United
States


Securities
and Exchange Commission


Washington,
D. C. 20549





FORM
10-Q





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





For
the quarterly period ended March 31, 2009





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


For the
transition period from _____ to _____





Commission
File No. 0-24185





CHINA AOXING PHARMACEUTICAL
COMPANY, INC.


(Exact
Name of Registrant as Specified in its Charter)





Florida
                65-0636168(State
      or Other Jurisdiction of incorporation or organization)
                (I.R.S.
      Employer I.D. No.)








40 Wall Street,
28thFloor, New York, NY
10006


(Address
of Principal Executive Offices)





Issuer's
Telephone Number: (646) 512-5662





Indicate  by
check mark  whether the  Registrant  (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the  Securities Exchange Act of
1934  during  the  preceding  12
months  (or for such shorter  period  that the
Registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.





YesX
                No___


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







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




Large
accelerated filer___Accelerated filer___  Non-accelerated filer___Smaller reporting companyX


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





APPLICABLE
ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding
of each of the Registrant's classes of common stock, as of the latest
practicable date:


May 15,
2009


Common
Stock: 82,819,555







CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


(Unaudited)






March
      31, 2009
                                                                                      (Unaudited)
                                                                                    
                                                                                    
                                                                                    June
      30, 2008ASSETSCURRENT
      ASSETS:Cash
                                                                                    
                                                                                    $
                                                                                    987,894
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,565,513Accounts receivable
                                                                                    
                                                                                    
                                                                                    2,294,235
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,536,047Inventories
                                                                                    
                                                                                    
                                                                                    701,462
                                                                                    
                                                                                    
                                                                                    
                                                                                    848,959Prepaid expenses and sundry current assets
                                                                                    
                                                                                    
                                                                                    754,996
                                                                                    
                                                                                    
                                                                                    
                                                                                    303,208TOTAL
      CURRENT ASSETS
                                                                                    
                                                                                    
                                                                                    4,738,587
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,253,727LONG-TERM
      ASSETS:Property and equipment, net of accumulated depreciation
                                                                                    
                                                                                    
                                                                                    30,333,047
                                                                                    
                                                                                    
                                                                                    
                                                                                    30,331,143Other intangible assets
                                                                                    
                                                                                    
                                                                                    1,578,321
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,635,375Goodwill
                                                                                    
                                                                                    
                                                                                    18,924,641
                                                                                    
                                                                                    
                                                                                    
                                                                                    18,904,845TOTAL
      LONG-TERM ASSETS
                                                                                    
                                                                                    
                                                                                    50,836,009
                                                                                    
                                                                                    
                                                                                    
                                                                                    50,871,363TOTAL
      ASSETS
                                                                                    
                                                                                    $
                                                                                    55,574,596
                                                                                    
                                                                                    
                                                                                    $
                                                                                    56,125,090LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term borrowings
                                                                                    
                                                                                    $
                                                                                    5,112,353
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,042,600Accounts payable
                                                                                    
                                                                                    
                                                                                    3,565,614
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,544,795Loan payable – other
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    380,070Due to stockholders
                                                                                    
                                                                                    
                                                                                    112,198
                                                                                    
                                                                                    
                                                                                    
                                                                                    112,068Accrued expenses and taxes payable
                                                                                    
                                                                                    
                                                                                    3,826,171
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,851,314Notes payable – bank
                                                                                    
                                                                                    
                                                                                    6,093,716
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,545,239TOTAL
      CURRENT LIABILITIES
                                                                                    
                                                                                    
                                                                                    18,710,052
                                                                                    
                                                                                    
                                                                                    
                                                                                    18,476,086LONG-TERM
      DEBT – STOCKHOLDER
                                                                                    
                                                                                    
                                                                                    4,103,722
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,098,687-
      OTHER
                                                                                    
                                                                                    
                                                                                    3,716,616
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,127,643CONVERTIBLE
      DEBENTURES
                                                                                    
                                                                                    
                                                                                    978,953
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,098,362WARRANT
      AND DERIVATIVE LIABILITIES
                                                                                    
                                                                                    
                                                                                    3,490,056
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,161,678MINORITY
      INTEREST
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    24,598STOCKHOLDERS’
      EQUITY:Common stock, $0.001 par value,100,000,000 shares authorized82,819,555and 82,819,555 shares issued and outstanding at
                                                                                    
                                                                                    
                                                                                    82,820
                                                                                    
                                                                                    
                                                                                    
                                                                                    81,090March
      31,2009 and June 30,2008, respectivelyPreferred stock, $0.001 par value300,000
      shares authorized277,018
      shares issued and outstanding
                                                                                    
                                                                                    
                                                                                    277
                                                                                    
                                                                                    
                                                                                    
                                                                                    277Additional paid-in capital
                                                                                    
                                                                                    
                                                                                    37,994,090
                                                                                    
                                                                                    
                                                                                    
                                                                                    36,749,956Accumulated deficit
                                                                                    
                                                                                    
                                                                                    (13,900,224
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (12,314,178
                                                                                    )Other comprehensive income
                                                                                    
                                                                                    
                                                                                    398,234
                                                                                    
                                                                                    
                                                                                    
                                                                                    620,891TOTAL
      STOCKHOLDERS’ EQUITY
                                                                                    
                                                                                    
                                                                                    24,575,197
                                                                                    
                                                                                    
                                                                                    
                                                                                    25,138,036TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                                    
                                                                                    $
                                                                                    55,574,596
                                                                                    
                                                                                    
                                                                                    $
                                                                                    56,125,090
 CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 THREE
      MONTHS ENDED
                                                                                                                                    March
      31,
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  NINE
      MONTHS ENDED
                                                                                                                                    March
      31,2009
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2008
                                                                                                                                    (Restated)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2009
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2008
                                                                                                                                    (Restated)SALES
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  1,587,989
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  857,065
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  7,501,763
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  3,101,236COST
      OF SALES
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,070,086
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  453,456
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,339,126
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,550,872GROSS
      PROFIT
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  517,903
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  403,609
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,162,637
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,550,364COSTS
      AND EXPENSES:Research
      and development expense
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  143,197
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  174,237
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  483,434
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  277,891General
      and administrative expenses
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  797,954
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,316,804
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,787,746
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,515,251Selling
      expenses
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  169,809
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  198,928
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,293,344
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  764,722Depreciation
      and amortization
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  114,187
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  125,068
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  346,069
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  363,463TOTAL
      COSTS AND EXPENSES
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,225,147
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,815,037
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,910,593
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,921,327LOSS
      FROM OPERATIONS
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (707,244
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,411,428
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,747,956
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (2,370,963
                                                                                                                                  )OTHER
      INCOME (EXPENSE):Interest
      expense
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (495,489
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (329,497
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,400,868
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,915,473
                                                                                                                                  )Change
      in fair value of warrant andderivative
      liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,502,314
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  8,981,552
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  506,028
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  9,121,393Gain
      on foreign currency translation
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (42,481
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  220,579
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -Impairment
      loss
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (561,913
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (561,913
                                                                                                                                  )Forgiveness
      of debt
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,459,654
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -TOTAL
      OTHER INCOME (EXPENSE)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  402,431
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  8,652,055
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  223,480
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,205,920LOSS
      BEFORE MINORITY INTERESTAND
      INCOME TAXES
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (304,813
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,240,627
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,524,476
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,834,957Minority
      interest in (income) losses of  subsidiary
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  65,605
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  209,032
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  37,084
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  476,856LOSS
      BEFORE INCOME TAXES
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (239,208
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,449,659
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,487,392
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,311,813Income
      taxes
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (98,686
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -NET
      INCOME (LOSS)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (239,208
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,449,659
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,586,078
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,311,813OTHER
      COMPREHENSIVE LOSS:Foreign
      currency translation adjustment
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  159,152
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  192,409
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (222,626
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  414,968COMPREHENSIVE
      INCOME (LOSS)
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (80,056
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  7,642,068
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (1,808,704
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  5,726,781BASIC
      AND DILUTED EARNINGSPER
      COMMON SHARE
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (0.00
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0.18
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (0.02
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (0.13
                                                                                                                                  )WEIGHTED
      AVERAGE NUMBER OFSHARES
      OUTSTANDING
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  82,819,555
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  41,312,664
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  82,261,499
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  40,822,684
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 NINE
      MONTHS ENDED
                                                                                                                          March
      31,2009
                                                                                                                        
                                                                                                                        
                                                                                                                        2008
                                                                                                                          (Restated)OPERATING
      ACTIVITIES:Net loss
                                                                                                                        
                                                                                                                        $
                                                                                                                        (1,586,078
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        5,311,813Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization
                                                                                                                        
                                                                                                                        
                                                                                                                        779,909
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        532,756Impairment loss
                                                                                                                        
                                                                                                                        
                                                                                                                        561,913Forgiveness of debt
                                                                                                                        
                                                                                                                        
                                                                                                                        (1,459,654
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -Non-cash interest expense related to
      conversionof
      debentures and warrants
                                                                                                                        
                                                                                                                        
                                                                                                                        170,591
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,081,872Stocks issued for services and interest
                                                                                                                        
                                                                                                                        
                                                                                                                        892,528
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,373,735Change in fair market value on derivative
      liability
                                                                                                                        
                                                                                                                        
                                                                                                                        (506,028
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (10,226,390
                                                                                                                        )Minority interest
                                                                                                                        
                                                                                                                        
                                                                                                                        (24,598
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (476,856
                                                                                                                        )Changes in operating assets and liabilities:Accounts receivable
                                                                                                                        
                                                                                                                        
                                                                                                                        244,927
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (85,304
                                                                                                                        )Inventories
                                                                                                                        
                                                                                                                        
                                                                                                                        148,540
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        40,302Prepaid expenses and sundry current
      assets
                                                                                                                        
                                                                                                                        
                                                                                                                        (451,595
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (59,513
                                                                                                                        )Accounts payable
                                                                                                                        
                                                                                                                        
                                                                                                                        (310,969
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (336,408
                                                                                                                        )Accrued expenses, taxes and sundry current
      liabilities
                                                                                                                        
                                                                                                                        
                                                                                                                        (720,564
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        874,509NET
      CASH USED IN OPERATING ACTIVITIES
                                                                                                                        
                                                                                                                        
                                                                                                                        (2,261,078
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (969,484
                                                                                                                        )INVESTING
      ACTIVITIES:Acquisition of property and equipment
                                                                                                                        
                                                                                                                        
                                                                                                                        (1,247,403
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (12,317
                                                                                                                        )NET
      CASH USED IN INVESTING ACTIVITIES
                                                                                                                        
                                                                                                                        
                                                                                                                        (1,247,403
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (12,317
                                                                                                                        )FINANCING
      ACTIVITIES:Proceeds from short-term borrowings
                                                                                                                        
                                                                                                                        
                                                                                                                        3,067,603Other loan
                                                                                                                        
                                                                                                                        
                                                                                                                        204,594
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        205,442Repayment of loans to stockholders
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (596,181
                                                                                                                        )Acquisition deposit
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,728,000Sale of convertible debentures
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        349,000NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                                                                                                                        
                                                                                                                        
                                                                                                                        3,272,197
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,686,261EFFECT
      OF EXCHANGE RATE ON CASH
                                                                                                                        
                                                                                                                        
                                                                                                                        (341,334
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        124,461INCREASE
      (DECREASE) IN CASH
                                                                                                                        
                                                                                                                        
                                                                                                                        (577,618
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        2,828,921CASH
      – BEGINNING OF PERIOD
                                                                                                                        
                                                                                                                        
                                                                                                                        1,565,513
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,511,127CASH
      – END OF PERIOD
                                                                                                                        
                                                                                                                        $
                                                                                                                        987,895
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        4,340,048Supplemental
      disclosures of cash flow information:Non-cash financing activities:Conversion of convertible debentures into common
      stock
                                                                                                                        
                                                                                                                        $
                                                                                                                        290,000
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,209,000Stock issued for financing agent
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        831,600
   
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  
 
 1           BASIS
OF PRESENTATION
  The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X relating to smaller reporting companies.  Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles (“GAAP”)
for complete financial statements.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.  Operating results for the three
and nine month periods ended March 31, 2009 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2009.
  The
balance sheet at June 30, 2008 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.
  For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the
year ended June 30, 2008 filed on October 14, 2008.
  Use
of estimates in the preparation of financial statements
 
 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.  Actual results could differ from those
estimates.
 
  2           BUSINESS
DESCRIPTION AND BASIS OF CONSOLIDATION
  China
Aoxing Pharmaceutical Co., Inc. (“the Company”), through its subsidiaries, is
a  pharmaceutical company specializing in research, development,
manufacturing and marketing of a variety of narcotics and pain management
pharmaceutical products in generic and innovative formulations.  The
Company has one major operating subsidiary, Hebei Aoxing Pharmaceutical Co.,
Inc. (“Hebei”), which at March 31, 2008 is 95% owned by the Company, which was
organized under the laws of the People’s Republic of China (“PRC”).
  Since
2002, Hebei has been engaged in developing its analgesic products, building its
facilities and obtaining the requisite licenses from the Chinese
Government.  Currently Hebei is selling over 40 pharmaceutical
products approved by the China SFDA with a strong focus on pain medicines,
including a line of pain management drugs, in pills, tablets, capsules, oral
solutions and other formulations, through the acquisition of Lerentang
Pharmaceutical Company (“LRT “) in 2008,  .
 
 The
consolidated financial statements include the accounts of the Company and all of
its subsidiaries. At March 31, 2009 the Company owned 95% of
Hebei.  The consolidated accounts include 100% of the assets and
liabilities of Hebei and the ownership interest of minority investors are
recorded as minority interest.  All significant inter-company accounts
and transactions have been eliminated.  These financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America.  The Company’s functional currency is
the Chinese Renminbi (RMB); however, the accompanying consolidated financial
statements have been translated and presented in United States Dollars
(USD).
   
  3           RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
 
 During
the fiscal year 2008, the Company determined that the manner in which it
historically accounted for the conversion feature and embedded put option of
certain of its convertible debentures during the fiscal year 2006 through the
fiscal year 2008 was not in accordance with SFAS No. 133, as amended, and EITF
Issue No. 00-19.  The Company determined that the conversion feature
was an embedded derivative instrument pursuant to SFAS No. 133.  The
accounting treatment of derivative financial instruments requires that the
Company record the derivatives and related warrants at their fair values as of
the inception date of the convertible debenture agreements and at fair value as
of each subsequent balance sheet date.  Any change in fair value was
required to be recorded as non-operating, non-cash income or expense at each
balance sheet date.  If the fair value of the derivatives was higher
at the subsequent balance sheet date, the Company was required to record a
non-operating, non-cash charge.  If the fair value of the derivatives
was lower at the subsequent balance sheet date, the Company was required to
record non-operating, non-cash income.  Accordingly, in connection
with the restatement adjustments, the Company has approximately reflected the
non-operating, non-cash income or expense resulting from the changes in fair
value.  The Company had previously not recorded the embedded
derivative instruments as liabilities and did not record the related changes in
fair value.
 
 The
following tables represent a summary of the effects of the restatement
adjustments on the Company’s consolidated statements of operations for the three
and nine months ended March 31, 2008 and its statements of cash flows for the
nine months ended March 31, 2008.
 Statement
      of Operations
                                                                                                                  
                                                                                                                  Previously
      Reported
                                                                                                                  
                                                                                                                  
                                                                                                                  Adjustments
                                                                                                                  
                                                                                                                  
                                                                                                                  As
      RestatedThree
      months endedMarch
      31, 2008Interest
      expense
                                                                                                                  
                                                                                                                  $
                                                                                                                  117,637
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  211,860
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  329,497Amortization
      of deferred interest
                                                                                                                  
                                                                                                                  $
                                                                                                                  519,915
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  (519,915
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  -Change
      in fair value of warrant and derivative liabilities
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  8,981,552
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  8,981,552Minority
      interest
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  209,032
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  209,032Income
      (loss) before minority interest and income taxes
                                                                                                                  
                                                                                                                  $
                                                                                                                  (2,285,426
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,526,053
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  7,240,627Net
      income (loss)
                                                                                                                  
                                                                                                                  $
                                                                                                                  (2,285,426
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,735,085
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  7,449,659Basic
      and diluted earnings per share
                                                                                                                  
                                                                                                                  $
                                                                                                                  (0.06
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  0.24
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  0.18Statement
      of Operations
                                                                                                                  
                                                                                                                  Previously
      Reported
                                                                                                                  
                                                                                                                  
                                                                                                                  Adjustments
                                                                                                                  
                                                                                                                  
                                                                                                                  As
      RestatedNine
      months endedMarch
      31, 2008Interest
      expense
                                                                                                                  
                                                                                                                  $
                                                                                                                  938,598
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  976,875
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  1,915,473Amortization
      of deferred interest
                                                                                                                  
                                                                                                                  $
                                                                                                                  1,559,745
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  (1,559,745
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  -Change
      in fair value of warrant and derivative liabilities
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,121,393
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,121,393Minority
      interest
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  476,856
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  476,856Income
      (loss) before minority interest and income taxes
                                                                                                                  
                                                                                                                  $
                                                                                                                  (4,869,306
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,704,263
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  4,834,957Net
      income (loss)
                                                                                                                  
                                                                                                                  $
                                                                                                                  (4,869,306
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  10,181,119
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  5,311,813Basic
      and diluted earnings per share
                                                                                                                  
                                                                                                                  $
                                                                                                                  (0.12
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  0.25
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  0.13Statement
      of Cash Flows
                                                                                                                  
                                                                                                                  Previously
      Reported
                                                                                                                  
                                                                                                                  
                                                                                                                  Adjustments
                                                                                                                  
                                                                                                                  
                                                                                                                  As
      RestatedNine
      month ended March 31, 2008Net
      income (loss)
                                                                                                                  
                                                                                                                  $
                                                                                                                  (4,869,306
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  10,181,119
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  5,311,813Non-cash
      interest expense related to convertible debentures and
      warrants
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  2,081,872
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  2,081,872Minority
      interest
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  (476,856
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  (476,856
                                                                                                                  )Change
      in fair value of warrant and derivative liabilities
                                                                                                                  
                                                                                                                  $
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  (10,226,390
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  (10,226,390
                                                                                                                  )
  
 
 4           DERIVATIVE
FINANCIAL INSTRUMENTS
  The
Company’s derivative financial instruments consist of warrants and embedded
derivatives related to the convertible debentures (see Note 13). These embedded
derivatives include conversion options. The Company determined that the features
were embedded derivative instruments pursuant to Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended, and Emerging Issues Task Force (“EITF”)
Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock.” The accounting treatment of
derivative financial instruments requires that the Company record the
derivatives and related warrants at their fair values as of the inception date
of the debt agreements and at fair value as of each subsequent balance sheet
date.  Any change in fair value was recorded as non-operating, non-cash
income or expense at each balance sheet date.  If the fair value of the
derivatives was higher at the subsequent balance sheet date, the Company
recorded a non-operating, non-cash charge.  If the fair value of the
derivatives was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income.
 
 During
the three months ended March 31, 2009 and 2008, the Company recognized gains of
$1,502,314 and $8,981,552, respectively, relating to recording the warrant and
derivative liabilities at fair value.  At March 31, 2009 and June 30,
2008 there were approximately $3,490,056 and $4,161,678 respectively, of warrant
and derivative liabilities, as the related debt instruments were not
settled.
 
 The
Company’s derivative instruments, including (1) conversion features embedded in
the 234,600 shares of 8% convertible debentures at both March 31 2009 and June
30, 2008. (2) five warrant contracts with expected terms of 2.46 years and
strike price at $2.00, $2.50, $3.50, $4.50, and $5.50 respectively, as of March
31, 2009. Each financial derivative was valued individually at the date of
issuance and at each subsequent balance sheet date using the Black-Scholes
option pricing model, with the following assumptions during the three months
ended March 31, 2009:
 Estimated
      dividends
                                                                                              NoneExpected
      volatility
                                                                                              169%
      (as of June 30, 2008)288%
      (as of March 31, 2009)Risk-free
      interest rate
                                                                                              0.37%
      – 2.28%Expected
      term (years)
                                                                                              0.57
      – 1.15 (as of March 31,
2009)
 
 
 5           GOING
CONCERN
 
 As
noted in the accompanying financial statements, at March 31, 2009 the Company
has a deficiency in working capital of $13,971,465.  The uncertainties
caused by this condition raise substantial doubt as to the Company’s ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
 
  The
primary reason for the deficit is the custom of Chinese banks of conducting
long-term lending relationships using short-term loans.  As a result,
the entirety of our debt to the Bank of China in the amount of $6,093,716 is
recorded as a current liability, although we fully expect that our credit with
the Bank will be extended.  In addition, we have an obligation to pay
$4,381,957 to American Oriental Bioengineering (“AOB”) in May
2009.  We expect that debt will be converted to stock in May
2009.  In addition, the management is also in active negotiation with
stockholders and other lenders to restructure the borrowings on the balance
sheet. For these reasons, we believe that we have necessary liquidity to carry
on our operations and implement our business plan.
 
 The
Company is exploring various alternatives to improve its financial position and
continue to meet its obligations, Management is focusing on improving its
operations and seeking additional debt and/or equity financing. There can be no
assurance that any of these efforts will be fruitful.
 
 6           NEW
ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value
Measurements”.  This statement defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements.  The standard applies under other accounting
pronouncements that require or permit fair value measurements with certain
exceptions, SFAS 157 was effective for the Company as of January 1,
2008.  The adoption of SFAS 157 did not have a material effect on the
Company’s financial position or results of operations.
 
 In
December 2007, the FASB issued a revision of SFAS No. 141, Business
Combinations (“SFAS 141(R).  This accounting standard requires
an acquirer to recognize and measure the assets acquired, liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited
exception.  In addition, SFAS 141(R) requires that acquisition-related
costs will be generally expensed as incurred.  SFAS 141(R) also
expands the disclosure requirements for business combinations.  SFAS
141(R) will be effective for the Company prospectively on July 1,
2009.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51”. This Statement
clarifies that a noncontrolling interest in a subsidiary should be reported as
equity in consolidated financial statements. The calculation of earnings per
share will continue to be based on income amounts attributable to the parent.
SFAS No. 160 is effective as of the beginning of the Company’s first fiscal year
that begins on or after December 15, 2008. The Company does not expect
application of SFAS No. 160 to have a material effect on its financial
statements.
 
  In
March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133,which requires additional disclosures about the
objectives of the derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and
related hedged items on our financial position, financial performance, and cash
flows. SFAS No. 161 is effective beginning January 1,
2009.
 
 In
June 2008, the FASB issued FASB Staff Position on Emerging Issues Task Force
Issue 03-6, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period
EPS data presented shall be adjusted retrospectively (including interim
financial statements, summaries of earnings, and selected financial data) to
conform with the provisions of FSP EITF 03-6-1. Early application is not
permitted. Management is currently evaluating the impact FSP EITF 03-6-1 will
have on the Company’s EPS calculations.
  
 
  7           SHORT-TERM
BORROWINGS
  Short-term
borrowings consist of the following at March 31, 2009:
 
 Short-term
      borrowing due to others maturing on various dates
                                                                                              
                                                                                              $  730,396Short-term
      borrowing due to AOB, bearing interest at 8% per annum and due May 26,
      2009.  Repayment of this loan, including accrued interest, can
      be paid in cash or converted to common stock.  Any amounts due
      on May 26, 2009 that have not been converted to common stock will be paid
      in cash.
                                                                                              
                                                                                              4,381,957$5,112,353
  8           LOANS
PAYABLE – OTHER
 
 Loans
payable – other consist of loans from
unrelated third parties maturing on December 31, 2011 and bearing interest at an
average rate of 10% per annum.
  
 9           LOAN
FROM STOCKHOLDERS
  Loan
from stockholders consists of the following:
 
 Loan
      payable bearing interest at 10% per annum and maturing on December 31,
      2011.
                                                                                            
                                                                                            $4,103,722Loans
      maturing on various dates through June 30, 2009, bearing interest at an
      average rate of 10% per annum
                                                                                            
                                                                                            112,1984,215,920Less
      current portion
                                                                                            
                                                                                            112,198$4,103,722
 
 
 10 NOTE
PAYABLE – BANK
 
 Note
payable – bank bears interest at 5.58% per annum, is collateralized by a first
security interest in substantially all assets of the Company and is guaranteed
by a vendor of the Company.
 
 On
August 27, 2008, the Company entered into an agreement with the Bank of China
(“BC”) to renegotiate the terms of this loan.
 
 According
to this agreement, the loan matures as follows:
 
 December
      31, 2008
                                                                                            $2,921,585June
      30, 2009
                                                                                            2,921,585December
      31, 2009
                                                                                            250,546$6,093,716
 
 As
of March 31, 2009, the Company was actively negotiating new terms with BC for
the loan principal that was due on December 31, 2008.
  
  11 MINORITY
INTEREST
 
 As
of March 31, 2008 the Company owned 60% of the issued and outstanding common
stock of Hebei. On May 1, 2008 the Company acquired an additional 35% interest
for $3,420,000.  In accordance with FASB Statement 141, the Company
has accounted for the additional investment under the purchase method of
accounting, resulting in goodwill of $2,790,236.  The purchase price
allocation is preliminary and a final determination of required purchase
accounting adjustments will be made upon the Company receiving a valuation of
the assets acquired and liabilities assumed.
 
 12CONVERTIBLE
DEBENTURES
 
 Convertible
      debentures outstanding as of March 31, 2009, are as
    follows:
 
 Convertible
      debentures issued
                                                                                            3,289,000Less
      amounts converted to common stock
                                                                                            (2,116,000)1,173,000Less
      debt discount
                                                                                            194,047Balance
      – March 31, 2009
                                                                                            978,953
 
 
 The
terms of the convertible debentures include certain features that are considered
embedded derivative financial instruments, such as a conversion feature which
provides for the conversion of the debentures into shares of the Company’s
common stock at a rate which is variable. Because the debentures are not
conventional convertible debt, the Company is required to record the derivative
financial instruments and the warrants issued in connection with the convertible
debentures at their fair values as of the issuance date of each of the
debentures.
 
 The fair values
assigned to the existing embedded derivatives
related to convertible debentures were $3,490,056 and $4,161,678 on March 31,
2009 and June 30, 2008, respectively.
  The Company recorded the fair value of the
derivative instruments and warrants as a debt discount which will be amortized
to interest expense over the term of the convertible debentures. During the
three months ended March 31, 2009 and 2008, the Company recorded interest
expense of $44,780 and $141,489, respectively, related to the amortization of
the debt discount. If the total fair value of the derivative instruments and
warrants was in excess of the proceeds received on the convertible debentures,
the Company recorded the excess as additional interest
expense.
 
 
 13           WARRANTS
 
 The
following table summarizes the information relating to the warrants issued in
connection with the sale of securities referred to in Note 13
above:
  Exercise
                                                                                                      Price
                                                                                                    
                                                                                                    Number
      Outstanding
                                                                                                      March
      31
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    Weighted
      Average
                                                                                                      Remaining
      Contractual
                                                                                                      Life
      (Years)2009
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2008$2.50
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.463.50
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.464.50
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.465.50
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,058,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.462.00
                                                                                                    
                                                                                                    
                                                                                                    423,200
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    493,733
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.464,655,200
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,725,733
 
 14           IMPAIRMENT
LOSS
 
 During
three months ended March 30, 2009, the Company recorded an impairment charge of
$561,913 to write-down the carrying value of two manufacturing buildings in
connection with the consolidation of LRT manufacturing function into
Hebei.
 
 
  15           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 twenty
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 PRCs 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 business is transacted in RMB, which is not freely
convertible into foreign currency.  The People’s Bank of China or
other banks are authorized to buy and sell foreign currencies at the exchange
rates quoted by the People’s 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 outside of
China may be limited.
 
 The
Company’s business depends on maintaining licenses of its current products from
the China State Food and Drug Administration.  Obtaining licenses for
additional products can be expensive and is usually time
consuming.  Failure to obtain the necessary licenses when needed can
cause the Company’s business plan to be delayed.  If the delays
prevent the Company from generating positive cash flow or introducing a
significant number of products, there will be a material adverse effect on the
Company.
 
 In
September 2006, PRC changed the laws regarding transfer of equity in PRC
companies in exchange for equity in non-PRC companies.  Approvals and
registrations for such transfers are required and penalties may be imposed if
the requirements are not met.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to significant concentration of
credit risk are primarily cash and cash equivalents.
 
 16           SUBSEQUENT
EVENTS
 
 On
April 17, 2009, the Company entered into a sales Agreement (the
“Agreement”) with Hebei Xinxing Geli Electronics Marketing Company Ltd and
Shijiazhuang City Xinyang Weiye Property Company, Ltd.(“Purchasers”), PRC
companies, for the sales of a land of 18,350 square meters located at the LRT
production facility in the central area of Shijiazhuang City.
 
 As
part of the Agreement, the Company will transfer and convey its rights to the
land to the Purchasers by June 15, 2009.  The gross proceeeds of the
transaction to be received by the Company was 33,000,000 RMB ($4,837,800 USD) in
cash, which will be used for general corporate purposes.
 
 With
additional capital from this transaction, the Company will continue to maintain
tight cost controls on all variable expenses, including third party services and
capital expenditure. Additionally, The Company will continue to explore various
alternatives to improve its financial position, including seeking additional
debt and/or equity financing. There can be no assurance that any of these
efforts will be fruitful.
  
  ITEM
2.  MANAGEMENT’S DISCUSSION AND
ANALYSIS




PRELIMINARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS




This
quarterly report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“China Aoxing believes,” “management believes” and similar language. The
forward-looking statements are based on the current expectations of China Aoxing
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under “Management’s Discussion” in this report.
Actual results may differ materially from results anticipated in these
forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update
them.




Outline
of Our Business




China
Aoxing is a pharmaceutical company specializing in research, development,
manufacturing and marketing of a broad range of narcotics and pain management
pharmaceutical products.  We sell over 40 pharmaceutical products
approved by the Chinese State Food and Drug Administration (“SFDA”), based on
demonstrated safety and efficacy.  Our product line is comprised of
prescription and over-the-counter pharmaceutical products, primarily targeting
hospitals, clinics, pharmacies and retail in most of the provinces of China,
including rural areas and major cities.





Most
recently, Hebei Aoxing received three production licenses from the China
SFDA:   (1) Paracetamol/Caffeine Tablets for pain relief, (2)
Isosorbide Mononitrate Injection for angina pectoris, myocardial infarction, of
chronic congestive heart failure, pulmonary hypertension and related coronary
artery disease, and (3) Ligustrazine Phosphate Injection for treatment of
ischemic cerebrovascular disease, or ischemic stroke.




Currently,
Hebei Aoxing is also licensed to carry on the following late stage research and
development:




§
            A
      clinical study of the use of Tilidine Hydrochloride tablets and capsules
      for treatment of moderate to severe pain associated with cancer and
      surgery, involving approximately 400 patients in several health centers in
      China;




§
            A
      clinical study of the use Codeine Phosphate Compound Medicine for
      treatment of cold and flu symptoms, involving approximately 300 patients
      at several health centers in China;




§
            A
      joint project with the National Institute of Drug Dependence at Beijing
      University to develop a sublingual Buprenorphine combo tablet to treat
      opioid dependence; and




§
            An
      application to the SFDA for a license to produce Pholcodine cough syrup,
      based on Hebei Aoxing’s existing designation as manufacturer of the active
      ingredient in Pholcodine.








In
addition, Hebei Aoxing is developing various drug delivery technologies at
advanced stages for a wide variety of prescription and non-prescription
pharmaceutical products.




Results
of Operations




Revenues
for the three months ended March 31, 2009 were $1,587,989, a 85% increase over
the revenues of $857,065 realized during the three months ended March 31,
2008.  Revenues for the nine months ended March 31, 2009 were
$7,501,763, a 142% increase over revenue of $3,101,236  realized
during the nine months ended March 31, 2008.  The increase in revenue
was mainly attributable to the contribution from our newly acquired subsidiary
LRT. Among the revenue contributors were Zhongtongan, Naloxone Hydrochloride
injectable and Shuanghuangliang Capsules.





Our cost
of sales was $1,070,086 for three months and $4,339,126 for the nine months
ended March 31, 2009, which was 136% and 180% greater than the $453,456 and
$1,550,872 in costs incurred during the three and nine month periods ended March
31, 2008.   The increase resulted in a reduction in our gross margin
ratio from 47% in the three months ended March 31, 2008 to 33% in the three
months ended March 31, 2009, reflecting temporarily higher cost and lower output
caused by the relocation and consolidation of the production workshop to Hebei
during the quarter.





Gross
profit increased by $114,294 during the three months ended March 31, 2009, a 28%
increase over three months ended March 31, 2008.  Gross profit
increased by $1,612,273 during the nine months ended March 31, 2009, a 104 %
increase over nine months ended March 31, 2008.  This increase
reflected higher net sales as a result of the contribution of our newly acquired
subsidiary, LRT.





General
and administrative expenses reduced from $1,316,804 in the three months ended
March 31, 2008 to $797,954 during the three months ended March 31, 2009,
reflecting tight cost control measure taken by the company management in recent
period.    Share-based compensation during the three months
ended March 31, 2009 was recorded in the amount of $202,227, including $29,100,
$167,400 and $5727, respectively, for independent directors, management, and
professional services.  The Company recorded share-based compensation
in the amount of $989,981 during the three months ended March 31,
2008.  The company accounted for the share based payments according to
SFAS 123R “Share Based Payment”, whereby it recognized the compensation expense
based upon the undiscounted quoted market price of the stock on the date of
issuance.





General
and administrative expense was slight increased from $2,515,251 during the nine
months ended March 31, 2008 to $2,787,746 during the nine months ended March 31,
2009.  The increase was primarily due to our ongoing business
expansion, including increased office rent, overhead expenses, legal,
accounting, investor relations and other services.





Our loss
from operations was $707,244 and $1,411,428 respectively, during the three
months ended March 31, 2009 and 2008.  Our loss from operations during
the nine months ended March 31, 2009 was $1,747,956, compared to $2,370,963
during the nine months ended March 31, 2008.  The reduction of
operational loss during the recent quarter was primarily due to contributions by
our LRT subsidiary as well as tight cost controls in operation.  It is
an important goal for the Company to reach profitability based on the existing
product lines and marketing strategy, although the Company needs to allocate
critical resources to continue supporting the narcotic drug pipeline in the
foreseeable future. This trend is likely to continue for the foreseeable future,
until our products receive production approval by the China SFDA and gain
reasonable scale in the marketplace.








Our
interest expense was $495,489 and $329,497 respectively, during the three month
ended March 31, 2009 and 2008.   Our interest expense was
$1,400,868 during the nine months ended March 31, 2009, 37% lower than that of
$1,915,473 recorded in the nine months ended March 31,
2008.   The decrease of interest expense during the nine months
ended March 31, 2009 was a result of the conversion of 10% convertible debenture
and reduction of bank debt.





In
February 2009, the company consolidated part of the manufacturing function of
LRT into the Hebei Aoxing facility.  As a result, an impairment loss
was recorded in the amount of $561,913 to reflect the write-down of carrying
value of two manufacturing buildings during the three months ended March 31,
2009.





Our net
loss was $239,209 for the three months ended March 31, 2009, compared to a net
income of $7,449,659 during the three months ended March 31,
2008.  However, the net income for both periods was significantly
attributed to the change in fair value of warrant and derivative liabilities in
the amount of $1,502,314 and $8,981,552, respectively, for the three months
ended March 31, 2009 and 2008.





Our net loss for the nine months ended
March 31, 2008 was $1,586,077, compared to that of $5,311,813 in net income
recorded during the nine months ended March 31, 2008.  However, the net income for both
periods was significantly attributed to the change in fair value of warrant and
derivative liabilities in the amount of $506,028 and $9,121,393, respectively,
for the nine months ended March 31, 2009 and 2008.





Our business operates entirely in
Chinese Renminbi, but we report our results in our SEC filings in U.S.
Dollars.  The conversion of our accounts from RMB to Dollars results
in translation adjustments.  While our net income is added to the
retained earnings on our balance sheet; the translation adjustments are added to
a line item on our balance sheet labeled “other comprehensive income,” since it
is more reflective of changes in the relative values of U.S. and Chinese
currencies than of the success of our business.  During the nine
months ended March 31, 2009, the effect of converting our financial results to
Dollars was a reduction of $222,626 for our other comprehensive income, as
compared to a gain of $414,968 during the nine months ended March 31,
2008.




Liquidity and Capital
Resources




Our
operations during the nine months ended March 31, 2009 consumed $2,261,078 in
cash.  The disparity between net loss from operation in the amount of
$1,747,956 and negative cash from operations in the amount of $2,261,078
partially reflected the impact of the forgiveness of bank debt in the amount of
$1,459,654.





Our cash
used in investing activities amounted to $1,247,403 during the nine months ended
March 31, 2009, reflecting the acquisition of additional property and equipment
related to our LRT business.





Our cash
flows from financing activities amounted to $3,272,197 during the nine months
ended March 31, 2009, mainly reflecting the receipt of cash from AOB in exchange
for  the convertible note signed in May 2008.










At March 31, 2009 we had a working
capital deficit of $13,971,466.  The primary reason for the deficit is
the custom of Chinese banks of conducting long-term lending relationships using
short-term loans.  As a result, the entirety of our debt to the Bank
of China is recorded as a current liability, although we fully expect that our
credit with the Bank will be extended.  In addition, we have an
obligation to pay $4.4 million to American Oriental Bioengineering (“AOB”) in
May 2009.  We expect that debt will be converted to stock in May
2009.  In addition, the management is also in active negotiation with
stockholders and other lenders to restructure borrowings on the balance
sheet.  For these reasons, we believe that we have necessary liquidity
to carry on our operations and implement our business plan.




The
capital injection that we received from AOB and the land sales of LRT
property  in April 2009 greatly improved the liquidity of the Company
as we continue to develop our pharmaceutical products.  Nevertheless,
we will continue to explore various alternatives to improve our financial
position and secure sources of financing.  Among the possibilities being
explored are new credit facilities, a new equity raise, new arrangements to
license intellectual property, and a sale of selected property
rights.  At the present time we have no commitment from any source for
additional funds.




Impact
of Accounting Pronouncements




New
accounting rules and disclosure requirements can significantly impact the
comparability of our financial statements.  We believe the following
new accounting pronouncements are relevant to the readers of our financial
statements.




In
December 2007, the Financial Accounting Standards Board (“FASB”) revised
Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations”. This Statement requires an acquirer to measure the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquirer at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 141(R) is
effective as of the beginning of the Company’s first fiscal year beginning on or
after December 15, 2008. The Company does not expect application of SFAS No. 141
(R) to have a material effect on its financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51”. This Statement
clarifies that a noncontrolling interest in a subsidiary should be reported as
equity in consolidated financial statements. The calculation of earnings per
share will continue to be based on income amounts attributable to the parent.
SFAS No. 160 is effective as of the beginning of the Company’s first fiscal year
that begins on or after December 15, 2008. The Company does not expect
application of SFAS No. 160 to have a material effect on its financial
statements.







In March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133,which requires additional disclosures about the
objectives of the derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and
related hedged items on our financial position, financial performance, and cash
flows. SFAS No. 161 is effective beginning January 1,
2009.













In
June 2008, the FASB issued FASB Staff Position on Emerging Issues Task Force
Issue 03-6, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period
EPS data presented shall be adjusted retrospectively (including interim
financial statements, summaries of earnings, and selected financial data) to
conform with the provisions of FSP EITF 03-6-1. Early application is not
permitted. Management is currently evaluating the impact FSP EITF 03-6-1 will
have on the Company’s EPS calculations.





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.





Risk Factors that May Affect Future
Results





Our business, financial condition,
operating results and prospects are subject to the following risks. Additional
risks and uncertainties not presently foreseeable to us may also impair our
business operations. If any of the following risks is realized, our business,
financial condition or operating results could be materially adversely affected.
In such case, the trading price of our common stock could decline, and our
stockholders may lose all or part of their investment in the shares of our
common stock.  You should carefully consider the risks described below
before buying our common stock.  If any of the risks described below
actually occurs, that event could cause the market value of our common stock to
decline, and you could lose all or part of your investment.




Our
sales revenue remains small and is mainly derived from a few
products.  A disruption in, or a compromise of, our manufacturing or
sales operations, or distribution channels related to any of these products
could materially and adversely affect our financial condition and results of
operations.




We
started to book our product revenues in late 2006, and our sales continue to be
produced by a handful of products approved by the China SFDA.  We
expect that these products will continue to account for a majority of our sales
in the near future. Because of our dependence on a few products, any disruption
in, or compromise of, our manufacturing operations, sales operations or
distribution channels, relating to any of these products could result in our
failure to meet shipping and delivery deadlines or meet quality standards, which
in turn could result in the cancellation of purchase orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect on our financial condition and results of
operations.







We lack sufficient capital to
fully carry out our business plan.




In order
to make our operations cost-efficient, it is necessary that we expand our
operations.  At the present time, however, our capital resources are
sparse. We are exploring various alternatives to improve our financial
position and secure other sources of financing.  Such possibilities include
a new credit facility, new equity raise, new arrangements to license
intellectual property, the sales of selected property
rights.   Especially in light of the current global credit
crisis, the availability of such financing is not assured.  Without
additional financing, our growth will be delayed significantly.




Intense
competition from existing and new companies may adversely affect our revenues
and profitability.




We
compete with other companies, many of whom are developing, or can be expected to
develop, products similar to ours. Some of our competitors are more established
than we are, have greater brand recognition of products that compete with ours,
have more financial, technical, marketing and other resources than we presently
possess and a larger customer base.




These competitors may
be able to respond more quickly to new or changing opportunities and customer
requirements and may be able to undertake more extensive promotional activities,
offer more attractive terms to customers or adopt more aggressive pricing
policies. Our commercial opportunity will be reduced or eliminated if our
competitors develop and commercialize products that are safer, more effective,
have fewer side effects, are less expensive or have more attractive product
characteristics than our current products or products that we may develop in the
future. We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures we face will not
harm our business.




Most of our pipeline products contain narcotic ingredients. As a result of
reports of misuse or abuse of prescription narcotics, the sale of such drugs may
be subject to new regulation, which may prove difficult or expensive to comply
with, and we and other pharmaceutical companies may face lawsuits.




Most of our core
pipeline products contain narcotic ingredients. Misuse or abuse of such drugs
can lead to physical or other harm. For example, in the past two years,
reportedly widespread misuse or abuse of OxyContin®, a product of Purdue Pharma
L.P., or Purdue, containing the narcotic oxycodone, resulted in the
strengthening of warnings on its labeling. In addition, we believe that Purdue,
the manufacturer of OxyContin®, faces or did face numerous lawsuits, including
class action lawsuits, related to OxyContin® misuse or abuse. We may be subject
to litigation similar to the OxyContin® suits related to our generic version of
oxycodone or any other narcotic containing product that we market.




The China SFDA and
Department of Health may impose new regulations concerning the manufacture,
storage, transportation and sale of prescription narcotics. Such regulations may
include new labeling requirements, the development and implementation of formal
risk minimization action plans, restrictions on prescription and sale of these
products.  The Chinese government and its agencies could require
companies to formulate risk evaluation and mitigation strategies to ensure a
drug’s benefits outweigh its risks.  In addition, the government and
its agencies have authority to regulate distribution and may modify their
regulations with respect to prescription narcotics in an attempt to curb abuse.
In either case, any such new regulations or requirements may be difficult and
expensive for us to comply with, may delay our introduction of new products, may
adversely affect our net sales and may have a material adverse effect on our
business, results of operations and financial condition.







We
depend on our key management personnel and the loss of their services could
adversely affect our business.




Our
success depends in part on our continued ability to attract, retain and motivate
highly qualified management. We place substantial reliance upon the efforts and
abilities of our executive officers. The loss of services of any of these
individuals or one or more other members of our senior management could delay or
prevent the successful execution of our business objectives and could have a
material adverse effect on our operations.





Replacing
key employees may be difficult and costly and may take an extended period of
time because of the limited number of individuals in our industry with the
breadth of skills and experience required to develop and commercialize products
successfully. We do not maintain “key person” insurance policies on the lives of
these individuals or the lives of any of our other employees. The Company has
entered into employment agreements with these individuals. We will need to hire
additional personnel as we expand our commercial activities. We may not be able
to attract or retain qualified management on acceptable terms in the future due
to the intense competition for qualified personnel in our industry. If we are
not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will impede these
objectives.




We
cannot assure you that we will be able to complete acquisitions or successfully
integrate new businesses into our own.




We intend
to pursue opportunities to grow our business by acquiring businesses, products
and technologies that are complementary or related to our existing product
lines. Successful completion of an acquisition depends on a number of factors
that are not entirely within our control, including our ability to negotiate
acceptable terms, conclude satisfactory agreements and obtain all necessary
regulatory approvals. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition candidate, we may face competition from other companies
interested in acquiring the target company that have greater financial and other
resources than we have. Acquisitions of businesses, products, technologies or
other material operations may require debt financing or additional equity
financing, resulting in leverage or dilution of ownership.




Even if
we complete one or more strategic transactions, we may be unable to integrate or
coordinate successfully the personnel and operations of a business. Integration
of acquired business operations could disrupt our business by diverting
management away from day-to-day operations. The difficulties of integration may
be increased by the necessity of coordinating geographically dispersed
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. We also may not be able to maintain key
employees or customers of an acquired business or realize cost efficiencies or
synergies or other benefits we anticipated when selecting our acquisition
candidates. In addition, we may incur non-recurring severance expenses,
restructuring charges and change of control payments and may need to record
write-downs from future impairments of intangible assets, which could reduce our
future reported earnings. At times, acquisition candidates may have liabilities
or adverse operating issues that we fail to discover through due diligence prior
to the acquisition.







In
addition to the above, acquisitions in China, including of state owned
businesses, will be required to comply with laws of the PRC, to the extent
applicable. There can be no assurance that any proposed acquisition will be able
to comply with PRC requirements, rules and/or regulations, or that we will
successfully obtain governmental approvals to the extent required, which may be
necessary to consummate such acquisitions.




We
may face difficulties in implementing our growth strategy.




Many
obstacles to entering new markets exist, such as the costs associated with
entering new markets, recruiting and retaining adequate numbers of effective
sales and marketing personnel, developing and implementing effective marketing
efforts abroad, establishing and maintaining the appropriate regulatory
compliance and maintaining attractive foreign exchange ratios. However, there is
no assurance that we will be successful in implementing our strategies or that
our strategies, even if implemented, will lead to the successful achievement of
our objectives. Our business plan and growth strategy is based on currently
prevailing circumstances and the assumption that certain circumstances will or
will not occur, as well as the inherent risks and uncertainties involved in
various stages of development. We cannot, therefore, assure you that we will be
able to successfully overcome such difficulties and continue to grow our
business.




If we fail to manage
our growth and current operations, we may not achieve future growth or our
expected revenues.




In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our manufacturing and marketing operations. To this end, we
expect to continue to substantially increase our employee headcount, which will
place a significant strain on our management and on our operational, accounting,
and information systems. Our need to manage our operations and growth
effectively requires us to continue to expend funds to improve our financial
controls, operating procedures, management information systems, reporting
systems and procedures to manage our increased operations. If we are unable to
implement improvements to our management information and control systems
successfully in an efficient or timely manner, or if we encounter deficiencies
in our existing systems and controls, then management may receive inadequate
information to manage our day-to-day operations. We will also need to
effectively train, motivate and manage our employees. Our failure to manage our
growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.





We
may be unable to secure the government licenses that are necessary for us to
engage in the sale of analgesic pharmaceuticals.




The
manufacture and marketing of narcotic drugs is highly regulated in
China.  Prior to marketing any of our products, we are required to
satisfy several government protocols, and receive several licenses from the
national and local governments.  Obtaining these licenses can be
expensive and it is usually time consuming.  If we are unable to
obtain the necessary licenses when we need to have them, our business plan will
be delayed.  If the delays prevent us from generating positive cash
flow or introducing a significant number of products, our business may
fail.




We
may have difficulty defending our intellectual property rights from infringement
which may undermine our competitive position.









We have been
designing and developing new technology. We rely on a combination of patents,
trade secret laws, and restrictions on disclosure to protect our intellectual
property rights. Unauthorized use of our technology could damage our ability to
compete effectively.  We regard our service marks, trademarks, trade
secrets, patents and similar intellectual property as critical to our success.
We rely on trademark, patent and trade secret law, as well as confidentiality
agreements to protect our proprietary rights. Certain of our products have
received trademark and patent protection in China. No assurance can be given
that such patents and licenses will not be challenged, invalidated, infringed or
circumvented, or that such intellectual property rights will provide a
competitive advantage to us. Our trade secrets may otherwise become known or be
independently discovered by our competitors. Policing the unauthorized use of
proprietary technology can be difficult and expensive. Also, litigation may be
necessary to enforce our intellectual property rights, protect our trade secrets
or determine the validity and scope of the proprietary rights of others. The
outcome of such potential litigation may not be in our favor and any success in
litigation may not be able to adequately protect our rights. Such litigation may
be costly and divert management attention away from our business. An adverse
determination in any such litigation would impair our intellectual property
rights and may harm our business, prospects and reputation. Enforcement of
judgments in China is uncertain and even if we are successful in such litigation
it may not provide us with an effective remedy. In addition, we have no
insurance coverage against litigation costs and would have to bear all costs
arising from such litigation to the extent we are unable to recover them from
other parties. The occurrence of any of the foregoing could have a material
adverse effect on our business, financial condition and results of operations.
In addition, there can be no assurance that we will be able to obtain licenses
from third-parties that we may need to conduct our business or that such
licenses can be obtained at a reasonable cost.





In
addition, third parties may file infringement claims against us asserting that
we are infringing on their patents or trademarks. In the event that such claims
are filed, regardless of the merit of such a claim, we may incur substantial
costs and diversion of management as a result of our involvement in such
proceedings.




We
currently sell our products in China. China will remain our primary market for
the foreseeable future. If we expand into additional countries, our risk of
intellectual property infringement may be heightened. Laws and enforcement
mechanisms in other countries may not protect proprietary rights to the same
extent as China.  The measures we take to protect our proprietary
rights may be inadequate, and we cannot give you any assurance that our
competitors will not independently develop formulations and processes that are
substantially equivalent or superior to our own or copy our
products.




We
are dependent on third parties to supply all raw materials used in our products
and to provide services for certain core aspects of our business. Any
interruption or failure by these suppliers, distributors and collaboration
partners to meet their obligations pursuant to various agreements with us could
have a material adverse effect on our business, results of operations and
financial condition.




We rely
on third parties to supply all raw materials used in our products. In addition,
we rely on third party suppliers, distributors and collaboration partners to
provide services for certain core aspects of our business, including
manufacturing, warehousing, distribution, customer service support, medical
affairs services, clinical studies, sales and other technical and financial
services. All third party suppliers and contractors are subject to the China
SFDA, and government agency requirements. Our business and financial viability
are dependent on the regulatory compliance of these third parties, and on the
strength, validity and terms of our various contracts with these third party
manufacturers, distributors and collaboration partners. Any interruption or
failure by these suppliers, distributors and collaboration partners to meet
their obligations pursuant to various agreements with us could have a material
adverse effect on our business, financial condition and results of
operations.





We are
dependent upon third parties to provide us with various estimates as a basis for
our financial reporting. While we undertake certain procedures to review the
reasonability of this information, we cannot obtain absolute assurance over the
accounting methods and controls over the information provided to us by third
parties. As a result we are at risk of them providing us with erroneous data
which could have a material adverse impact on our business.




The
government limits the availability of the active ingredients used in many of our
current products and products in development and, as a result, our procurement
quota may not be sufficient to meet commercial demand or complete clinical
trials.




The
Chinese government and SFDA regulate the access and supplies of chemical
compounds in some of our current products and products in development, including
oxycodone, codeine, buprenorphine, Tilidine. Consequently, their manufacture,
shipment, storage, sale and use are subject to a high degree of
regulation.





Furthermore,
the government limits the availability of the active ingredients used in many of
our current products and products in development and, as a result, our
procurement quota of these active ingredients may not be sufficient to meet
commercial demand or complete clinical trials. We must annually apply to the
government agencies for procurement quota in order to obtain these substances.
Any delay or refusal by the agencies in establishing our procurement quota for
controlled substances could delay or stop our clinical trials, product launches
or could cause trade inventory disruptions for those products that have already
been launched, which could have a material adverse effect on our business,
financial position and results of operations.




Timing
and results of clinical trials to demonstrate the safety and efficacy of
products as well as the SFDA’s approval of products are uncertain.




Before
obtaining regulatory approvals for the sale of our products, , we must
demonstrate through preclinical studies and clinical trials that the product is
safe and effective for each intended use. Preclinical and clinical studies may
fail to demonstrate the safety and effectiveness of a product. A failure to
demonstrate safety and efficacy would result in our failure to obtain regulatory
approvals.




The rate
of patient enrollment sometimes delays completion of clinical studies. There is
substantial competition to enroll patients in clinical, and such competition has
delayed clinical development of our products in the past. Delays in planned
patient enrollment can result in increased development costs and delays in
regulatory approval. In addition, we rely on collaboration partners that may
control or make changes in trial protocol and design enhancements that may also
delay clinical trials. We cannot assure you that we will not experience delays
or undesired results in these or any other of our clinical trials.




We cannot
assure you that the SFDA or other regulatory agencies will approve any products
developed by us, on a timely basis, if at all, or, if granted, that such
approval will not subject the marketing of our products to certain limits on
indicated use. Any limitation on use imposed by the SFDA or delay in or failure
to obtain SFDA approvals of products developed by us would adversely affect the
marketing of these products and our ability to generate product revenue, as well
as adversely affect the price of our common stock.





Before
obtaining regulatory approvals for certain generic products, we must conduct
limited clinical or other trials to show comparability to the branded products.
A failure to obtain satisfactory results in these trials would prevent us from
obtaining required regulatory approvals.




We
do not have adequate product liability insurance and we could be exposed to
substantial liability.




We face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse side
effects. Adverse side effects, marketing or manufacturing problems pertaining to
any of our products could result in:






•
            
            decreased
      demand for our products;




•
            
            adverse
      publicity resulting in injury to our
reputation;




•
            
            product
      liability claims and significant litigation
  costs;




•
            
            substantial
      monetary awards to or costly settlements with
  consumers;




•
            
            product
      recalls;




•
            
            loss
      of revenues; or




•
            
            the
      inability to commercialize future
products.




These
risks will exist for those products in clinical development and with respect to
those products that have received regulatory approval for commercial sale or any
product we may acquire. To date, we have not experienced any product liability
claims. However, that does not mean that we will not have any such claims with
respect to our products in the future. We do not carry product liability
insurance. The lack of product liability insurance exposes us to risks
associated with potential product liability claims, which can be
significant.




We have significant
goodwill and other intangible assets. Consequently, potential impairment of
goodwill and other intangibles may significantly impact our
profitability.




Goodwill and other
intangibles represent a significant portion of our assets and stockholders’
equity. As of March 31, 2009, goodwill and other intangibles comprised
approximately 37% of our total assets. Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, prescribes a
two-step method for determining goodwill impairment. In the first step, we
determine the fair value of our one reporting unit. If the net book value of our
reporting unit exceeds the fair value, we would then perform the second step of
the impairment test which requires allocation of our reporting unit’s fair value
to all of its assets and liabilities in a manner similar to a purchase price
allocation, with any residual fair value being allocated to goodwill. An
impairment charge will be recognized only when the implied fair value of our
reporting unit’s goodwill is less than its carrying amount. Our other intangible
assets, consisting of licenses and patents, are assessed for impairment, in
accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. The impairment testing involves comparing the carrying amount of
the asset to the forecasted undiscounted future cash flows of the product. In
the event the carrying value of the asset exceeds the undiscounted future cash
flows of the product and the carrying value is not considered recoverable,
impairment exists. An impairment loss is measured as the excess of the asset’s
carrying value over its fair value, calculated using a discounted future cash
flow method. An impairment loss would be recognized in net income in the period
that the impairment occurs.





Events giving rise to
impairment are an inherent risk in the pharmaceutical industry and cannot be
predicted. As a result of the significance of goodwill and other intangible
assets, our results of operations and financial position in a future period
could be negatively impacted should an impairment of goodwill or other
intangible assets occur.







Our
international operations require us to comply with a number of U.S. and
international regulations.




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




We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.




We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, and other rules implemented by the Securities and Exchange
Commission. We expect all of these applicable rules and regulations to increase
our legal and financial compliance costs and to make some activities more
time-consuming and costly. We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors, on
committees of our board of directors or as executive officers.




As a
public company, we are required to comply with rules and regulations of the SEC,
including expanded disclosure, accelerated reporting requirements and more
complex accounting rules.  This will continue to require additional
cost management resources. We will need to continue to implement additional
finance and accounting systems, procedures and controls as we grow to satisfy
these reporting requirements. In addition, we may need to hire additional legal
and accounting staff with appropriate experience and technical knowledge, and we
cannot assure you that if additional staffing is necessary that we will be able
to do so in a timely fashion. If we are unable to complete the required annual
assessment as to the adequacy of our internal reporting or if our independent
registered public accounting firm is unable to provide us with an unqualified
report as to the effectiveness of our internal controls over financial reporting
in the future, we could incur significant costs to become
compliant.





We
continuously evaluate and monitor developments with respect to Section 404
of Sarbanes-Oxley and other applicable rules, however, we cannot predict or
estimate the amount of additional costs we may incur or the timing of such
costs.




There
could be changes in government regulations in China  toward the
pharmaceutical industries that may adversely affect our business.




The
manufacture and sale of pharmaceutical products in China is heavily regulated by
many state, provincial and local authorities. These regulations significantly
increase the difficulty and costs involved in obtaining and maintaining
regulatory approvals for marketing new and existing products. Our future growth
and profitability depend to a large extent on our ability to obtain regulatory
approvals. Additionally, the law could change so as to prohibit the use of
certain pharmaceuticals. If one of our products becomes prohibited, this change
would cease the productivity of that product. The China National Development and
Reform Commission, or CNDRC, has recently implemented price adjustments on many
marketed pharmaceutical products. We have no control over such governmental
policies, which may impact the pricing and profitability of our
products.




The State
Food and Drug Administration of China requires pharmaceutical manufacturers to
obtain Good Manufacturing Practices, or GMP, certifications. We have received
our certifications. However, should we fail to receive or maintain the GMP
certifications in the future, we would no longer be able to manufacture
pharmaceuticals in China, and our businesses would be materially and adversely
affected.   Moreover, the laws and regulations regarding
acquisitions in the pharmaceutical industry in China may change, which could
significantly impact our ability to grow through acquisitions.




Certain
political and economic considerations relating to China could adversely affect
our company.




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




Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.





The
pharmaceutical industry is heavily regulated, which creates uncertainty about
our ability to bring new products to market and imposes substantial compliance
costs on our business.




The China SFDA as
well as Department of Health impose substantial requirements on the development,
manufacture, labeling, sale, distribution, marketing, advertising, promotion and
introduction of therapeutic narcotic pharmaceutical products through lengthy and
detailed laboratory and clinical testing and other costly and time-consuming
procedures. The submission of a drug application alone does not guarantee that
the SFDA will grant approval to market the product.  Satisfaction of
SFDA requirements typically takes a number of years, varies substantially based
upon the type, complexity and novelty of the pharmaceutical product and is
subject to uncertainty. The drug approval process varies in time, could take
several years from the date of application. The timing for the approval process
is difficult to estimate and can vary significantly.




The current SFDA
standards of approving pharmaceutical products are more stringent than those
that were applied in the past. These standards were not applied to many
established products currently on the market, including certain narcotics
products. We cannot assure you that the SFDA or other regulatory agencies will
approve any products developed by us, on a timely basis, if at all, or, if
granted, that approval will not entail limiting the indicated uses for which we
may market the product, which could limit the potential market for any of these
products.




The
recent nature and uncertain application of many PRC laws applicable to us create
an uncertain environment for business operations and they could have a negative
effect on us.




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




Currency
conversion and exchange rate volatility could adversely affect our financial
condition and the value of our common stock.




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








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




Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.




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




Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar. As our operations are primarily in China, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues, financial condition and the value of our common stock. For example, to
the extent that we need to convert U.S. dollars into RMB for our operations,
appreciation of this currency against the U.S. dollar could have a material
adverse effect on our business, financial condition, results of operations and
the value of our common stock. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of declaring dividends on our common stock or
for other business purposes and the U.S. dollar appreciates against the RMB, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.




Future
inflation in China may inhibit our ability to conduct business in
China.




In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as 2.2%. These factors have led to the
adoption by the PRC government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. While inflation has been more moderate since 1995, high
inflation may in the future cause the PRC government to impose controls on
credit or prices, or to take other action, which could inhibit economic activity
in China, and thereby harm the market for our products.





It
may be difficult to effect service of process and enforcement of legal judgments
upon us and our officers and certain of our directors because they reside
outside the United States.





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




Any
future outbreak of avian influenza, or the Asian bird flu, or any other epidemic
in China could have a material adverse effect on our business operations,
financial condition and results of operations.




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




Our
business may be affected by unexpected changes in regulatory requirements in the
jurisdictions in which we operate.




We are
subject to many general regulations governing business entities and their
behavior in China and in other jurisdictions in which we have operations. In
particular, we are subject to laws and regulations covering food, dietary
supplements and pharmaceutical products. Such regulations typically deal with
licensing, approvals and permits. Any change in product licensing may make our
products more or less available on the market. Such changes may have a positive
or negative impact on the sale of our products and may directly impact the
associated costs in compliance and our operational and financial viability. Such
regulatory environment also covers any existing or potential trade barriers in
the form of import tariffs and taxes that may make it difficult for us to import
our products to certain countries and regions, such as Japan, South Korea and
Hong Kong, which would limit our international expansion.




Most
of our assets are located in China, any dividends or proceeds from liquidation
are subject to the approval of the relevant Chinese government
agencies.




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





There
have been recent incidents in which patients have experienced severe adverse
reactions following the use of pharmaceutical products manufactured in
China.




There
have been recent incidents reported in the Chinese media of a significant number
of patients experiencing severe adverse health consequences following their use
of pharmaceutical products manufactured by certain pharmaceutical companies in
China. A number of patients have become ill and a number of fatalities have been
reported. For example, several deaths were caused by drugs sold by the Second
Pharmaceutical Factory of Qiqihaer, a Chinese drug manufacturer, in May 2006.
Concerns over the safety of pharmaceutical products manufactured in China could
have an adverse effect on the sale of such products, including products
manufactured by us. If in the future we become involved in incidents of the type
described above, such problems could severely and adversely impact our product
sales and reputation.





Anti-corruption
measures taken by the government to correct corruptive practices in the
pharmaceutical industry could adversely affect our sales and
reputation.




The
government has recently taken anti-corruption measures to correct corrupt
practices. In the pharmaceutical industry, such practices include, among others,
acceptance of kickbacks, bribery or other illegal gains or benefits by the
hospitals and medical practitioners from pharmaceutical distributors in
connection with the prescription of a certain drug. Substantially all of our
sales to our ultimate customers are conducted through third-party distributors.
We have no control over our third-party distributors, who may engage in corrupt
practices to promote our products. While we maintain strict anti-corruption
policies applicable to our internal sales force and third-party distributors,
these policies may not be effective. If any of our third-party distributors
engage in such practices and the government takes enforcement action, our
products may be seized and our own practices, and involvement in the
distributors’ practices may be investigated. If this occurs, our sales and
reputation may be materially and adversely affected.




Our
common stock price may be extremely volatile, and you may not be able to resell
your shares at or above the price you paid for the stock.




Our
common stock price has experienced large fluctuations. In addition, the trading
prices of stocks for companies in our industry in general have experienced
extreme price fluctuations in recent years. Any negative change in the public’s
perception of the prospects of companies in our industry could depress our stock
price regardless of our results of operations. Other broad market and industry
factors may decrease the trading price of our common stock, regardless of our
performance. Market fluctuations, as well as general political and economic
conditions such as terrorism, military conflict, recession or interest rate or
currency rate fluctuations, may also decrease the trading price of our common
stock. In addition, our stock price could be subject to wide fluctuations in
response to various factors, including:







•
            
            changes
      in laws or regulations applicable to our
  products;




•
            
            period
      to period fluctuations in our operating
results;




•
            
            announcements
      of new technological innovations or new products by us or our
      competitors;





•
            
            changes
      in financial estimates or recommendations by securities
      analysts;




•
            
            conditions
      or trends in our industry;




•
            
            changes
      in the market valuations of other companies in our
    industry;




•
            
            developments
      in domestic and international governmental policy or
      regulations;




•
            
            announcements
      by us or our competitors of significant acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;




•
            
            additions
      or departures of key personnel;




•
            
            disputes
      or other developments relating to proprietary rights, including patents,
      litigation matters and our ability to obtain patent protection for our
      technologies;




•
            
            additional
      sales of our common stock by us;
and




•
            
            sales
      and distributions of our common stock by our
  stockholders.




In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s securities. If a
stockholder files a securities class action suit against us, we would incur
substantial legal fees and our management’s attention and resources would be
diverted from operating our business in order to respond to the
litigation.




We
may have difficulty establishing adequate management and financial controls in
China.




The
People’s Republic of China has only recently begun to adopt the management and
financial reporting concepts and practices with which investors in the United
States are familiar.  We may have difficulty in hiring and retaining
employees in China who have the experience necessary to implement the kind of
management and financial controls that are expected of a United States public
company.  If we cannot establish such controls, we may experience
difficulty in collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that
meet U.S. standards.





We
may never pay any dividends to our stockholders.




We have
not paid any cash dividends on shares of our common stock. We currently intend
to retain all available funds and future earnings, if any, to support our
operations and finance the growth and development of our business. Our board of
directors does not intend to distribute dividends in the foreseeable future. The
declaration, payment and amount of any future dividends, if any, will be made at
the discretion of the board of directors, and will depend upon, among other
things, the results of our operations, cash flows and financial condition,
operating and capital requirements, and other factors the board of directors
considers relevant. There is no assurance that future dividends will be paid,
and if dividends are paid, there is no assurance with respect to the amount of
any such dividend.




Capital
outflow policies in China may hamper our ability to pay dividends to
shareholders in the United States.




The
People’s Republic of China has adopted currency and capital transfer
regulations. These regulations require that we comply with complex regulations
for the movement of capital. Although Chinese governmental policies were
introduced in 1996 to allow the convertibility of RMB into foreign currency for
current account items, conversion of RMB into foreign exchange for capital
items, such as foreign direct investment, loans or securities, requires the
approval of the State Administration of Foreign Exchange. We may be unable to
obtain all of the required conversion approvals for our operations, and Chinese
regulatory authorities may impose greater restrictions on the convertibility of
the RMB in the future. Because most of our future revenues will be in RMB, any
inability to obtain the requisite approvals or any future restrictions on
currency exchanges will limit our ability to fund our business activities
outside China or to pay dividends to our shareholders.




Our
business development would be hindered if we lost the services of our
Chairman.




Juan Yue
Han is the Chief Executive Officer of China Aoxing and of its operating
subsidiary, Hebei Aoxing Pharmaceutical Group.  Mr. Yue is responsible
for strategizing not only our business plan but also the means of financing
it.  If Mr. Yue were to leave Hebei Aoxing or become unable to fulfill
his responsibilities, our business would be imperiled.  At the very
least, there would be a delay in the development of Hebei Aoxing until a
suitable replacement for Mr. Yue could be retained.




China
Aoxing is not likely to hold annual shareholder meetings in the next few
years.




Management
does not expect to hold annual meetings of shareholders in the next few years,
due to the expense involved.  The current members of the Board of
Directors were appointed to that position by the previous
directors.  If other directors are added to the Board in the future,
it is likely that the current directors will appoint them.  As a
result, the shareholders of China Aoxing will have no effective means of
exercising control over the operations of the Company.





ITEM
3 QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.








ITEM
4.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures.  Our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of March 31, 2009.  Pursuant to
Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, “disclosure controls and procedures” means
controls and other procedures that are designed to insure that information
required to be disclosed by China Aoxing in the reports that it files with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time limits specified in the Commission’s
rules.  “Disclosure controls and procedures” include, without
limitation, controls and procedures designed to insure that information China
Aoxing is required to disclose in the reports it files with the Commission is
accumulated and communicated to our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding required
disclosure.  Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that China Aoxing’s system of disclosure
controls and procedures was effective as of March 31, 2009 for the purposes
described in this paragraph.





Changes in Internal
Controls.  There was no change in internal controls over
financial reporting (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act or 1934) identified in connection with the evaluation
described in the preceding paragraph that occurred during China Aoxing’s third
fiscal quarter that has materially affected or is reasonably likely to
materially affect China Aoxing’s internal control over financial
reporting.





PART
II   -   OTHER INFORMATION





Item 1.   Changes in
Securities and
Registrant Purchase of Equity Securities





(c) Unregistered sales of
equity securities





None





(e) Purchases of
equity securities





The
Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Exchange Act during the 3rd   quarter
of fiscal 2009.





Item
2. Exhibits





31.1 Rule
13a-14(a) Certification – CEO


31.2 Rule
13a-14(a) Certification – CFO


32            Rule
13a-14(b) Certification







SIGNATURES





Pursuant
to 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.





CHINA
      AOXING PHARMACEUTICAL COMPANY, INC.





Date:
      May 15, 2009
                    By:
      /s/ Juan Yue HanJuan
      Yue Han, Chief Executive OfficerDate:
      May 15, 2009
                    By:
      /s/ Hongyue HaoHongyue
      Hao, Acting Chief  Financial
Officer




---