U. S. Securities and Exchange Commission Washington, D. C. 20549  FORM 10-QSB  [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended December 31, 2006  [   ] 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.(Name of Small Business Issuer in its Charter)Florida65-0636168(State of Other Jurisdiction of
incorporation or organization)(I.R.S.  Employer
Identification No.)    444 Washington Blvd., Unit 2424, Jersey City, NJ07310(Address of principal executive offices)(Zip Code)  (201) 420-1076(Registrants telephone number including area code)  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.   Yes   [X]     No  [  ]  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: February 16, 2007 Common Stock: 40,163,541 shares  Transitional Small Business Disclosure Format (check one):        Yes   [   ]     No  [X]  1    CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  BALANCE SHEETS (U.S. $) DECEMBER 31, 2006
(Unaudited)JUNE 30, 2006  ASSETSCURRENT ASSETS:Cash$1,384,422$     777Accounts receivable406,320-Inventories68,145-Prepaid expenses214,233156,463TOTAL CURRENT ASSETS2,073,120157,240PROPERTY AND EQUIPMENT, NET OFACCUMULATED DEPRECIATION18,380,35317,822,043DEFERRED INTEREST10,571,601-TOTAL ASSETS$31,025,074$17,979,283LIABILITIES AND STOCKHOLDERS=EQUITYCURRENT LIABILITIES:Short-term borrowings$    256,400$    249,798Accounts payable1,284,721789,957Loans payable  other393,843499,849Due to stockholders and officers790,19529,014Accrued expenses and taxes payable1,269,234995,998Current portion of long-term debt6,889,4682,997,564TOTAL CURRENT LIABILITIES10,883,8615,562,180LONG-TERM DEBT4,230,6007,898,582CONVERTIBLE DEBENTURES1,989,000-STOCKHOLDERS=EQUITY13,921,6134,518,521TOTAL LIABILITIES AND STOCKHOLDERS=EQUITY$31,025,074$17,979,283   See notes to financial statements 2    CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (U.S. $)  THREE MONTHS ENDED
DECEMBER 31,SIX MONTHS ENDEDDECEMBER 31,2006200520062005  REVENUES$345,907$               -$345,907$           -COST OF SALES157,567-157,567-GROSS PROFIT188,340-188,340-COSTS AND EXPENSES (INCOME):Research and development costs115,4542,259125,52120,357General and administrative expenses262,729197,418521,028437,546Grant from local government(63,250)-(63,250)-Interest expense402,322151,562731,353313,823Amortization of deferred interest492,303-492,303-TOTAL COSTS AND EXPENSES1,209,558351,2391,806,955771,726NET LOSS$(1,021,218)$(351,239)$(1,618,615)$(771,726)BASIC AND DILUTED EARNINGSPER SHARE$     (0.03)N/A$       (0.04)N/AWEIGHTED AVERAGE NUMBEROF SHARES OUTSTANDING40,104,883N/A40,073,541N/A  See notes to financial statements 3    CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (U.S. $) SIX MONTHS ENDED
DECEMBER 31,20062005  OPERATING ACTIVITIES:Net loss$(1,618,615)$(771,726)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation178,993179,582Amortization of deferred interest492,303-Changes in operating assets and liabilities:Accounts receivable(406,320)-Inventories(68,145)-Prepaid expenses and sundry current assets(54,021)(19.303)Accounts payable475,835-Other receivables(117,983)84,317Accrued expenses, taxes and sundry current liabilities249,370484,866NET CASH USED IN OPERATING ACTIVITIES(868,583)(42,264)INVESTING ACTIVITIES:Acquisition of property and equipment(310,257)(10,405)NET CASH USED IN INVESTING ACTIVITIES(310,257)(10,405)FINANCING ACTIVITIES:Repayment of bank borrowings(64,100)-Loans from stockholders760,486(110)Sale of convertible debentures1,713,920-Sale of common stock127,000-NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES2,537,306(110)EFFECT OF EXCHANGE RATE ON CASH25,17931,719INCREASE (DECREASE) IN CASH1,383,645(21,060)CASH  BEGINNING OF PERIOD77736,993CASH  END OF PERIOD$1,384,422$     15,933  See notes to financial statements 4  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)   1 REVERSE MERGER China Aoxing Pharmaceutical Company, Inc. (the Company) was incorporated in the State of Florida on January 23, 1996 as Central American Equities Corp. (CAE).  Until recently, the Company owned and operated hotels and restaurants and real property in Costa Rica.  On July 31, 2006, the Companys hotel assets were sold to the individuals who were the Companys Board of Directors until April 18, 2006. On April 18, 2006, Ostar Pharmaceutical, Inc. (Ostar), a Delaware Corporation, was merged into a wholly-owned subsidiary of CAE.  As a result of the merger, the former stockholders of Ostar became owners of a majority of the voting power of the Company.  On July 6, 2006, the Company changed its name to China Aoxing Pharmaceutical Company, Inc. Ostar owns 60% of Hebei Aoxing Pharmaceutical Group (Hebei) which manufactures and distributes analgesic drugs in the Peoples Republic of China (PRC).  The remaining 40% is owned by the Chairman of the Company. In connection with the merger, CAE issued 9,866,153 shares of common stock and 297,018 shares of a new Series C Preferred Stock.  The preferred stock was subsequently converted into 29,598,500 shares of common stock. The above merger and sale of the hotels have been accounted for as a reverse merger, since the former shareholders of Hebei effectively control the Company and the only operations of the Company are solely those of Hebei. In September 2006, the Company entered into an agreement pursuant to which the Company intends to acquire an additional 35% in Hebei from the Chairman for $3,080,000.  The acquisition will take place when the Company has raised $5,000,000 from the sale of equity.  If that has not occurred prior to September 14, 2007, the acquisition agreement will terminate.  2 SALE OF SECURITIES On September 28, 2006, the Company completed the sale of 869,500 units of securities at $2.00 per unit.  Each unit consisted of one share of common stock and four common stock purchase warrants exercisable at prices ranging from $2.50 to $5.50.  The warrants are exercisable for five years and may be redeemed by the Company if the market price of its common stock exceeds 200% of the exercise price of the warrants.  In October 2006, the Company exchanged all of the shares of common stock purchased in this offering for a 10% convertible debenture in the amount of his/her investment, plus the four warrants purchased in the offering.  The warrants were valued at $11,063,904 using the Black Scholes method by recording deferred interest and a credit to stockholders equity. On November 30, 2006, the Company sold 188,500 units of securities.  Each unit consists of a share of common stock or 10% convertible debenture and four common stock purchase warrants, exercisable at prices ranging from $2.50 to $5.50.  The warrants are exercisable for five years and may be redeemed by the Company if the market price of its common stock exceeds 200% of the exercise price of the warrants (see Notes 9 and 10 for detailed information). The Company received gross proceeds of $2,116,000 less placement fees of approximately $275,080, resulting in net proceeds of $1,840,920.  5  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)    3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Uses 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.  Cash  The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of their acquisition date.  Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value.  The Company maintains cash and cash equivalents with financial institutions in the PRC.  The Company performs periodic evaluation of the relative credit standing of financial institutions that are considered in the Company=s investment strategy.  Deferred interest  Deferred interest represents the estimated fair value of the warrants issued in connection with the sale of securities referred to in Note 2 and is being amortized over the life of the convertible debentures referred to in Note 9.  New accounting pronouncements  In December 2004, the FASB issued SFAS No, 123-R, Share-Based Payment to replace SFAS No. 123, Accounting for Stock-Based Compensation and APB Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123-R requires, among other things, that all share-based payments to employees, including grants of stock options, be measured at the grant-date fair value and recognized as expense in the financial statements.  Unless observable market prices exist, the grant-date fair value is estimated using an appropriate option-pricing model as determined by management.  Management believes the adoption of SFAS 123-R will have a material impact on the Companys consolidated results of operations and earnings per share. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB107).  SAB 107 provides the SECs view on the interaction between SFAS 123-R and certain SEC rules and regulations.  Specifically, SAB 107 provides guidance on share-based payment transactions with non-employees, valuation methods, accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, capitalization of compensation costs relate to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123-  6  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)   R, the modification of employee share options prior to adoption of SFAS 123-R and disclosures in Managements Discussion and Analysis subsequent to adoption of SFAS 123-R.  In the opinion of management, the adoption of SAB 107 will not have a material impact on the Companys implementation of SFAS 123-R.  In May 2005, the FASB issued SFAS No, 154, Accounting Changes and Error Corrections which replaces Accounting Principles Board Opinion (APB) No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements  an Amendment of APB Opinion No. 28 and changes the requirements for the accounting for, and reporting of, a change in accounting principle.  SFAS 154 requires retrospective application to prior period financial statements (to the extent practicable) of changes in accounting principle instead of recognition of the cumulative effect of the change in net income in the period of the change as required by APB No 20.  SFAS 154 also requires that a change in depreciation or amortization be accounted for as a change in accounting estimate affected by a change in accounting principle.  In the opinion of management, adoption of SFAS 154 will not have a material effect on the Companys consolidated results of operations and financial position.   Property and equipment Property and equipment are recorded at cost.  Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method for financial reporting purposes, whereas accelerated methods are used for tax purposes. The Company leases a parcel of land, on which the office and production facilities of the Company are situated, pursuant to a real estate contract from the local government of the PRC government expiring in 2053. Maintenance, repairs and minor renewals are charged to expense when incurred.  Replacements and major renewals are capitalized.  Impairment of long-lived assets The Company accounts for the impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable.  For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value.  If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.   7  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)   Research and development costs Research and development costs are charged to expenses as incurred.  Deferred income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (ASFAS 109") which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, SFAS 109 requires recognition of future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.  Currency translation Since the Company operates solely in the PRC, the Company=s functional currency is the Chinese Yuan (ARMB@).    Assets and liabilities are translated into U.S. Dollars at the June 30th exchange rates and records the related translation adjustments as a component of other comprehensive income (loss).  Revenue and expenses are translated using average exchange rates prevailing during the period.  Foreign currency transaction gains and losses are included in current operations.  4 PROPERTY AND EQUIPMENT A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization is as follows: Amount Life Right to use land$ 6,922,800Life of leaseBuilding and building improvements9,858,91039 yearsMachinery and equipment1,788,8155-8 yearsFurniture and fixtures316,8515-8 yearsAutomobiles294,0353-5 years19,181,411Accumulated depreciation801,058$18,380,353  5 DUE TO STOCKHOLDERS AND OFFICERS  The amounts due stockholders are non-interest bearing and are due on demand.  8  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)    6 SHORT-TERM BORROWINGS  Short-term borrowings consist of non-interest bearing note payable to a local government and are due three months after the Company is listed on NASDAQ.  7 LOANS PAYABLE - OTHER  Loans payable  other consists of various loans to unrelated third parties which are due on demand and bear interest as follows:  Non-interest bearing$359,189Weighted average interest rate of 10.5%34,654$393,863  8           LONG-TERM DEBT  Long-term debt consists of the following:  Notes payable to a bank bearing interest at 5.58% per annum due as follows: $3,012,700 in 2007, $3,717,800 in 2008 and $4,230,600 in 2009.$10,961,100Note payable to credit union bearing interest at 6.635% and due December 31, 2007158,96811,120,068Less current portion6,889,468$ 4,230,600The notes payable bank are collateralized by a first security interest in substantially all assets of the Company and $5,063,900 is guaranteed by a vendor of the Company.  The note payable to the credit union is personally guaranteed by the majority stockholder of the Company.The Company is in default of the bank loan in the amount of $3,012,700 which is due December 31, 2006.  The Company is in active discussions with the Bank of China regarding the bank loan refinancing and expects to reach an agreement on the refinance terms by the end of the first quarter of 2007.
  9 CONVERTIBLE DEBENTURES  The convertible debentures (debentures), bearing interest at 10% per annum, are payable semi-annually and are due on January 9, 2009.  Interest will accrue on the principal amount at 10% per  9  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)   annum and interest will be payable on January 1st and July 1st each year.  The unpaid principal and accrued interest on the debenture will automatically convert into common stock of the Company on September 30, 2008, if, on that date, there is an effective registration statement on file with the Securities and Exchange Commission that will permit an investor to re-sell the common stock to the public.  10 WARRANTS  The following table summarizes the information relating to the warrants issued in connection with the sale of securities referred to in Note 2:  Exercise PriceNumber
OutstandingWeighted Average
Remaining
Contractual Life (Years)   $2.501,058,0005.133.501,058,0005.134.501,058,0005.135.501,058,0005.132.00493,7335.134,725,733   11 GRANT FROM LOCAL GOVERNMENT  The Company has received a grant from the local government during the period ended December 31, 2006 totaling $63,250.  The grant was designated for research and development of Tilidine products.   12 EARNINGS PER SHARE  Outstanding shares prior to March 15, 2006, the date of the merger, are undeterminable.  The total shares issued are therefore used as the average shares outstanding.   13 RISK FACTORS  Vulnerability due to Operations in PRC  The Company=s operations may be adversely affected by significant political, economic and social uncertainties in the PRC.  Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC=s political, economic and social conditions.  There is also no guarantee that the PRC government=s pursuit of  10  CHINA AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited)   economic reforms will be consistent or effective.  Substantially all of the Company=s businesses are transacted in RMB, which is not freely convertible.  The People=s Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the 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.  Concentration of Credit Risk  Financial instruments that potentially subject the Company to significant concentration of credit risk are primarily cash and cash equivalents.  As of September 30, 2006, substantially all of the Company=s cash and cash equivalents were managed by financial institutions.  Other Risks  Although the process of approval by the government of the PRC to manufacture pharmaceuticals is in its final stages, there is no assurance that such approval will be obtained.  Failure to obtain such approvals could have a material adverse effect on the Companys planned operations.    14 REVERSE STOCK SPLIT  All statements regarding the Companys common stock have been adjusted to give retroactive effect to the July 6, 2006 one-for-four reverse split.   11    ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS Results of Operations China Aoxing has one operating subsidiary, Hebei Aoxing Pharmaceutical Group.  Since 2002 Hebei Aoxing has been engaged in developing its analgesic products, building its facilities, and obtaining the requisite licenses from the Chinese government. In June 2006 Hebei Aoxing obtained approval from the State Food and Drug Administration of the Peoples Republic of China (SFDA) for it to commence sales of its Naloxone products.  In November 2006, Hebei Aoxing received GMP (Good Manufacturing Practices) certification for its Naloxone raw materials workshop from the SFDA.  Hebei Aoxing started the production of the Naloxone raw materials in December 2006.  In January, 2007 the SFDA granted Hebei Aoxing the final GMP certificate (H4107) for small volume injectables, which was a significant milestone in our history.  This certificate and previous certification approvals paved the way for the product launch of Naloxone Hydrochloride into the Chinese market, which is scheduled to occur later in February 2007.  Currently Hebei Aoxing is authorize by the SFDA to manufacture Naloxone Hydrochloride in four dosage strengths:  0.4mg (1ml), 1mg (1ml), 2mg (2ml) and 4mg (10ml). In the fall of 2006 China Aoxing closed a private placement of securities that yielded it net proceeds in excess of $1.8 million.  With those funds, Hebei Aoxing commenced manufacturing of the first product that it took to market:  a traditional Chinese treatment for cough and cold named Shuanghuanglian.  Having recently received government approval of its analgesic manufacturing facilities, Hebei Aoxing is also using the proceeds of the offering to commence production and marketing of its Naloxone products.  It plans to subsequently introduce its Oxycodone products after the marketing of its Naloxone products has stabilized.  Assuming that Hebei Aoxing obtains the funds necessary to develop the production facilities for its Tilidine products ($15.3 million), the Company plans to introduce that product line by the end of 2008. The Company reported product revenues of $345,907 from the sales of Shuanghuanglian during the six months ended December 31, 2006.  As Shuanghuanglian is an herbal medicine that is most popular during the winter season, we anticipate seasonal fluctuation of the demand for Shuanghuanglian in the coming quarters. The Companys largest expense during the six months ended December 31, 2006 was interest.  At December 31, 2006 we had over $14.5 million in debt, long and short-term, that we incurred to build our facilities and develop our product line.  The interest that accrued on our debt during the six months ended December 31, 2006 totaled $731,353.  Until Hebei Aoxing generates revenues from operations or secures capital infusions from investors, we will depend on loans to fund our ongoing development costs, and our interest expense will be high. A second category of interest expense  amortization of deferred interest  arose from the financing that we completed in the fall of 2006.  In that financing we sold convertible debentures in the principal amount of $1,989,000, 63,500 shares of common stock, and warrants to purchase 4,232,000 shares of common stock. We also issued warrants to the placement agent that facilitated the financing.  Because the exercise price of the warrants was less than the market price of our common stock when we completed the financing, the fair value of the warrants (based on the Black-  12    Scholes formula) is considered to have been $11,063,904, which we are accounting for as an expense attributable to the debentures.  Therefore we recorded that sum as Deferred Interest on our balance sheets, and will amortize the deferred interest over the life of the debentures, the principal amount of which is payable on January 9, 2009.  To the extent that the debentures are converted into common stock before they mature, the amortization of the deferred interest will be accelerated.  Our earnings, therefore, will be burdened by the amortization of deferred interest for the next two years  or less if the debentures are converted into common stock. The Companys second largest expense for the six months ended December 31, 2006 was the general and administrative expense in the amount of $521,028.  The increase from the $437,546 in general and administration expense incurred in the six months ended December 31, 2006 was primarily attributable to the fact that Hebei Aoxing is now introducing its products to the market, and has ramped up its staffing for that purpose.  In addition, we are now incurring legal, accounting and bookkeeping fees in connection with our new reporting obligations as a public company.  On top of this, China Aoxing is now incurring expenses incidental to its status as a U.S. public company, such as the cost of maintaining a physical presence in the U.S. and expenses related to investor relations. Now that we are introducing Naloxone Hydrocloride to the market, we will be adding to our expense burden significant marketing and production expenses.  The level of these expenses will be determined by the amount of our available cash, since it is our plan to devote all available resources to the task of marketing, producing, and selling our products, including the analgesics and the other products that are awaiting approval. Our net loss for the six months ended December 31, 2006 totaled $1,618,615.  This represents the consolidation of the results realized by our subsidiary, Hebei Aoxing, with the administrative expenses incurred by China Aoxing.  At the present time, however, China Aoxing owns only 60% of the equity in Hebei Aoxing.  Accordingly, only 60% of the retained loss from the operations of Hebei Aoxing affects the equity of our shareholders on a liquidation basis.  Likewise, if in the future Hebei Aoxing produces net income, the effect of that income on the value of our shareholders shares will be reduced by 40%.  It is for that reason that we have entered into an agreement with our Chairman, Zhenjiang Yue, to acquire an additional 35% interest in Hebei Aoxing, and are undertaking to raise the funds necessary to complete that acquisition. Liquidity and Capital Resources Since inception, the Companys operations have been funded primarily by loans, including loans from stockholders and officers, short term borrowings from a local government, two loans from the Bank of China, a loan from a credit union, and other loans.  The balance of our borrowings as of December 31, 2006 (including the current portion of the long-term debt) totaled $14,549,506.  The Company is currently in active negotiation with Bank of China to refinance its bank loan in the amount of $3,012,700, which was due on December 31, 2006.  The Company expects to reach an agreement on refinance terms by the end of the current quarter. Despite the infusion of capital at the end of September 2006, Hebei Aoxing still has a substantial working capital deficit.  The balance sheet of China Aoxing and its subsidiaries at December 31, 2006, showed a working capital deficit of $8,810,741.  The greater portion of the  13    deficit was represented by $6,889,368 due to the Bank of China. That liability is the current portion of two loans totaling $10,961,100 that call for annual payments over the next three years.  The loans bear interest at 5.58% per annum, and are collateralized by a first security interest in substantially all of Hebei Aoxings assets. Hebei Aoxing expects to be able to service its debt to the Bank of China and its other debt obligations from refinancing and with cash flow from operations, assuming that it is successful in initiating production and sales during the next few months.  This will free our cash reserves to be used to fund our growth.  Our ability to achieve financial stability, however, will depend on the success of our marketing efforts, which cannot be predicted at this time. Therefore, we continue to actively seek investment capital, and expect to issue more equity securities for this purpose in the coming months.  From the proceeds of those offerings, we have committed to pay $1,280,000 to our Chairman, Zhenjiang Yue, which will be coupled with a long-term promissory note for $1,800,000 to purchase an additional 35% interest in Hebei Aoxing (which will bring our total interest in that subsidiary to 95%).  Any other funds obtained from future financing will be added to our working capital to fund the roll-out of our product lines. 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  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 trading price of our common stock to decline, and you could lose all or part of your investment.  I. Risks Attendant to our Business  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.  At December 31, 2006 we had $1,384,422 in cash and no other liquid assets.  On the same date we had $10,883,861 in current liabilities.  Our cash resources will permit us to initiate production and marketing.  However, we will need an additional infusion of capital to fund the build-out of our manufacturing facility and an accumulation of inventory in order to achieve optimal size.  It is not clear whether sufficient capital will become available to us to permit us to expand to an efficient operating point.  Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.  Our future success depends on our ability to attract and retain highly skilled chemists, pharmaceutical engineers, technical, marketing and customer service personnel, especially qualified personnel for our operations in China. Qualified individuals are in high demand in China, and there  14    are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.  We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.  We are continuously 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.  In China, monitoring unauthorized use of our products is difficult and costly.  In addition, intellectual property law in China is less developed than in the United States and historically China has not protected intellectual property to the same extent as it is protected in other jurisdictions, such as the United States. Any resort to litigation to enforce our intellectual property rights could result in substantial costs and diversion of our resources, and might be unsuccessful.  We may be subject to the Peoples Republic of Chinas price control of drugs which may limit our profitability and even cause us to stop manufacturing certain products  The State Development and Reform Commission ("SDRC") of the Peoples Republic of China and the price administration bureaus of the relevant provinces of China in which our pharmaceutical products are manufactured are responsible for the retail price control over our pharmaceutical products.  The SDRC sets the price ceilings for certain pharmaceutical products in China.  Where our products are subject to a price ceiling, we will need to adjust the product price to meet the requirement and to accommodate for the pricing of competitors in the competition for market shares.  The price ceilings set by the SDRC may limit our profitability, and in some instances, such as where the price ceiling is below production costs, may cause us to stop manufacturing certain products.  Product liability claims could materially impact operating results and profitability.  We may produce products which inadvertently have an adverse pharmaceutical effect on the health of individuals.  Existing laws and regulations in China do not require us to maintain third party liability insurance to cover product liability claims.  However, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue, and our inability to commercialize some products.  We have limited business insurance coverage.  The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.  15     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.  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.  Currency fluctuations may adversely affect our business.  We generate revenues and incur expenses and liabilities in Chinese RMB. However we report our financial results in the United States in U.S. Dollars.  As a result, we are subject to the effects of exchange rate fluctuations between these currencies.  Recently, there have been suggestions made to the Chinese government that it should adjust the exchange rate and end the linkage that in recent years has held the RMB-U.S. dollar exchange rate constant. If the RMB exchange rate is adjusted or is allowed to float freely against the U.S. dollar, our revenues, which are denominated in RMB, may fluctuate significantly in U.S. dollar terms. We have not entered into agreements or purchased instruments to hedge our exchange rate risks.  Our business development would be hindered if we lost the services of our Chairman.  Zhenjiang Yue 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.  16     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.  The stockholders ability to bring an action against the Company or against our directors, or to enforce a judgment against the Company or the directors, will be limited because we conduct all of our operations in China and because most of our management resides outside of the United States.  We conduct all of our operations in China through our wholly-owned subsidiary. All but one of our management personnel reside in China and all of the assets of those Chinese residents are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the United States and of China may render you unable to enforce a judgment against our assets or the assets of our directors.  II.  Risks attendant to the market for our common stock. The illiquidity of the market for China Aoxing common stock may prevent a shareholder from obtaining a fair price for his shares.  China Aoxing at the present time has fewer than 500 shareholders and only a small number of market makers.  As a result, our stock trades only occasionally and the market price for our common stock is volatile, at times moving over 50% in one day.  Unless and until the market for our common stock grows and stabilizes, the common shares you purchase will remain illiquid.  A shareholder in China Aoxing who wants to sell his shares, therefore, runs the risk that at the time he wants to sell, he will be unable to find a buyer or the market price may be much less than the price he would consider to be fair.  China Aoxing Pharmaceutical Company will be quoted on the OTC Bulletin Board for the immediate future.  China Aoxing does not meet the eligibility requirements for listing on the NASDAQ Stock Market.  Until we meet those standards and are accepted into the NASDAQ Stock Market, or unless we are successful in securing a listing on the American Stock Exchange or some other exchange, China Aoxing common stock will be quoted only on the OTC Bulletin Board.  Such a listing is considered less prestigious than a NASDAQ Stock Market or an exchange listing, and many brokerage firms will not recommend Bulletin Board stocks to their clients.  This situation may limit the liquidity of your shares.  17    ITEM 3.  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 December 31, 2006.  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 December 31, 2006 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 second 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 2.  Changes in Securities and Small Business Issuer Purchase of Equity Securities  (c) Unregistered sales of equity securities  On September 28, 2006 China Aoxing completed the sale of 869,500 Units of securities to a total of 27 investors.  Each Unit included one share of common stock and four common stock purchase warrants.  In October 2006 China Aoxing completed the exchange with 24 of those investors of 10% Convertible Debentures for common stock.  The sale of the Debentures was exempt from the registration requirements of the Securities Act pursuant to Section 4(6) of the Act, because each of the investors was an Accredited Investor and there was no advertising or public solicitation performed in connection with the offering.  The sale of the Debentures was also exempt from registration pursuant to Rule 506 of the Securities and Exchange Commission, since the sales satisfied all of the conditions specified in SEC Rules 501 and 502 and each of the investors had such knowledge and experience in financial and business matters that the investor was capable of evaluating the merits and risks of the investment.  On November 13, 2006 China Aoxing completed the sale of 188,500 Units of securities to a total of 7 investors.  Each Unit included one 10% Convertible Debenture and four common stock purchase warrants.  The sale of the Units was exempt from the registration requirements of the Securities Act pursuant to Section 4(6) of the Act, because each of the investors was an Accredited  18    Investor and there was no advertising or public solicitation performed in connection with the offering.  The sale of the Units was also exempt from registration pursuant to Rule 506 of the Securities and Exchange Commission, since the sales satisfied all of the conditions specified in SEC Rules 501 and 502 and each of the investors had such knowledge and experience in financial and business matters that the investor was capable of evaluating the merits and risks of the investment.  (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 2nd quarter of fiscal 2007.  Item 3 Defaults upon Senior Securities  Hebei Aoxing Pharmaceutical Group, Inc., the operating subsidiary of China Aoxing, is in default in its obligation to satisfy a debt of $3,012,700 that was due to the Bank of China on December 31, 2006.  Hebei Aoxing is in active discussions with the Bank of China regarding the loan, and expects to reach agreement on refinancing terms before the end of the current quarter.  Item 5 Other Information   Modification of Stock Purchase Agreement In September 2006 China Aoxing entered into an agreement with its Chairman, Yue Zhenjiang, which contemplates that China Aoxing will purchase an additional 35% interest in Hebei Aoxing from Mr. Yue for a price of $3,080,000.  In January 2007 China Aoxing and Mr. Yue agreed to modify the terms of the agreement.  As modified, the agreement provides that the purchase price for the 35% interest will be $3,080,000, consisting of $1,280,000 in cash and a long-term promissory note for $1,800,000.  The note will bear interest at 5.6% per annum.  Principal and interest on the note will be payable only from positive cash flow from operations and will not be payable within the first year after the note is issued.  Principal and interest will be payable in cash or equity at the option of China Aoxing.  China Aoxings obligations under the note will be subordinated to other debt.  The acquisition will take place when China Aoxing has raised $5,000,000 from the sale of equity.  If that has not occurred prior to September 14, 2007, the acquisition agreement will terminate.  Consulting Agreement In February 2007, Hebei Aoxing entered into a two-year financial and strategic business consulting agreement with Warner Technology and Investment Group (WTI), which is to be effective on April 1, 2007.  The new two-year agreement provides that WTI will (1) assist the Companys development in the US capital market. (2) assist the Company in developing international drugs for the China market, and (3) advise the Company regarding the introduction of its products into the international market.  The relationship and appropriate compensation for WTIs services will be reviewed by the two parties regularly, and WTI will be compensated on a quarterly basis either by cash or by China Aoxings equity.  If the decision is made to compensate WTI with  19    equity, the shares will be valued at 85% of average trading price over the twenty trading days preceding issuance.  Item 6. Exhibits  31 Rule 13a-14(a) Certification 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: February 20, 2007 By: /s/ Zhenjiang Yue  Zhenjiang Yue, Chief Executive Officer and Chief Financial Officer   20