stores   | $ | (1,394,807                  | ) | $ | (811,110                   | )
|Sales at new stores opened in FY2011 |   | 420,598                     |   |   | 264,516                    |  
|Effect of currency conversion        |   | 312,022                     |   |   | 290,229                    |  
|Total increase (decrease) in sales   | $ | (662,187                    | ) | $ | (256,365                   | )

23

---

Comparable Store Sales.The percentage change in
comparable store sales by store type for the three and nine months ended March
31, 2011 as compared to 2010 is as follows:

|                     |  | Three months ended |  |  | Nine months ended | 
|-------------------- |  | ------------------ |  |  | ----------------- | 
|                     |  | March 31           |  |  | March 31          | 
|Corporate stores     |  | -27%               |  |  | -29%              | 
|Non-corporate stores |  | -33%               |  |  | -24%              | 

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 or 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.

Sales per average square foot is as follows:

|                                        |   | For the three months ended March 31, |  |   | For the nine months ended March 31, | 
|--------------------------------------- | - | ------------------------------------ |  | - | ----------------------------------- | 
|                                        |   | 2011                                 |  |   | 2010                                | 
|Sales per average square foot
      (1) | $ | 25                                   |  | $ | 34                                  | 

(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:

|                                 |  | Three months ended March 31, 2011 |   |  | Three months ended March 31, 2010 |  
|-------------------------------- |  | --------------------------------- | - |  | --------------------------------- | -
|                                 |  | Corporate                         |   |  | Non-corporate                     |  
|                                 |  | Stores                            |   |  | Stores                            |  
|Number of stores as of January 1 |  | 134                               |   |  | 28                                |  
|Number of stores opened          |  | 4                                 |   |  | 0                                 |  
|Number of stores closed          |  | (18                               | ) |  | 0                                 |  
|Number of stores as of March 31  |  | 120                               |   |  | 28                                |  
|                                 |  |                                   |   |  |                                   |  
|                                 |  |                                   |   |  |                                   |  
|                                 |  | Nine months ended March 31, 2011  |   |  | Nine months ended March 31, 2010  |  
|                                 |  | Corporate                         |   |  | Non-corporate                     |  
|                                 |  | Stores                            |   |  | Stores                            |  
|Number of stores as of July 1    |  | 131                               |   |  | 34                                |  
|Number of stores opened          |  | 27                                |   |  | 2                                 |  
|Number of stores closed          |  | (38                               | ) |  | (8                                | )
|Number of stores as of March 31  |  | 120                               |   |  | 28                                |  

24

---

Cost of Goods Sold and Gross Margin

Cost of goods sold was $4,128,997 for the three months ended
March 31, 2011 as compared to $2,722,007 for the same period in FY2010, an
increase of 51.7% while the gross margin decreased from 61.6% to 35.7% .
Excluding exchange rate effect, cost of goods sold at corporate stores increased
62.5% despite the decrease in sales at corporate stores mainly because of an
increase of $465,013 inventory markdown in FY2011 as compared to a reversal of
$1,012,822 in inventory reserve in FY2010 due to additional markdowns on winter
season merchandise aged more than two years. As a result, the gross margin for
corporate store sales decreased by 25.6% . Excluding exchange rate effect, cost
of goods sold to non-corporate stores decreased 28.4% as compared to the three
months ended March 31, 2010, which is less than the decline in non-corporate
store sales due to higher discounts offered to non-corporate store owners as a
result of the stock replenishment issue. The gross margin from sales at
non-corporate stores decreased by 33.6% as compared to the gross margin for the
same period in FY2010.

Cost of goods sold was $9,099,027 for the nine months ended
March 31, 2011 as compared to $10,087,510 for the same period in FY2010, a
decrease of 9.8% while the gross margin increased from 49.4% to 50.7% .
Excluding exchange rate effect, cost of goods sold at corporate stores declined
4.7%, more than the decrease in sales at corporate stores mainly because of a
lower portion of warehouse sales among corporate store sales in FY2011 versus
FY2010. Warehouse sales usually have negative margins. As a result, the gross
margin for corporate store sales increased by 1.3% . Excluding exchange rate
effect, cost of goods sold to non-corporate stores decreased 41.3% as compared
to the nine months ended March 31, 2010, which is less than the decline in
non-corporate store sales due to more discounts offered to non-corporate store
owners as a result of the inventory replenishment issues. The gross margin from
sales at non-corporate stores decreased by 15.3% as compared to the gross margin
for the same period in FY2010.

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 three months ended March 31, 2011, the Company incurred
selling, general and administrative expenses of $4,265,839, an increase of 21.3%
as compared to $3,516,372 for FY2010.

Our general and administrative expenses increased 241.9% as
compared to last year mainly because of additional bad debt allowance provided
based on accounts receivable ageing. The Company in general has arranged 60-day
collection terms with shopping malls if not otherwise specified. As of March 31,
2011, 44.7% of accounts receivable balances were aged more than 90 days as
compared to 26.0% at June 30, 2010 mainly because of delays in settlement of
outstanding accounts receivable balances with customers, to whom the Company
also owed agency fees. The Company normally reconciles the outstanding accounts
receivable balances and agency fee payable balances with those customers on a
half-year basis and settles the amount through offsetting of payments. The
Company provided full allowance balances aged more than 90 days after taking
into account the subsequent settlement. For the three months ended March 31,
2011, the Company provided additional allowances of $1,616,896 compared to
$411,196 for the same period last year. The balance of bad debt allowance was
$2,158,171 and $921,203 on March 31, 2011 and June 30, 2010, representing 38.4%
and 24.3% of the total accounts receivable balance, respectively.

We incurred selling expenses of $2,603,276 for the three months
ended March 31, 2011, a decrease of 14.1% as compared to $3,030,093 for the
three months ended March 31, 2010. Of all the selling expenses, store rent in
the amount of $1,284,062 constituted 49.3% and decreased by 1.7% compared to the
same period of last year due to decrease in corporate store sales. Agency fees
constituted 15.4% of total selling expenses for the three months ended March 31, 2011 and decreased by 31.3% when compared to the same
period in 2010 mainly due to the change to exclude the store rent from the sales
basis to calculate agency fees. A decrease in corporate store sales also
contributed to the decline of agency fees. Salaries and benefits, which
constituted 15.3% of total selling expenses for the three months ended March 31,
2011, increased by 0.7% as compared to the same period in 2010. Other selling
expenses constituted 20.0% of total selling expenses, of which $213,887 was
spent on store charges and promotion and $170,577 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.

25

---

For the nine months ended March 31, 2011, the Company incurred
selling, general and administrative expenses of $10,154,026, an increase of 2.9%
as compared to $9,866,548 for FY2010.

Our general and administrative expenses increased 130.8% as
compared to last year mainly because of additional bad debt allowance provided
based on accounts receivable ageing. For the nine months ended March 31, 2011,
the Company provided an additional allowance of $1,236,968 versus $511,097 for
the same period last year. For the nine months ended March 31, 2011, the Company
incurred $82,820 bad debt as a result of closing of three non-corporate stores.
The Company was founded not long ago and has a short operating 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.

We incurred selling expenses of $8,302,056 for the nine months
ended March 31, 2011, a decrease of 8.4% as compared to $9,064,223 for the nine
months ended March 31, 2010. Of all the selling expenses, store rent in the
amount of $3,643,482 constituted 43.9% and decreased by 0.2% compared to the
same period of last year in line with the change in corporate store sales.
Agency fees constituted 21.0% of total selling expenses for the nine months
ended March 31, 2011 and decreased by 22.4% when compared to the same period in
2010 mainly due to the change to exclude the store rent from the sales basis to
calculate agency fees. Salaries and benefits, which constituted 13.7% of total
selling expenses for the nine months ended March 31, 2011, increased by 4.7% as
compared to the same period in 2010 due to increase in store assistants and
staff compensation in the first quarter of FY2011 partially offset by a
temporary reduction of store assistants in the second quarter of FY2011 as a
result of the replenishment issues and decline in corporate store sales. Other
selling expenses constituted 21.4% of total selling expenses, of which $724,862
was spent on store charges and promotion and $478,246 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

In January 2011, the Company entered into an interest-bearing
loan of $1,048,901 (RMB7,000,000) from Industrial Bank. The amount was used to
repay the long-term loan of $854,105 (RMB5,700,000) borrowed from an unrelated
party and for general operating purposes. Interest expense amounted to $23,949
and $30,861, respectively, for the three months ended March 31, 2011 and 2010
and $86,697 and $93,009 for the nine months ended March 31, 2011 and 2010,
respectively.

Provision for Income Taxes

The Company recognized $-0- current income tax expense due to
the net loss for the three and nine months ended March 31, 2011. $-0- current
income tax expense was also recognized for the same periods in 2010 as a result
of loss carried forward to offset the income before tax or a net loss. Income
tax expense for the three and nine months ended March 31, 2011 was also $11,687
because of the valuation allowance the Company set up for deferred tax assets.
As of March 31, 2011 and June 30, 2010, the Company recognized $11,687 and $-0-
of net deferred tax assets after valuation allowance, respectively.

26

---

Net Income

We had a net loss of $2,008,438 for the three months ended
March 31, 2011 as compared to a net income of $816,002 for the three months
ended March 31, 2010. We had a net loss of $900,469 and a net loss of $92,745
for the nine months ended March 31, 2011 and 2010, respectively. The change of
the performance result was mainly because of the additional allowance provided
for accounts receivable balances aged more than 90 days.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of
$82,056 and negative working capital of $7,548,629. The following table provides
detailed information about our net cash flows for the financial statement
periods presented in this annual report:

|Cash Flow                                                     |   | For the nine months ended
      March 31, |  
|------------------------------------------------------------- | - | ----------------------------------------- | -
|                                                              |   | 2011                                      |  
|Net cash used in operating
      activities                   | $ | (2,903,696                                | )
|Net cash used in investing activities                         |   | (10,956                                   | )
|Net cash provided by financing
      activities               |   | 2,812,251                                 |  
|Effect of foreign currency translation on cash and
      cash |   | 3,981                                     |  
|Net decrease in cash and cash
      equivalent                | $ | (98,420                                   | )

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 $2,903,696 for the nine months ended March
31, 2011 as compared to $907,145 for the nine months ended March 31, 2010. The
increase in net cash used in operating activities was primarily due to the
increase in the net loss as compared to the same period in FY2010. The
difference was also attributable to an increase in the inventory balance by
$1,256,302 for the nine months ended March 31, 2011 versus $112,730 for the same
period in FY2010 as a result of a delay in the receipt of merchandise delivery
from suppliers as a result of a nation-wide restriction on power supply to
achieve the energy saving and emission reduction target for the Chinese
governments 11th Five-Year Plan.

Our accounts receivable increased from $3,784,745 at June 30,
2010 to $5,623,441 at March 31, 2011 mainly due to business expansion and sales
increases during major sales seasons in October and December through February
due to the National Day, Christmas and New Year holidays and Chinese New Year
holidays. 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. The Company has put in place a very
rigorous review process of outstanding accounts receivable balances. At March
31, 2011, we had $3,126,147 in accounts receivable aged in excess of 60 days,
among which $2,512,294 was aged over 90 days, compared to $1,204,393 in excess
of 60 days including $985,067 over 90 days at June 30, 2010. Full allowance has
been provided for the balance over 90 days and not subsequently collected. As a
result, allowance for doubtful accounts increased from $921,203 as of June 30,
2010 to $2,158,171 as of March 31, 2011 due to increase in balances aged over 90
days. For the nine months ended March 31, 2011, the Company incurred $82,820 bad
debt as a result of closing of three non-corporate stores. We believe that we
have been conservative and have provided sufficient allowance for ageing
accounts receivable balances.

Net Cash Used in Investing Activities. Net cash
used in investing activities were $10,956 and $10,085 for the nine months ended
March 31, 2011 and 2010, respectively.

27

---

Net Cash Provided by Financing Activities. Net
cash provided by financing activities totaled $2,812,251 and $861,668 for the
nine months ended March 31, 2011 and 2010, respectively. The increase in net
cash provided by financing activities mainly resulted from an increase of
$120,039 in accounts payable to an affiliated company for the nine months ended
March 31, 2010 versus an increase of $2,610,712 for the same period in FY2011.
In addition, the Company borrowed $1,048,901 and repaid $854,105 for the nine
months ended March 31, 2011 compared to $732,161 borrowing and $-0- repayment
for the same period in FY2010.

Cash.At March 31, 2011, we had cash of
$82,056, as compared to $180,476 as of June 30, 2010. Cash used in operating
activities increased significantly as compared to the same period last year,
which was partially offset by the increase of cash provided by financing
activities, resulting in increased cash outflow for the nine months ended March
31, 2011 as compared to the same period last year.

As of March 31, 2011, the Companys current liabilities
exceeded its current assets by $7,548,629 and the Companys total liabilities
exceeded its total assets by $8,100,380. The Companys cash position on March
31, 2011 was $82,056. 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 is meant to
ensure that most, if not all of the inventory can be digested within 24 months
after production. In addition, warehouse sales scheduled in the next twelve
months are expected to generate revenue of about $1.5 million. Sales from Class
A and Class B stores during the next twelve months are expected to be around $23
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 Selling, General & Administrative 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 with
which we have negotiated and have established a favorable six-month payment term
with an additional extension if the payment would materially impact the
Companys liquidity profile. This policy should effectively prevent further
deterioration of the Companys cash position.

The Company has successfully refinanced its borrowing from an
unrelated party through a bank loan before the due date. The Company has
successfully amended its loans due in January 2011 and extended the term with
the lenders to June 2011.

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.

28

---

Loan Facilities

At March 31, 2011, we had $810,160 in long-term debts. The
long-term debts consisted of the following:

|                                                                                                              |   | As of          |  |   | As of         | 
|------------------------------------------------------------------------------------------------------------- | - | -------------- |  | - | ------------- | 
|                                                                                                              |   | March 31, 2011 |  |   | June 30, 2010 | 
|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       | 
|Amount borrowed from an unrelated party,
      bearing zero interest and due June 30, 2011, guaranteed by CTS |   | 762,614        |  |   | 736,279       | 
|Subtotal                                                                                                      |   | 1,572,774      |  |   | 2,385,798     | 
|Less: current portion                                                                                         |   | 762,614        |  |   | 1,575,638     | 
|Total                                                                                                         | $ | 810,160        |  | $ | 810,160       | 

Long-term debts mature as follows:

|As of March 31, 2011 |   |         | 
|-------------------- | - | ------- | 
|                     |   |         | 
|2011                 | $ | 762,614 | 
|2012                 | $ | -       | 
|2013                 | $ | 810,160 | 

Interest expense amounted to $23,949 and $30,861, respectively
for the three months ended March 31, 2011 and 2010 and $86,697 and $93,009 for
the nine months ended March 31, 2011 and 2010, respectively.

Obligations Under Material Contracts

Below is a table setting forth our contractual obligations as
of March 31, 2011:

|                                                             |   |           |  |   | Payment due in year ended June 30, | 
|------------------------------------------------------------ | - | --------- |  | - | ---------------------------------- | 
|                                                             |   | Total     |  |   | 2011                               | 
|                                                             |   |           |  |   |                                    | 
|Long term debt obligations
      (including current portion) | $ | 1,572,774 |  | $ | 762,614                            | 
|Operating lease obligations                                  |   | 1,420,884 |  |   | 536,032                            | 
|Purchase obligations                                         |   | -         |  |   | -                                  | 
|Total                                                        | $ | 2,993,658 |  | $ | 1,298,646                          | 

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.

29

---

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 herein, 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. The period allowed for return is short (two weeks) and based
on historical experience, and 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, 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
defective merchandise within ten days of receipt. The 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 account 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
our reserves 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.

30

---

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. The percentages were 34% and 42% of ending inventory
levels as of March 31, 2011 and June 30, 2010, respectively 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.

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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

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 March 31,
2011, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.

31

---

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2011, 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There has been no material change in the Company's risk factors
as previously disclosed in the Company's Annual Report on Form 10-K filed with
the SEC on September 28, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

On January 12, 2011, the Company entered into a short-term loan
agreement with Industrial Bank Co. Ltd, to borrow RMB7,000,000 (USD1,067,659)
for the purpose of purchasing inventory from Changzhou CTS Fashion Co. Ltd. The
principal is due on January 11, 2012 with interest payable on a quarterly basis
at 1.2 times the standard borrowing rate published by Peoples Bank of China.

ITEM 6. EXHIBITS

|Exhibit No. | **Description**                                                                                                                                                                                                                    
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        | Loan Agreement dated January 12, 2011 between
    Shanghai Baby Fox Fashion Co., Ltd. and Industrial Bank Co., Ltd. (English
    translation)                                                                                      
|31.1        | Certification of Principal
      Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2        | Certification of
      Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
      the Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1        | Certification of Principal
      Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 
|32.2        | Certification of
      Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 

32

---

SIGNATURES

In accordance with the requirements 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: May 23, 2011  | By: /s/ Jieming
      Huang                                         
|                    | Jieming Huang                                                       
|                    | Chief
      Executive Officer                                       
|                    | (Principal Executive Officer)                                       
|                    |                                                                     
|Dated: May 23, 2011 | By: /s/ Ping
      Chen                                             
|                    | Ping
      Chen                                                     
|                    | Chief
      Financial Officer                                       
|                    | (Principal
      Financial Officer and Principal Accounting Officer)

33

---

EXHIBIT INDEX

|Exhibit No. | **Description**                                                                                                                                                                                                                    
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        | Loan Agreement dated January 12, 2011 between
    Shanghai Baby Fox Fashion Co., Ltd. and Industrial Bank Co., Ltd. (English
    translation)                                                                                      
|31.1        | Certification of Principal
      Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2        | Certification of
      Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under
      the Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1        | Certification of Principal
      Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 
|32.2        | Certification of
      Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 

34

---