---

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 September 30, 2010

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

For the transition period from _________ to
____________

Commission file number 333-150835

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

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

Shanghai Minhang District89 Xinbang Road, Suite
305-B5 The 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 November 8,
2010: 40,447,500

---

INDEX

|                                   |                                                                                                                                                                      | Page No.
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|PART I FINANCIAL
      INFORMATION |                                                                                                                                                                     
|Item 1.                            | Financial Statements                                                                                                                                                 |         
|                                   | Condensed Consolidated Balance Sheets
      (unaudited) as of September 30, 2010 and as of June 30, 2010                                                             | 1       
|                                   | Condensed Consolidated Statements of Operations and Other
      Comprehensive Income (Loss) for the Three Months Ended September 30, 2010
      and 2009 (unaudited) | 2       
|                                   | Condensed Consolidated Statement of
      Changes in Stockholders Equity (Deficiency) for the Three Months Ended
      September 30, 2010 (unaudited)               | 3       
|                                   | Condensed Consolidated Statements of Cash Flows for the
      Three Months Ended September 30, 2010 and 2009 (unaudited)                                             | 4       
|                                   | Notes to Condensed Consolidated Financial
      Statements (unaudited)                                                                                               | 5       
|Item 2.                            | Managements Discussion and Analysis of
      Financial Condition And Results of Operations                                                                          | 17      
|Item 3.                            | Quantitative and Qualitative
      Disclosure About Market Risk                                                                                                      | 26      
|Item 4.                            | Controls and Procedures                                                                                                                                              | 26      
|PART II OTHER
      INFORMATION    |                                                                                                                                                                     
|Item 1.                            | Legal Proceedings                                                                                                                                                    | 27      
|Item 1A.                           | Risk Factors                                                                                                                                                         | 27      
|Item 2.                            | Unregistered Sales of Equity Securities and Use
      of Proceeds                                                                                                    | 27      
|Item 3.                            | Defaults Upon Senior Securities                                                                                                                                      | 27      
|Item 4.                            | (Removed and Reserved)                                                                                                                                               | 27      
|Item 5.                            | Other Information                                                                                                                                                    | 27      
|Item 6.                            | Exhibits                                                                                                                                                             | 27      
|SIGNATURES                         | 28                                                                                                                                                                  

---

FORWARD LOOKING STATEMENTS

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

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

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

---

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

|                                                                                                                                                                                           |   | September 30, |   |   | June 30,   |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | - | - | ---------- | -
|                                                                                                                                                                                           |   | 2010          |   |   | 2010       |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|ASSETS                                                                                                                                                                                     |  
|CURRENT ASSETS:                                                                                                                                                                            |   |               |   |   |            |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|Cash                                                                                                                                                                                       | $ | 130,763       |   | $ | 180,476    |  
|Accounts Receivable, net                                                                                                                                                                   |   | 3,484,388     |   |   | 2,863,542  |  
|Inventory, net                                                                                                                                                                             |   | 8,288,105     |   |   | 6,808,309  |  
|Advance to vendors, net                                                                                                                                                                    |   | -             |   |   | -          |  
|Prepaid expenses and other current assets                                                                                                                                                  |   | 113,982       |   |   | 158,536    |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|TOTAL CURRENT ASSETS                                                                                                                                                                       |   | 12,017,238    |   |   | 10,010,863 |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|Property and equipment, net                                                                                                                                                                |   | 49,205        |   |   | 51,037     |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|Deferred tax asset, net                                                                                                                                                                    |   | -             |   |   | -          |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|Deposits                                                                                                                                                                                   |   | 225,269       |   |   | 207,101    |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|TOTAL ASSETS                                                                                                                                                                               | $ | 12,291,712    |   | $ | 10,269,001 |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|LIABILITIES AND
      STOCKHOLDERS' DEFICITS                                                                                                                                               |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|CURRENT LIABILITIES:                                                                                                                                                                       |   |               |   |   |            |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|Accounts payable - Trade                                                                                                                                                                   | $ | 600,626       |   | $ | 515,298    |  
|affiliated company                                                                                                                                                                         |   | 10,751,766    |   |   | 9,510,853  |  
|Deposits payable & customer advances                                                                                                                                                       |   | 1,390,335     |   |   | 1,263,502  |  
|Accrued expenses and other current liabilities                                                                                                                                             |   | 3,034,687     |   |   | 2,751,220  |  
|Loans payable - officer and stockholder                                                                                                                                                    |   | 35,815        |   |   | 35,341     |  
|Current portion of long-term debt                                                                                                                                                          |   | 1,596,753     |   |   | 1,575,638  |  
|Dividends payable                                                                                                                                                                          |   | 853,997       |   |   | 842,704    |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                                  |   | 18,263,979    |   |   | 16,494,556 |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|LONG-TERM DEBT                                                                                                                                                                             |   | 810,160       |   |   | 810,160    |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|STOCKHOLDERS' DEFICIENCY                                                                                                                                                                   |   |               |   |   |            |  
|Preferred Stock, $0.001 par value, 10,000,000 shares
      authorized, -0- shares issued and outstanding                                                                                   |   | -             |   |   | -          |  
|Common Stock, $0.001 par value, 90,000,000
      shares authorized, 40,447,500 and 40,427,500 shares issued and
      outstanding as of September 30, 2010 and June 30, 2010, respectively |   | 40,447        |   |   | 40,427     |  
|Additional paid-in capital                                                                                                                                                                 |   | 69,980        |   |   | -          |  
|Accumulated deficits                                                                                                                                                                       |   | (6,831,671    | ) |   | (7,095,053 | )
|Accumulated other comprehensive income                                                                                                                                                     |   | (61,183       | ) |   | 18,911     |  
|                                                                                                                                                                                           |   |               |   |   |            |  
|TOTAL STOCKHOLDERS' DEFICIENCY                                                                                                                                                             |   | (6,782,427    | ) |   | (7,035,715 | )
|                                                                                                                                                                                           |   |               |   |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                                                             | $ | 12,291,712    |   | $ | 10,269,001 |  

See accompanying notes to unaudited condensed consolidated financial
statements

1



---

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

|                                                               |   | FOR THREE MONTHS ENDED
      SEPTEMBER 30 |  
|-------------------------------------------------------------- | - | ----------------------------------------- | -
|                                                               |   | 2010                                      |  
|                                                               |   |                                           |  
|                                                               |   |                                           |  
|SALES                                                          |   |                                           |  
|Corporate stores                                               | $ | 4,841,047                                 |  
|Non-corporate
      stores                                     |   | 413,891                                   |  
|TOTAL SALES                                                    |   | 5,254,938                                 |  
|                                                               |   |                                           |  
|COST OF GOODS SOLD                                             |   |                                           |  
|Corporate stores                                               |   | 1,690,383                                 |  
|Non-corporate stores                                           |   | 276,101                                   |  
|TOTAL COST OF GOODS SOLD                                       |   | 1,966,484                                 |  
|                                                               |   |                                           |  
|GROSS PROFIT                                                   |   | 3,288,454                                 |  
|                                                               |   |                                           |  
|                                                               |   |                                           |  
|OPERATING EXPENSES:                                            |   |                                           |  
|Selling Expenses                                               |   | 2,535,749                                 |  
|General & Administrative
      Expenses                        |   | 464,803                                   |  
|TOTAL OPERATING EXPENSES                                       |   | 3,000,552                                 |  
|                                                               |   |                                           |  
|INCOME (LOSS) FROM OPERATIONS                                  |   | 287,902                                   |  
|                                                               |   |                                           |  
|Other income                                                   |   | 6,731                                     |  
|Interest expense                                               |   | 31,251                                    |  
|                                                               |   |                                           |  
|TOTAL OTHER EXPENSE                                            |   | (24,520                                   | )
|                                                               |   |                                           |  
|INCOME (LOSS) BEFORE TAXES                                     |   | 263,382                                   |  
|                                                               |   |                                           |  
|INCOME TAX PROVISION                                           |   |                                           |  
|Cuurent                                                        |   | -                                         |  
|Deferred                                                       |   | -                                         |  
|TOTAL INCOME TAX PROVISION                                     |   | -                                         |  
|                                                               |   |                                           |  
|NET INCOME (LOSS)                                              | $ | 263,382                                   |  
|                                                               |   |                                           |  
|OTHER COMPREHENSIVE INCOME (LOSS):                             |   |                                           |  
|Foreign currency translation loss                              |   | (80,094                                   | )
|                                                               |   |                                           |  
|COMPREHENSIVE INCOME (LOSS)                                    | $ | 183,288                                   |  
|                                                               |   |                                           |  
|                                                               |   |                                           |  
|BASIC AND DILUTED INCOME (LOSS) PER SHARE                      |   | 0.01                                      |  
|                                                               |   |                                           |  
|BASIC AND DILUTED WEIGHTED AVERAGE
         SHARES OUTSTANDING |   | 40,430,761                                |  

See accompanying notes to unaudited condensed consolidated financial
statements

2

---

BABY FOXINTERNATIONAL,INC. ANDSUBSIDIARY CONDENSED CONSOLIDATED STATEMENTOFCHANGESINSTOCKHOLDERS'DEFICIENCY(UNAUDITED)

ACCUMULATEDOTHER
    
    
    TOTAL**PREFERRED STOCK**
    
    
    COMMON STOCK
    
    
    ADDITIONAL
    
    
    ACCUMULATED
    
    
    COMPREHENSIVE
    
    
    STOCKHOLDERS'**Shares**
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    PAID-IN CAPITAL
    
    
    DEFICITS
    
    
    INCOME
    
    
    DEFICIENCYBALANCE- JUNE30, 2008
    
    **-**
    
    
    **-**
    
    
    40,427,500
    
    
    40,427
    
    
    
    
    
    (2,176,893
    )
    
    54,451
    
    
    (2,082,015
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,482,629
    )
    
    
    
    
    (4,482,629
    )Foreign currency translation
      adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,818
    )
    
    (4,818
    )BALANCE- JUNE30,2009
    
    **-**
    
    
    **-**
    
    
    40,427,500
    
    
    40,427
    
    
    -
    
    
    (6,659,522
    )
    
    49,633
    
    
    (6,569,462
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (435,531
    )
    
    
    
    
    (435,531
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,722
    )
    
    (30,722
    )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
    
    
    
    
    
    
    
    
    70,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    263,382
    
    
    
    
    
    263,382Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,094
    )
    
    (80,094
    )BALANCE- September
      30,2010
    
    **-**
    
    
    **-**
    
    
    40,447,500
    
    
    40,447
    
    
    69,980
    
    
    (6,831,671
    )
    
    (61,183
    )
    
    (6,782,427
    )


See accompanying notes to unaudited condensed consolidated financial
statements

3

---

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

|                                                                                              |   | FOR THE THREE MONTHS ENDED
      SEPTEMBER 30 |  
|--------------------------------------------------------------------------------------------- | - | --------------------------------------------- | -
|                                                                                              |   | 2010                                          |  
|                                                                                              |   |                                               |  
|OPERATING ACTIVITIES:                                                                         |   |                                               |  
|Net income (loss)                                                                             | $ | 263,382                                       |  
|Adjustments to reconcile net income (loss) to net
      cash    used in operating activities: |   |                                               |  
|Depreciation expense                                                                          |   | 4,323                                         |  
|Bad debt
      allowance                                                                      |   | 113,649                                       |  
|(Reversal) Accrual of inventory
      reserve                                                 |   | (365,548                                      | )
|(Decrease)
      increase of valuation allowance on deferred tax assets                       |   | (24,460                                       | )
|Common stock issued for legal
      services                                                  |   | 70,000                                        |  
|                                                                                              |   |                                               |  
|Decrease (increase) in current assets                                                         |   |                                               |  
|Accounts
      receivable                                                                     |   | (692,245                                      | )
|Inventory                                                                                     |   | (1,013,770                                    | )
|Advance to vendors                                                                            |   | -                                             |  
|Deposit                                                                                       |   | (15,290                                       | )
|Prepaid expenses
      and sundry current assets                                              |   | 46,368                                        |  
|Deferred tax                                                                                  |   | 24,460                                        |  
|Increase (decrease) in current
      liabilities                                              |   |                                               |  
|Accounts payable-trade                                                                        |   | 77,901                                        |  
|Accrued expenses,
      taxes and sundry current liabilities                                  |   | 246,299                                       |  
|Customer deposits and advances                                                                |   | 109,170                                       |  
|                                                                                              |   |                                               |  
|NET CASH USED IN OPERATING ACTIVITIES                                                         |   | (1,155,761                                    | )
|                                                                                              |   |                                               |  
|INVESTING ACTIVITIES:                                                                         |   |                                               |  
|Acquisition of
      property and equipment                                                   |   | (1,824                                        | )
|                                                                                              |   |                                               |  
|NET CASH USED IN INVESTING
      ACTIVITIES                                                   |   | (1,824                                        | )
|                                                                                              |   |                                               |  
|FINANCING ACTIVITIES:                                                                         |   |                                               |  
|Accounts payable- affiliated
      company                                                    |   | 1,106,048                                     |  
|Proceeds of
      stockholder loan                                                            |   | -                                             |  
|Proceeds from short-term loan                                                                 |   | -                                             |  
|Proceeds from
      long-term debt                                                            |   | -                                             |  
|                                                                                              |   |                                               |  
|NET CASH PROVIDED BY FINANCING
      ACTIVITIES                                               |   | 1,106,048                                     |  
|                                                                                              |   |                                               |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH
      EQUIVALENTS                                   |   | 1,824                                         |  
|                                                                                              |   |                                               |  
|DECREASE IN CASH                                                                              |   | (49,713                                       | )
|                                                                                              |   |                                               |  
|CASH - BEGINNING OF THE PERIOD                                                                |   | 180,476                                       |  
|                                                                                              |   |                                               |  
|CASH - END OF THE PERIOD                                                                      | $ | 130,763                                       |  
|                                                                                              |   |                                               |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
      INFORMATION                                        |   |                                               |  
|Income tax paid                                                                               | $ | -                                             |  

See accompanying notes to unaudited condensed consolidated financial
statements

4

---

|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (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 month period ended
September 30, 2010 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.

5

---

|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|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 three months
ended September 30, 2010 and 2009.

Revenue recognition and return policy

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

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

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

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

Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, and no other significant
obligations of the Company exist and collectability is reasonably assured.
According to the contract, non-corporate stores have the right to return
defected merchandise within ten days of receipt. Return of unsold merchandise
for current style is determined by our headquarters and full cooperation from
non-corporate stores is required. Reserves are established to reflect actual and
anticipated losses resulting from the returns of defected and unsold merchandise
based on historical information. Currently we estimate returns to be 20% of our
sales to non-corporate stores and relevant reserves have been made accordingly
each reporting period. Since fashion clothing is trending towards shorter
product life cycle and the return period we allow for non-corporate stores is
relatively long, the current reserve already takes into the effect of
introducing new products on expected return of previous products. The return
reserve based on this percentage of sales has been consistent with actual
returns in our operating history. The balances of the return reserve as of
September 30, 2010 and 2009 were $23,962 and $140,142, 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.

6

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|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 sales

Cost of sales 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 $22,079 for the three months ended September 30,
2010 and 2009, respectively.

Fair value of financial instruments

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

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

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

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

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

Cash and cash equivalents

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

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

7

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|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 September 30, 2010 and June 30, 2010, the balances of bad debt
allowance represented 23.1% and 24.3% 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 created to
reduce the carrying value of these items to market value.

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

The company values inventory at the lower of cost or market,
and maintains a reserve for inventory markdowns. This encompasses current goods
held for liquidation and markdown, and application of historical percentages of
current inventory which is anticipated to be marked down and /or liquidated. The
percentage was 36% and 42% of ending inventory level as of September 30, 2010
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
estimated residual value over their useful lives using the straight line method
for financial reporting purposes. Total depreciation for the three months ended
September 30, 2010 and 2009 were $4,323 and $3,710, 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.

8

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Income taxes

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

Earnings per share

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

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.

9

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Recent accounting pronouncements (continued)

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

|3. | GOING CONCERN
|-- | -------------

As of September 30, 2010, the Companys current liabilities
exceeded its current assets by $6,246,741 and the Companys total liabilities
exceeded its total assets by $6,782,427. The Companys cash position on
September 30, 2010 was $130,763. In addition, the Company receives payment terms
from a related party supplier, that may not be available from unrelated
third parties. 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.

|4. | ACCOUNTS RECEIVABLE
|-- | -------------------

|                         |   | As of              |   |   | As of         |  
|------------------------ | - | ------------------ | - | - | ------------- | -
|                         |   | September 30, 2010 |   |   | June 30, 2010 |  
|Accounts receivable      | $ | 4,532,347          |   | $ | 3,784,745     |  
|Less: bad debt allowance |   | (1,047,959         | ) |   | (921,203      | )
|Accounts receivable, net | $ | 3,484,388          |   | $ | 2,863,542     |  

|5. | ADVANCE TO VENDORS
|-- | ------------------

|                         |   | As of              |   |   | As of         |  
|------------------------ | - | ------------------ | - | - | ------------- | -
|                         |   | September 30, 2010 |   |   | June 30, 2010 |  
|Advance to vendors       | $ | 22,355             |   | $ | 22,059        |  
|Less: bad debt allowance |   | (22,355            | ) |   | (22,059       | )
|Advance to vendors, net  | $ | -                  |   | $ | -             |  

10

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|6. | INVENTORIES
|-- | -----------

|                                     |   | As of              |   |   | As of         |  
|------------------------------------ | - | ------------------ | - | - | ------------- | -
|                                     |   | September 30, 2010 |   |   | June 30, 2010 |  
|Inventories                          | $ | 12,849,609         |   | $ | 11,672,624    |  
|Less: reserve for inventory markdown |   | (4,561,504         | ) |   | (4,864,315    | )
|Inventories, net                     | $ | 8,288,105          |   | $ | 6,808,309     |  

|7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS
|-- | -----------------------------------------

Prepaid expenses and other current assets consist of the
following:

|                 |   | As of              |  |   | As of         | 
|---------------- | - | ------------------ |  | - | ------------- | 
|                 |   | September 30, 2010 |  |   | June 30, 2010 | 
|Employee advance | $ | 3,731              |  | $ | 3,682         | 
|Prepaid expenses |   | 110,251            |  |   | 154,854       | 
|Total            | $ | 113,982            |  | $ | 158,536       | 

|8. | RELATED PARTY TRANSACTIONS
|-- | --------------------------

The Company purchased 100% of its merchandise for the three
months ended September 30, 2010 from Changzhou CTS Fashion Co., Ltd. (CTS)
which is owned by the majority shareholder and Chief Executive Officer (CEO)
of the Company. Total purchases from CTS amounted to $4,533,181 and $3,480,918
for the three months ended September 30, 2010 and 2009, respectively.

Total accounts payable to CTS as of September 30, 2010 and June
30, 2010 were $10,751,766 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 $8,524 and $2,224 for the three months ended September
30, 2010, and $8,430 and $2,199 for the three months ended September 30, 2009.

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

|9. | 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.

11

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|10. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|--- | ----------------------------------------------

Accrued expenses and other current liabilities consist of the
following:

|                          |   | As of              |  |   | As of         | 
|------------------------- | - | ------------------ |  | - | ------------- | 
|                          |   | September 30, 2010 |  |   | June 30, 2010 | 
|Employee benefits payable | $ | 102,797            |  | $ | 101,971       | 
|Salary payable            |   | 112,848            |  |   | 109,678       | 
|Store expense             |   | 55,888             |  |   | 67,171        | 
|Agency fee                |   | 1,814,395          |  |   | 1,607,950     | 
|Interest payable          |   | 306,969            |  |   | 273,198       | 
|Other current liabilities |   | 641,790            |  |   | 591,252       | 
|Total                     | $ | 3,034,687          |  | $ | 2,751,220     | 

We formally adopted an agency marketing system in October 2008.
Regional agents are an individual or a trading company who is contracted to have
exclusive and nontransferable rights to sell and promote our products in
designated areas such as a city or province. The contract term is usually for a
year and renewable 60 days prior to expiration. The agent is selected from our
target area and responsible for determining store locations within the area
(contingent upon Company approval), setting up the corporate stores in that
area, hiring store staff, and managing all stores day-to- day operation in the
area. The agent does not have authority to raise standard price of our products
or offer discount without our approval nor can they sell products of other brand
names in the stores. In return for their services on behalf of the Company,
sales agent is paid a commission called agency fee ranging from 5% to 38% of the
stores sales revenue. As our regional agent is selected based on his or her
local expertise in sales and marketing in the area, such marketing system helps
us penetrate a target market more rapidly and provides proper incentive for the
agent to increase our market share in that area. For the three months ended
September 30, 2010 and 2009, we incurred agency fee of $516,389 and $588,284,
respectively.

|11. | DIVIDENDS PAYABLE
|--- | -----------------

The Companys wholly-owned subsidiary, Shanghai Baby Fox
Fashion Co., Ltd. declared dividends on August 8, 2007 and December 10, 2007 in
the amount of approximately $411,005 and $442,992, respectively, to Fengling
Wang, its sole shareholder on record on the dates the dividends were declared.

|12. | LONG-TERM DEBTS
|--- | ---------------

Long-term debt consists of the following:

|                                                                                                                                      |   | As of              |  |   | As of         | 
|------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ |  | - | ------------- | 
|                                                                                                                                      |   | September 30, 2010 |  |   | 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                             |   | 850,607            |  |   | 839,359       | 
|Amount borrowed from an unrelated party,
      bearing zero interest    and due January 31, 2011, the loan
      is guaranteed by CTS |   | 746,146            |  |   | 736,279       | 
|Subtotal                                                                                                                              |   | 2,406,913          |  |   | 2,385,798     | 
|Less: current portion                                                                                                                 |   | 1,596,753          |  |   | 1,575,638     | 
|Total                                                                                                                                 | $ | 810,160            |  | $ | 810,160       | 

12

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|12. | LONG-TERM DEBTS (continued)
|--- | ---------------------------

Long-term debt matures as follows:

|As of September 30, 2010 |   |           | 
|------------------------ | - | --------- | 
|                         |   |           | 
|2011                     | $ | 1,596,753 | 
|2012                     |   | -         | 
|2013                     | $ | 810,160   | 

The total interest expense for the three months ended September
30, 2010 and 2009 were $21,124 and $20,892, respectively.

|13. | INCOME TAXES
|--- | ------------

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

|                                                                   |  | For the three months
      ended September 30, |  
|------------------------------------------------------------------ |  | ---------------------------------------------- | -
|                                                                   |  | 2010                                           |  
|Earnings from continuing operation before
      income taxes-China |  | 344,479                                        |  
|Earnings from continuing operation before income taxes-US          |  | (81,097                                        | )

The income tax expense (benefit) are as follows:

|               |   | For the three months
      ended September 30, | 
|-------------- | - | ---------------------------------------------- | 
|               |   | 2010                                           | 
|Current-China  | $ | -                                              | 
|Deferred-China |   | -                                              | 
|Subtotal-China |   | -                                              | 
|               |   |                                                | 
|Current-US     |   | -                                              | 
|Deferred-US    |   | -                                              | 
|Subtotal-US    |   | -                                              | 
|               |   |                                                | 
|Current-Total  |   | -                                              | 
|Deferred-Total |   | -                                              | 
|Total          | $ | -                                              | 

13

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|13. | INCOME TAXES (continued)
|--- | ------------------------

Deferred tax assets at September 30, 2010 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 September 30, 2010 and June 30, 2010 are as follows:

|                               |   | As of              |   |   | As of         |  
|------------------------------ | - | ------------------ | - | - | ------------- | -
|                               |   | September 30, 2010 |   |   | June 30, 2010 |  
|Bad debt allowance             | $ | 261,990            |   | $ | 235,815       |  
|Inventory provision            |   | 1,140,376          |   |   | 1,216,079     |  
|Net loss carried forward-China |   | 278,714            |   |   | 258,644       |  
|Net loss carried forward-US    |   | 72,425             |   |   | 44,852        |  
|Total deferred tax assets      |   | 1,753,505          |   |   | 1,755,390     |  
|Valuation allowance            |   | (1,753,505         | ) |   | (1,755,390    | )
|Net deferred tax assets        |   | -                  |   |   | -             |  

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 months ended September 30, 2010 and
2009 is as follows:

|                                                             |  | For the three months
      ended September 30, |  
|------------------------------------------------------------ |  | ---------------------------------------------- | -
|                                                             |  | 2010                                           |  
|Income tax expense (benefit) at federal
      statutory rate |  | 89,550                                         |  
|Adjustment due to:                                           |  |                                                |  
|Foreign rate differential                                    |  | (31,003                                        | )
|Other                                                        |  | (34,087                                        | )
|Increase (decrease) in
      valuation allowance             |  | (24,460                                        | )
|Income tax expense                                           |  | -                                              |  

|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 September 30,** | 
|--------------------------------------------------------- |  | ------------------------------------------------------ | 
|                                                          |  | 2010                                                   | 
|Weighted-average number of shares-basic and
      diluted |  | 40,430,761                                             | 

On September 16, 2010, the Company issued 20,000 shares to The
Crone Law Group for legal services valued at $70,000.

14

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|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        | $ | 977,843 | 
|2012        |   | 46,941  | 
|2013        |   | 8,894   | 
|2014        |   | 4,447   | 
|2015        |   | -       | 
|Thereafter  |   | -       | 

Approximately 33% of our corporate stores in malls are required
to pay minimum annual rents for the spaces leased plus additional rents
calculated based on certain percentage of actual sales over minimum amount of
sales required. The remaining stores do not have minimum annual rent requirement
but are required to pay rents based on certain percentage of actual sales over
minimum sales required. These leases can be terminated if performance does not
meet certain predetermined levels stipulated by mall operators. Rental expense
charged to operations aggregated $1,063,095 and $963,039 for the three months
ended September 30, 2010 and 2009, respectively.

|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
September 30, 2010, the Company has not experienced such loss.

15

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|BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY         
|----------------------------------------------------
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SEPTEMBER 30, 2010 (UNAUDITED)                      

|16. | RISKS AND UNCERTAINTIES (continued)
|--- | -----------------------------------

Concentration of Vendors and Customers

For the three months ended September 30, 2010 and 2009, the
Company made 100% and 95% of its total purchase of merchandise from CTS, an
affiliated company and balance of payables to CTS represented 96% and 95% of the
Companys outstanding accounts payable at September 30, 2010 and June 30, 2010,
respectively.

No single customer accounted for more than 10% for the total
sales for the three months ended September 30, 2010 and 2009.

16

---

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 months ended September 30, 2010 and 2009 should be read in
conjunction with Baby Fox consolidated financial statements, and the notes to
those financial statements that are included elsewhere in this 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 this annual report. We use words such
as anticipate, estimate, plan, project, continuing, ongoing,
expect, believe, intend, may, will, should, could, and similar
expressions to identify forward-looking statements.

Our Company

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

Shanghai Baby Fox is a China-based specialty retailer,
developer, and designer of fashionable, value-priced womens apparel and
accessories. The companys products are aimed to target women aged 18 to 40 in
China. It continuously updates its fashions and clothing designs to stay in sync
with the latest fashions and trends in Korea, Japan, & Europe. Since the
launch of its first retail mall store in July 2006, the brand has gained
exposure in leading womens magazines and the company has 158 stores in over 30
cities as of September 30, 2010.

Listing on the OTC Bulletin Board

On August 6, 2010, the Companys S-1/A was approved by SEC. On
October 6, 2010, the Companys common stock was approved by FINRA for listing 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 first
half of 2009 and 28.5% in 2008 (the most recent available data from Li &
Fung Research Centers research report Latest Developments of Chinas Apparel
Market, (Issue Number 15 in December 2009). We believe our strong knowledge of
local markets, media contacts and brand image we have built, and award winning
design experience give the organization significant competitive advantages in
this rapidly growing market.

Experienced management and design team. Women in China
have become increasingly selective in their choice of clothing and the Chinese
fashion industry is trending towards shorter product life cycles and better
designs and development. The ability to respond to instantaneous fashion trends
is a key attribute to the success of an apparel company. Baby Fox is at the forefront of trends by having an experienced management and
designer team to launch a garment from design to production, and finally to
distribution in just weeks. The Company brings together a complimentary mix of
industry expertise, management 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.

17

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Store expansion plan. Since inception in 2006, the
Company has 158 corporate and non-corporate stores in over 30 cities as of
September 30, 2010. Corporate stores are primarily opened in major metropolitan
areas and non-corporate or licensed stores are mostly established in suburban
communities. We plan to continue growing retail store locations over next few
years but due to liquidity constraint, we will be more focused on location
selections. We will also increase our efforts to improve sales at current stores
and remove non-performing store locations in a timely fashion.

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

PRC Taxation

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

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

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 Se ptember 30, | 
|----------------------------------------------- | - | ----------------------------------------------- | 
|                                                |   | 2010                                            | 
|                                                |   | (unaudited)                                     | 
|Total sales                                     | $ | 5,254,938                                       | 
|Cost of goods sold                              |   | 1,966,484                                       | 
|                                                |   |                                                 | 
|Gross profit                                    |   | 3,288,454                                       | 
|                                                |   |                                                 | 
|Selling, general and administrative expenses    |   | 3,000,552                                       | 
|                                                |   |                                                 | 
|Income (loss) before provision for income taxes |   | 263,382                                         | 
|Income taxes                                    |   | -                                               | 
|                                                |   |                                                 | 
|Net income (loss)                               | $ | 263,382                                         | 

18

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

|                                                |  | For the three months
      ended September 30, | 
|----------------------------------------------- |  | ---------------------------------------------- | 
|                                                |  | 2010                                           | 
|                                                |  | (unaudited)                                    | 
|Total sales                                     |  | 100.0%                                         | 
|Cost of goods sold                              |  | 37.4%                                          | 
|                                                |  |                                                | 
|Gross profit                                    |  | 62.6%                                          | 
|                                                |  |                                                | 
|Selling, general and administrative expenses    |  | 57.1%                                          | 
|                                                |  |                                                | 
|Income (loss) before provision for income taxes |  | 5.0%                                           | 
|Income taxes                                    |  | 0.0%                                           | 
|                                                |  |                                                | 
|Net income (loss)                               |  | 5.0%                                           | 

Starting from the beginning of FY2010, 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.
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
a 80-90% discount. Class A stores are expected to sell 70% of products of each
season with the rest sold through Class B stores and warehouse sales. The tiered
structure would ensure that most, if not all of the inventory can be digested
within 24 months after production. Also based on the Class A and B stores system
formally adopted in fiscal 2009 to better match price and product demand by
different target market segments, a Class A store that does not meet our sales
expectation will first be downgraded to Class B store which are being used to
provide discounted merchandise that did not sell well during the season at Class
A stores. When the lease with 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 September 30, 2010 and 2009, the Company generated
revenues of $5,254,938 and $5,359,439, respectively, reflecting a decrease of
1.9% . Excluding exchange rate effect, sales at corporate stores increased 8.0%
while sales to non-corporate stores declined 55.2% . The increase in corporate
store sales is mainly due to the increase in per-store sales as a result of
strategy to improve revenue and margin of existing stores. The increase in the
average number of stores during the period as compared to the same period in
FY2010 also contributed to the increase in corporate store sales. The
significant decline in non-corporate store sales is mainly due to the stock
replenishment issue 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. The restriction led to raw
material replenishment issues for CTS, the company's major supplier and impacted
the replenishment of goods in non-corporate stores. Fewer number of
non-corporate stores also contributed to the decline. For the three months ended
September 30, 2010, sales at corporate stores contributed 92.1% of total sales,
while sales to non-corporate stores contributed 7.9%, compared to 82.9% and
17.1%, 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 months ended
September 30, 2010 and 2009, and the effect of change in rate used for the
currency conversion in three months ended September 30, 2010 and 2009:

19

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|                                     |  |             |   |  | Corporate |  |  | Non-Corporate |  
|------------------------------------ |  | ----------- | - |  | --------- |  |  | ------------- | -
|                                     |  | Total Sales |   |  | Stores    |  |  | Stores        |  
|Change in sales at existing stores   |  | (225,041    | ) |  | 285,658   |  |  | (510,699      | )
|Sales at new stores opened in FY2011 |  | 61,100      |   |  | 61,100    |  |  | -             |  
|Effect of currency conversion        |  | 59,440      |   |  | 49,298    |  |  | 10,142        |  
|Total increase (decrease) in sales   |  | (104,501    | ) |  | 396,056   |  |  | (500,557      | )

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

|                     |  | 2011 | 
|-------------------- |  | ---- | 
|Corporate stores     |  | 6%   | 
|Non-corporate stores |  | -65% | 

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:

|                                        |   | 2011 |  |   | 2010 | 
|--------------------------------------- | - | ---- |  | - | ---- | 
|Sales per average square foot
      (1) | $ | 29   |  | $ | 27   | 

(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 30 September, 2010
    
    
    Three months ended 30 September, 2009Corporate
    
    
    Non-corporate
    
    
    
    
    
    Corporate
    
    
    Non-corporateStores
    
    
    Stores
    
    
    Total
    
    
    Stores
    
    
    Stores
    
    
    TotalNumber of stores as of July 1
    
    131
    
    
    34
    
    
    165
    
    
    127
    
    
    53
    
    
    180Number of stores opened
    
    9
    
    
    1
    
    
    10
    
    
    14
    
    
    7
    
    
    21Number of stores closed
    
    14
    
    
    3
    
    
    17
    
    
    15
    
    
    10
    
    
    25Number of stores as of September 30
    
    126
    
    
    32
    
    
    158
    
    
    126
    
    
    50
    
    
    176


Cost of Goods Sold and Gross Margin

Cost of goods sold was $1,966,484 for the three months ended
September 30, 2010 as compared to $3,547,465 for the same period in FY2010, a
decrease of 44.6% while the gross margin increased from 33.8% to 62.6% . Cost of
goods sold at corporate stores declined 41.7% in spite of increase in sales at
corporate stores mainly because of a reversal of $365,548 inventory markdown in
FY2011 as compared to an increase of $273,788 in inventory reserve in FY2010 due
to better inventory management and liquidation of prior year products.
Besides, the company used to offer significant discount for prior year products
to buyers for cash payment. The practice was significantly reduced since the
introduction of warehouse sales, which led to decline in the retail sales
revenue but improved margin. As a result, the gross margin for corporate store
sales increased by 30.3% . Cost of goods sold to non-corporate stores decreased
57.5% as compared to the three months ended September 30, 2009, which is in line
with the decline in non-corporate store sales due to the stock replenishment
issue as a result of nationwide restriction on power supply resulting in
shortage of raw material to CTS, the Companys major supplier and impacting on
the replenishment of stocks at non-corporate store sales. The gross margin from
sales at non-corporate stores increased by 4.3% as compared to the gross margin
for the same period in FY2010.

20

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

Selling, General and Administrative
Expenses.

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

For the three months ended September 30, 2010, the Company
incurred selling, general and administrative expenses of $3,000,552, an increase
of 19.1% as compared to $2,518,843 for FY2010.

Our general and administrative expenses increased 295.8% as
compared to last year mainly because of additional bad debt allowance provided
for the increase in the balance of accounts receivable. The Company in general
has arranged 60-day collection terms with shopping malls if not otherwise
specified. Despite most of our accounts receivable balances being current
(within 60 days), we have seen an increase in the percentage of balances aged
more than 90 days starting from September 30, 2009 as a result of significant
expansion of the Companys business. Therefore, a full allowance of 100% of the
amount of such balances aged more than 90 days is being provided. For the three
months ended September 30, 2010, the additional allowance provided was $113,649
compared to $-0- for the same period last year. The balance of bad debt
allowance was $1,047,959 and $177,044 on September 30, 2010 and 2009,
representing 23.1% and 4.3% of the total accounts receivable balance,
respectively. For the three months ended September 30, 2010, 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 operation history. In view
of the rapid expansion of our business since inception, we believe that we have
been very prudent in providing sufficient allowance for ageing accounts
receivable balances.

We incurred selling expenses of $2,535,749 for the three months
ended September 30, 2010, an increase of 5.6% as compared to $2,401,404 for the
three months ended September 30, 2009. Of all the selling expenses, store rent
in the amount of $1,063,095 constituted 41.9% and increased by 11.0% compared to
the same period of last year due to increase in corporate store sales. Agency
fees constituted 20.4% of total selling expenses for the three months ended
September 30, 2010 and decreased by 12.2% when compared to the same period in
2009 mainly due to the change to exclude the store rent from the sales basis to
calculate agency fee. Salaries and benefits, which constituted 13.9% of total
selling expenses for the three months ended September 30, 2010, increased by
18.7% as compared to the same period in 2009 due to more store assistants hired
to improve the per-store sales as well as an increase in the staff compensation.
Other selling expenses constituted 23.8% of total selling expenses, of which
$239,945 was spent on store charges and promotion and $151,974 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.

21

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Other Expenses

We had the same interest-bearing loans for the three months
ended September 30, 2010 and 2009 and such interest expense amounted to $31,251
and $31,102, respectively.

Provision for Income Taxes

The Company recognized $-0- current income tax expense due to
the loss carried forward, which offset the income before tax for the three
months ended September 30, 2010. $-0- current income tax expense was also
recognized for the same period in 2009 as a result of net loss. Income tax
expense for the three months ended September 30, 2010 and 2009 was also
$-0-because of the valuation allowance the Company set up for deferred tax
assets. As of September 30, 2010 and June 30, 2010, the Company recognized $-0-
of net deferred tax assets after valuation allowance.

Net Income

We had a net income of $263,382 for the three months ended
September 30, 2010 as compared to a net loss of $737,971 for the three months
ended September 30, 2009. Our net margin improved mainly because of
better-than-expected revenue recovered from the liquidation of the inventory of
prior seasons as well as better managed inventory level through the newly
established tiered system and growth of stores in a more measured manner.

Liquidity and Capital Resources

As of September 30, 2010, we had cash and cash equivalents of
$130,763 and negative working capital of $6,246,741. 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 three months
      ended Se ptember 30, |  
|------------------------------------------------------- |  | ----------------------------------------------- | -
|                                                        |  | 2010                                            |  
|Net cash used in operating activities                   |  | (1,155,761                                      | )
|Net cash used in investing activities                   |  | (1,824                                          | )
|Net cash provided by financing activities               |  | 1,106,048                                       |  
|Effect of foreign currency translation on cash and cash |  | 1,824                                           |  
|Net decrease in cash and cash equivalent                |  | (49,713                                         | )

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 $1,155,761 for the three months ended
September 30, 2010 as compared to $2,600,584 for the three months ended
September 30, 2009. The decrease in net cash used in operating activities was
primarily due to the net income of $263,382 for the three months ended September
30, 2010 as compared to the net loss of $737,971 for the same period last year.
For the three months ended September 30, 2009, the Company settled $1,050,780
accounts payable to third party suppliers as we gradually shifted all the
purchases from third party suppliers to CTS, a related party supplier. For the
three months ended September 30, 2010, the balance of accounts payable to third
party suppliers increased slightly by $77,901. The difference, partially offset
by the higher growth of the inventory balance, also contributed to the decrease
of the net cash used in operating activities.

Our accounts receivable increased from $3,784,745 at June 30,
2010 to $4,532,347 at September 30, 2010 mainly due to business expansion and
sales increases in September due to the national holidays to observe the
Mid-Autumn Festival, the accounts receivable balances of which were not due and
collected by September 30, 2010 . The Festival was in October in 2009. Sales
increases contributed to the larger amount of outstanding accounts receivable to
be collected from shopping malls, with which we generally have established
60-day collection terms. In view of the rapid expansion of our business since
inception, the Company has put in place a very rigorous review process of
outstanding accounts receivable balances. At September 30, 2010, we had
$1,247,806 in accounts receivable aged in excess of 60 days, among which
$1,090,433 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. Excluding the amount that can
be offset against the agent fees payable, full allowance has been provided for
the balance over 90 days and not subsequently settled. As a result,
allowance for doubtful accounts increased from $$921,203 as of June 30, 2010 to
$1,047,959 as of September 30, 2010 as a result of an increase in balances aged
over 90 days. Considering that the accounts receivable balances aged between 60
days and 90 days at September 30, 2010 was not material, and was subsequently
settled, no bad debt allowance was accrued with respect to such balances. For
the three months ended September 30, 2010, the Company incurred $82,820 bad debt
as a result of closing of three non-corporate stores. We believe that we have
been very prudent and have provided sufficient allowance for ageing accounts
receivable balances.

22

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Net Cash Used in Investing Activities. Net cash
used in investing activities were $1,824 and $1,762 for the three months ended
September 30, 2010 and 2009, respectively.

Net Cash Provided by Financing Activities. Net
cash provided by financing activities totaled $1,106,048 and $2,362,650 for the
three months ended September 30, 2010 and 2009, respectively. The decrease
mainly represented the loan of RMB5,000,000 we borrowed on July 22, 2009. The
loan is due on January 31, 2011. Besides, better control on the inventory
balance and our store expansion for the three months ended September 30, 2010
resulted in slower growth of our accounts payable to our affiliated company,
which also contributed to the decrease.

Cash.At September 30, 2010, we had cash
of $130,763, as compared to $180,476 as of June 30, 2010. Cash used in operating
activities decreased significantly as compared to the same period last year,
which was partially offset by the decline of cash provided by financing
activities, resulting in reduced cash outflow for the three months ended
September 30, 2010 as compared to the same period last year.

As of September 30, 2010, the Companys current liabilities
exceeded its current assets by $6,246,741 and the Companys total liabilities
exceeded its total assets by $6,782,427. The Companys cash position on
September 30, 2010 was $130,763. Our auditor has expressed their concern as to
our ability to continue as a going concern in the audit opinion of our financial
statements for the year ended June 30, 2010.

We believe that we can satisfy our cash requirements during the
next 12 months through reduction of expenses associated with retail store
openings, better management of our inventory and realization of our accounts
receivables. We have experienced a rapid growth in both sales and store numbers
since 2008. The Company has adjusted its strategy to slow down the new store
openings and focus on digesting inventory of past seasons and improving revenue
and margin from existing stores in the fiscal year 2010, which is expected to
continue in fiscal year 2011. The Company has successfully established a tiered
inventory digesting structure through Class A stores, Class B stores and
warehouse sales. Class A stores sell current season products at full price,
Class B stores sell one-year-old products at a 30-50% discount while warehouse
sales digest products aged more than one year at a 80-90% discount. Class A
stores are expected to sell 70% of products of each season with the rest sold
through Class B stores and warehouse sales. The tiered structure would ensure
that most, if not all of the inventory can be digested within 24 months after
production. From December 2009 to May 2010, the Company held a series of large
warehouse sales and cleared the entire 2007 inventory and realized the majority
of the 2008 inventory and generated around $1.5 million in cash. Additional
warehouse sales scheduled in the next twelve months are expected to generate
similar amount of revenue and sales from Class A and Class B stores are expected
to be around $24 million. We believe that cash generated from the stores and
warehouse sales in the next 12 months will be sufficient to cover payment for
inventory purchases and 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 which
we have negotiated and have established a favorable six-month payment term with
additional extension if the payment would materially impact the Companys
liquidity profile. This policy will effectively prevent further deterioration of
the Companys cash position.

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

23

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

Loan Facilities

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

|                                                                                                                                      |   | As of              |  |   | As of         | 
|------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ |  | - | ------------- | 
|                                                                                                                                      |   | September 30, 2010 |  |   | 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                             |   | 850,607            |  |   | 839,359       | 
|Amount borrowed from an unrelated party,
      bearing zero interest    and due January 31, 2011, the loan
      is guaranteed by CTS |   | 746,146            |  |   | 736,279       | 
|Subtotal                                                                                                                              |   | 2,406,913          |  |   | 2,385,798     | 
|Less: current portion                                                                                                                 |   | 1,596,753          |  |   | 1,575,638     | 
|Total                                                                                                                                 | $ | 810,160            |  | $ | 810,160       | 

Long-term debts mature as follows:

As of September 30, 2010

|2011 | $ | 1,596,753 | 
|---- | - | --------- | 
|2012 |   | -         | 
|2013 | $ | 810,160   | 

Total interest expense on loans amounted to $31,251 and $31,102
for the three months ended September 30, 2010 and 2009, respectively.

Obligations Under Material Contracts

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

Payment due in year
      ended June 30,Total
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterLong term debt obligations (including
      current portion)
    $
    2,406,913
    
    $
    1,596,753
    
    $
    -
    
    $
    810,160
    
    $
    -Operating lease obligations
    
    1,038,125
    
    
    977,843
    
    
    46,941
    
    
    8,894
    
    
    4,447Purchase obligations
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
    $
    3,445,038
    
    $
    2,574,596
    
    $
    46,941
    
    $
    819,054
    
    $
    4,447


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.

24

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

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

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

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

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

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

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

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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 36% and 42% of ending inventory
levels as of September 30, 2010 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 4T. 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 September
30, 2010, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.

Changes in Internal Control Over Financial Reporting

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

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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

On September 16, 2010, the Company issued 20,000 shares of its
common stock to its outside corporate counsel, the Crone Law Group, as
compensation for legal services. The common stock was issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

|Exhibit No. | Description                                                                                                                                                                                                                        
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                 

27

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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: November 15, 2010  | By:                         
|                         |                             
|                         |                             
|                         |                             
|                         |                             
|Dated: November 15, 2010 | By:                         
|                         |                             
|                         |                             
|                         |                             

28

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EXHIBIT INDEX

|Exhibit No. | Description                                                                                                                                                                                                                        
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                 

29

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