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 September 30, 2007
 
 [
                   ]
              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)
 
 Florida
              65-0636168(State
                  or Other Jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer I.D. No.)
 
 444
        Washington Blvd., Unit 2424, Jersey City, NJ 07310
 (Address
        of Principal Executive Offices)
 
 Issuer's
        Telephone Number: (201) 420-1075
 
 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 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:
 November
        14, 2007
 Common
        Stock: 40,595,507 shares
 
 Transitional
        Small Business Disclosure Format (check
        one):                 Yes 
          NoX
  
  **CHINA
        AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES**
 
 BALANCE
        SHEET
 
 SEPTEMBER
        30, 2007
  **ASSETS****CURRENT
                  ASSETS:**Cash
              
              $
              1,030,721Accounts
                  receivable
              
              
              155,966Inventories
              
              
              321,732Prepaid
                  expenses and sundry current assets
              
              
              200,973**TOTAL
                  CURRENT ASSETS**
              
              ****
              **1,709,392****PROPERTY
                  AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION**
              
              ****
              **19,324,273****DEFERRED
                  INTEREST**
              
              ****
              **9,011,856****TOTAL
                  ASSETS**
              
              **$**
              **30,045,521****CURRENT
                  LIABILITIES:**Short-term
                  borrowings
              
              $
              266,042Accounts
                  payable
              
              
              638,781Loan
                  payable – other
              
              
              573,550Due
                  to stockholders
              
              
              685,798Accrued
                  expenses and taxes payable
              
              
              2,286,924Current
                  portion of long-term debt
              
              
              6,983,473**TOTAL
                  CURRENT LIABILITIES**
              
              ****
              **11,434,568****LONG-TERM
                  DEBT**
              
              ****
              **4,389,699****CONVERTIBLE
                  DEBENTURES**
              
              ****
              **2,347,000****STOCKHOLDERS’
                  EQUITY:**Common
                  stock, $0.001 par value, 100,000,000 shares authorized 41,595,507
                  shares
                  issued and outstanding
              
              
              40,595Preferred
                  stock, $0.001 par value,300,000 shares authorized 277,018 shares
                  issued
                  and outstanding
              
              
              277Additional
                  paid-in capital
              
              
              19,470,686Deferred
                  stock compensation
              
              
              (255,277
              )Accumulated
                  deficit
              
              
              (7,807,723
              )Other
                  comprehensive income
              
              
              425,696**TOTAL
                  STOCKHOLDERS’ EQUITY**
              
              ****
              **11,874,254****TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY**
              
              **$**
              **30,045,521**
 
 
 See
        notes
        to financial statements
  
  **CHINA
        AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES**
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 THREE
                  MONTHS ENDEDSEPTEMBER
                  30,2007
              
              
              2006**SALES**
              
              **$**
              **1,380,294**
              
              
              **$**
              **-****COST
                  OF SALES**
              
              ****
              **625,653**
              
              
              ****
              **-****GROSS
                  PROFIT**
              
              ****
              **754,641**
              
              
              ****
              **-****COSTS
                  AND EXPENSES:**Research
                  and development
              
              
              57,262
              
              
              
              10,067General
                  and administrative
              
              
              815,103
              
              
              
              201,386Interest
                  expense
              
              
              259,303
              
              
              
              329,031Depreciation
                  and amortization
              
              
              118,812
              
              
              
              -Amortization
                  of deferred interest
              
              
              519,915
              
              
              
              56,913**TOTAL
                  COSTS AND EXPENSES**
              
              ****
              **1,770,395**
              
              
              ****
              **597,397****NET
                  LOSS**
              
              **$**
              **(1,015,754**
              **)**
              
              **$**
              **(597,397**
              **)**Basic
                  and diluted earnings per common share
              
              $
              (0.03
              )
              
              $
              (0.01
              )Weighted
                  average number of shares outstanding
              
              
              40,453,009
              
              
              
              40,050,000
 
 
 See
        notes
        to financial statements
  
  **CHINA
        AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES**
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 THREE
                  MONTHS ENDED
                SEPTEMBER
                  30,2007
              
              
              2006**OPERATING
                  ACTIVITIES:**
              
              $
              (1,015,754
              )
              
              $
              (597,397
              )Net
                  loss*Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:*Depreciation
              
              
              177,072
              
              
              
              70,502Amortization
                  of deferred interest
              
              
              519,915
              
              
              
              -Stock
                  issued for services
              
              
              179,932*Changes
                  in operating assets and liabilities:*Accounts
                  receivable
              
              
              (41,757
              )
              
              
              -Inventories
              
              
              (98,856
              )
              
              
              -Prepaid
                  expenses and sundry current assets
              
              
              (81,737
              )
              
              
              (128,834
              )Accounts
                  payable
              
              
              (270,300
              )
              
              
              (6,179
              )Accrued
                  expenses, taxes and sundry current liabilities
              
              
              331,933
              
              
              
              567,521**NET
                  CASH USED IN OPERATING ACTIVITIES**
              
              ****
              **(299,552**
              **)**
              
              ****
              **(94,387**
              **)****INVESTING
                  ACTIVITIES:**Acquisition
                  of property and equipment, net
              
              
              (9,915
              )
              
              
              (194,289
              )**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              ****
              **(9,915**
              **)**
              
              ****
              **(194,289**
              **)****FINANCING
                  ACTIVITIES:**Proceeds
                  from other borrowings
              
              
              67,284
              
              
              
              -Repayment
                  of loans from stockholders
              
              
              (463,378
              )
              
              
              (29,409
              )Sale
                  of convertible debentures
              
              
              160,000
              
              
              
              -Sale
                  of common stock
              
              
              -
              
              
              
              1,513,200**NET
                  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES**
              
              ****
              **(236,094**
              **)**
              
              ****
              **1,483,791****EFFECT
                  OF EXCHANGE RATE ON CASH**
              
              ****
              **65,155**
              
              
              ****
              **301,240****INCREASE
                  (DECREASE) IN CASH**
              
              ****
              **(480.406**
              **)**
              
              ****
              **1,496,355****CASH
                  – BEGINNING OF YEAR**
              
              ****
              **1,511,127**
              
              
              ****
              **777****CASH
                  – END OF YEAR**
              
              **$**
              **1,030,721**
              
              
              **$**
              **1,497,132****Supplemental
                  disclosures of cash flow information:***Non-cash
                  financing activities:*Common
                  stock issued as payment for accrued interest
              
              $
              25,829Conversion
                  of convertible debenture to common stock
              
              $
              360,000
 
 See
        notes
        to financial statements
  
  **CHINA
        AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES**
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 SEPTEMBER
        30, 2007
 
   **1**
              **BUSINESS
                  DESCRIPTION AND REVERSE
                  MERGER**
  ***Business
        description***
  China
        Aoxing Pharmaceutical Co., Inc. (“the Company”) is a vertically integrated
        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’s operating
        subsidiary, Hebei Aoxing Pharmaceutical Co., Inc. (“Hebei”) is a corporation
        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.
  ***Reverse
        Merger***
  The
        Company was incorporated in the State of Florida on January 23, 1996 as Central
        American Equities Corp. (“CAE”) which 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 which manufactures and distributes analgesic drugs in the
        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.
  On
        September 4, 2007 The Company and the Chairman agreed that the “Purchase Price”
paid pursuant to the Stock Purchase Agreement will be a junior subordinated
        note
        bearing interest at an interest rate of 5.0% annually.  The principal
        and accrued interest will be payable on December 31, 2012, except that the
        Company shall prepay accrued interest and principal to the extent of any
        positive cash flow from its operations.
  In
        addition, the parties have now agreed that in the event that the closing
        date
        has not occurred on or prior to September 14, 2008, the purchase agreement
        shall
        automatically terminate on that date and have no further force and
        effect.
  
  **2**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
  ***Basis
        of presentation***
 
 The
        consolidated financial statements include China Aoxing Pharmaceutical Co.,
        Inc.
        and its subsidiaries.  Intercompany transactions are
        eliminated.
  ***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.
  ***Revenue
        recognition***
 
 Sales
        are
        recognized when revenue is realized or realizable and has been
        earned.  Revenue transactions represent sales of
        inventory.  The revenue recorded is presented net of sales and other
        taxes the Company collects on behalf of government authorities.  The
        Company’s policy is to recognize revenue when title to the product, ownership
        and risk of loss transfer to the customer, which can be on the date of shipment
        or the date of receipt by the customer.  A provision for payment
        discounts and product return allowances is recorded as a reduction of sales
        in
        the same period that revenue is recognized.
  ***Cost
        of sales***
 
 Cost
        of
        sales is primarily comprised of direct materials and supplies consumed in
        the
        manufacture of product, as well as manufacturing labor, depreciation expense
        and
        direct overhead expense necessary to acquire and convert the purchased materials
        and supplies into finished products.
  ***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.
  ***Inventories***
  Inventories
        are valued at the lower of cost as determined by the first-in, first out
        method
        or market.
 
 
 
 
  
  ***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.
  ***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.
  
  
  
  
  
  ***New
        accounting pronouncements***
  In
        July
        2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in
        Income Taxes, an interpretation of FASB Statement No. 109,”* (“FIN 48”),
        which seeks to reduce the diversity in practice associated with the accounting
        and reporting for uncertainty in income tax positions.  This
        interpretation prescribes a comprehensive model for the financial statement
        recognition, measurement, presentation and disclosure of uncertain tax positions
        taken or expected to be taken in income tax returns.  An uncertain tax
        position will be recognized if it is determined that it is more likely than
        not
        to be sustained upon examination.  The tax position is measured as the
        largest amount of benefit that is greater than fifty percent likely of being
        realized upon ultimate settlement.  The cumulative effect of applying
        the provisions of this interpretation is to be reported as a separate adjustment
        to the opening balance of retained earnings in the year of
        adoption.  FIN 48 is effective for fiscal years beginning after
        December 15, 2006.
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, “*Fair Value Measurements” (“SFAS 157”).*SFAS 157
        defines fair value, establishes a framework for measuring fair value in
        accordance with generally accepted accounting principles, and expands
        disclosures about fair value measurements.  The provisions of SFAS 157
        are effective for fiscal years beginning after November 15, 2007.
  In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin No. 108, “*Considering the Effects of Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements”*(“SAB 108”).  SAB 108 requires analysis of
        misstatements using both an income statement (rollover) approach and a balance
        sheet (iron curtain) approach in assessing materiality and provides for a
        one-time cumulative effect transition adjustment. SAB 108 is effective for
        annual financial statements for the first fiscal year ending after November
        15,
        2006.
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, “*The Fair Value Option for Financial Assets and Financial
        Liabilities”* (“SFAS 159”).  SFAS 159 permits entities to choose
        to measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value.  Unrealized
        gains and losses on items for which the fair value option has been elected
        are
        reported in earnings.  SFAS 159 does not affect any existing
        accounting literature that requires certain assets and liabilities to be
        carried
        at fair value.  SFAS 159 is effective for fiscal years beginning after
        November 15, 2007.
   **3**
              **PROPERTY
                  AND EQUIPMENT**
  A
        summary
        of property and equipment and the estimated lives used in the computation
        of
        depreciation and amortization as of September 30, 2007 is as
        follows:
  AMOUNT
              
              LIFERight
                  to use land
              
              $
              7,183,144
              
              Life
                  of leaseBuilding
                  and building improvements
              
              
              11,207,123
              
              39
                  yearsMachinery
                  and equipment
              
              
              1,944,628
              
              5-8
                  yearsFurniture
                  and office equipment
              
              
              314,152
              
              5-8
                  yearsAutomobiles
              
              
              305,093
              
              3-5
                  years20,954,140Accumulated
                  depreciation
              
              
              1,629,867$
              19,324,273
  
  
  **4**
              **DUE
                  TO STOCKHOLDERS**
 
 The
        amounts due stockholders bear interest at rates ranging from 6% to 10%per
        annum
        and are due on demand.
 
 
 **5**
              **SHORT-TERM
                  BORROWINGS**
 
 Short-term
        borrowings consist of a non-interest bearing note payable to a local government
        and are due three months after the Company is listed on NASDAQ.
 
 
 **6**
              **LOANS
                  PAYABLE - OTHER**
 
 Loans
        payable – other consists of various loans to unrelated third parties which are
        due on demand and bear interest at a weighted average interest rate of
        10.5.%
 
 
 **7**
              **LONG-TERM
                  DEBT**
 
 Long-term
        debt consists of notes payable to a bank bearing interest at 5.58% per annum
        and
        due as follows:
 
 Year
                  ended June 30,2008
              
              $
              6,983,4732009
              
              
              4,389,69911,373,172Less
                  current portion
              
              
              6,983,473$
              4,389,699
 
 The
        notes
        payable bank are collateralized by a first security interest in substantially
        all assets of the Company and $6,118,974 is guaranteed by a vendor of the
        Company.
 
 The
        Company is in default of the bank loan in the amount of $3,125,859 which
        was 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 in the near future.
   **8**
              **CONVERTIBLE
                  DEBENTURES**
  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 convertible
        debentures bear interest payable semi-annually.  The warrants were
        valued at $11,063,904 using the Black Scholes method by recording deferred
        interest and a credit to stockholders’ equity. (See Note 9 for detailed
        information).
  
  
  **8**
              **CONVERTIBLE
                  DEBENTURES - Continued**
  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 Note 9 for detailed
        information).  The convertible debentures bear interest payable
        semi-annually.
  The
        Company received gross proceeds of $2,116,000 less placement fees of
        approximately $275,080, resulting in net proceeds of $1,840,920. As of September
        30, 2007, $677,000 in convertible debetures were converted to common
        stocks.
  As
        of
        September 30, 2007 the Company has sold $908,000 in principal for convertible
        debentures, which bear interest at 8% per annum, are payable semi-annually
        and
        are due May 1, 2010.  Interest will accrue on the principal amount at
        8% per annum and will be payable on January 1st and July
        1st each
        year.  The holder may convert the principal and accrued interest into
        the Company’s common stock at a conversion price per share equal to the greater
        of (a) $5.00, or (b) 75% of the average of the closing bid prices reported
        for
        the five trading days preceding the date of conversion.
  Amount
                
                Interest
                    Rate
                
                Due
                    date$1,439,000
                
                10%
                
                January
                    9, 2009908,000
                
                8%
                
                From
                    May 1st
                    to
                  August
                    2, 2010$2,347,000
 
 
 **9**
              **WARRANTS**
 
 The
        following table summarizes the information relating to the warrants issued
        in
        connection with the sale of securities referred to in Note 9 above:
 
 Exercise
                  Price
              
              Number
                  Outstanding
              
              Weighted
                  Average Remaining Contractual Life (Years)$2.50
              
              1,058,000
              
              4.083.50
              
              1,058,000
              
              4.084.50
              
              1,058,000
              
              4.085.50
              
              1,058,000
              
              4.082.00
              
              493,733
              
              4.084,725,733
   **10**
              **GOING
                  CONCERN**
 
 The
        Company has invested significant capital in research and development since
        the
        inception of its pharmaceutical business.  For the three months ended
        September 30, 2007, the Company generated net losses of
        $1,015,000.  As shown on the attached balance sheet, the Company’s
        current liabilities exceeded its current assets by $9,725,000.
 
 The
        uncertainties caused by these conditions 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
        Company is exploring various alternatives to improve their financial position
        and secure other sources of financing.  Such possibilities include a
        new credit facility, new equity raise, new arrangements to license intellectual
        property and the sale of selected property rights.  Since August 1,
        2006 the Company has raised approximately $3 Million.  However, this
        amount is insufficient to fully address the uncertainty of the Company’s
        financial condition and the Company will continue to seek additional
        funding.
 
 
  
  **11**
              **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, there is no guarantee
        that the PRC government’s pursuit of economic reforms will be consistent or
        effective.
 
 The
        PRC
        has adopted currency and capital transfer regulations.  These
        regulations require that the Company complies with complex regulations for
        the
        movement of capital.  Because most of the Company’s future revenues
        will be in RMB, any inability to obtain the requisite approvals, or any future
        restrictions on currency exchanges, will limit the Company’s ability to fund its
        business activities outside China or to pay dividends to its
        shareholders.
 
 ***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 June 30.
        2007, substantially all of the Company=s
        cash and
        cash equivalents were managed by financial institutions.
 
 ***Other
        Risks***
 
 The
        core
        business of the Company is the manufacture and sale of narcotic drugs, which
        is
        highly regulated by the PRC government.  The Company depends on
        obtaining licenses of its products from the China State Food and Drug
        Administration (SFDA).  Obtaining these licenses 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.
   **12**
              **POTENTIAL
                  ACQUISITION**
 
 In
        April
        2007 the Company announced that it signed a Letter of Intent to acquire 100%
        ownership of Shijiazhuang Le Ren Tang Pharmaceutical Ltd. (“LRT”), a
        pharmaceutical company organized under the laws of the PRC specializing in
        the
        manufacture and distribution of modernized Chinese traditional
        medicines.  The purchase price is approximately $10 Million (or
        approximately two times total LRT product sales in 2006, depending on the
        final
        audited financial statements).  The purchase price will be paid 50% in
        cash and 50% in shares of the Company’s common stock.  Completion of
        the transaction is expected to occur in the fourth quarter of calendar year
        2007.  Completion, however, is subject to a number of conditions,
        including execution of a final purchase agreement and receipt of approval
        from
        the Chinese government.
  
  **ITEM
        2.  MANAGEMENT’S DISCUSSION AND ANALYSIS**
  **Outline
        of Our Business**
  China
        Aoxing is a vertically integrated pharmaceutical company specializes in
        research, development, manufacturing and marketing of a variety of narcotics
        and
        pain management pharmaceutical products in generic and innovative formulations.
        China Aoxing’s operating subsidiary, Hebei Aoxing, is a corporation organized
        under the laws of the People's Republic of China.  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
        November 2006, Hebei Aoxing received GMP (Good Manufacturing Practices)
        certification for its Naloxone raw materials workshop from the China State
        Food
        and Drug Administration (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.  In February 2007, Hebei
        Aoxing initiated the product launch of Naloxone Hydrochloride injectable
        in the
        Chinese market.  Currently Hebei Aoxing is authorize by the SFDA to
        manufacture Naloxone Hydrochloride injectable in four dosage strengths:
 0.4mg (1ml), 1mg (1ml), 2mg (2ml) and 4mg (10ml).
 
 In
        April
        2007,   Hebei Aoxing received clearance from the SFDA for the clinical
        study of Tilidine Hydrochloride tablets and capsules for the treatment of
        moderate to severe pain associated with cancer and surgery, as well as other
        forms of pain.  The Tilidine drug is not currently available in China and
        Hebei Aoxing is currently the only authorized domestic manufacturer of Tilidine
        tablets and capsules.  In the second half of 2007, Hebei Aoxing
        started a clinical study program, which will include approximately four hundred
        patients through several health centers in China.  The purpose of the
        study will be to confirm Tilidine's efficacysafety in reducing pain levels
        for
        Chinese patients.
 
 In
        April
        2007 China Aoxing announced that it has signed a Letter of Intent to acquire
        Shijiazhuang Le Ren Tang Pharmaceutical Ltd (“LRT”). LRT is a pharmaceutical
        company organized under the laws of China specializing in the manufacturing
        and
        distribution of modernized Chinese traditional medicines, with a strong
        portfolio of pain management products.  The Letter of Intent
        contemplates that CAXG will acquire 100% ownership of LRT.  The
        purchase price is approximately $10 million (or approximately two times total
        LRT product sales in 2006, depending on the final audited financial statements).
        The purchase price will be paid 50% in cash and 50% in shares of the Company’s
        common stock valued at $4 per share. Completion of the transaction is expected
        to occur in the fourth quarter of calendar 2007. Completion, however, is
        subject
        to a number of conditions, including execution of a final purchase agreement
        and
        receipt of approval from the Chinese government.
 
 In
        June
        2007, Hebei Aoxing received formal approval from the SFDA for the clinical
        study
        of Codeine Phosphate Compound Medicine for cold and flu treatment (SFDA
        Certificate 2007LO1280).  While Codeine Phosphate is widely used and
        considered effective in cold and flu treatment in Western countries, it just
        became available in China in 2006.  Hebei Aoxing is one of only two
        drug makers developing this medicine in China. The company started a clinical
        study of the Codeine Phosphate Compound Medicine in later 2007 to test efficacy
        and safety in China. The clinical study is a multi-center randomized,
        double-blind, controlled trial, involving 300 patients in China.
 
  
  Products
        – Narcotics and Pain Management
  Since
        its
        inception in 2002, Hebei Aoxing has been focusing on research, development,
        manufacturing and distribution of a variety of narcotics and pain management
        pharmaceutical products in China.  Its facility is dedicated to
        conducting the narcotic drug business with GMP manufacturing capability for
        drugs in tablet, capsule, injectable, oral solution and granulated
        formulations.  Over the years, the company has developed a compelling
        pipeline in narcotics and pain management drugs, including Naloxone, Oxycodone,
        Tilidine, Codeine Phosphate, Pholcodine, Buprenorphine, etc.
 
 Narcotics,
        also known as opioids, are chemical substances that have a morphine-like
        action
        in the body.  They are prescribed when other pain medications and
        therapies fail to work. Opioids are used mostly for their analgesic properties
        to treat severe pain (fentanyl, hydromorphone, methadone, morphine and
        pethidine), moderate to severe pain (buprenorphine18 and oxycodone) and mild
        to
        moderate pain (codeine, dihydrocodeine and dextropropoxyphene), as well as
        to
        induce or supplement anaesthesia (fentanyl and fentanyl analogues such as
        alfentanil and remifentanil). They are also used as cough suppressants (codeine,
        dihydrocodeine and, to a lesser extent, pholcodine and ethylmorphine), to
        treat
        gastrointestinal disorders, mainly diarrhoea (codeine and diphenoxylate),
        and in
        the treatment of addiction to opioids (buprenorphine and methadone). Certain
        analgesic opioids, such as hydrocodone or oxycodone, are compounded in mixtures
        with non-opiate drugs to provide analgesic action (analgesic-antipyretic
        preparations).  These drugs are often used in combination with other
        medications such as antidepressants, anticonvulsants, and non-narcotic pain
        relievers.  Opioids are the strongest pain medicines available and may
        become addictive if used on a long-term basis.
 
 Scientific
        research suggests that opioids relieve pain in two ways. First, they attach
        to
        opioid receptors, which are specific proteins on the surface of cells in
        the
        brain, spinal cord and gastrointestinal tract. These drugs interfere and
        stop
        the transmission of pain messages to the brain. Second, they work in the
        brain
        to alter the sensation of pain. These drugs do not take the pain away, but
        they
        do reduce and alter the patient’s perception of the pain.  There are
        four broad classes of narcotics, (1) endogenous opioid peptides (opioids
        produced naturally in the body); (2) opiates, such as the naturally occurring
        alkaloids, morphine, codeine, thebaine, papaverine, and the non-alkaloid
        heroin
        (processed morphine);  (3) semi-synthetic opioids, created from the
        natural opioids, such as hydromorphone, hydrocodone, and oxycodone;
        and  (4) fully synthetic opioids, such as fentanyl, pethidine,
        methadone, and propoxyphene;
 
 At
        the
        present time, Hebei Aoxing distributes Naloxone and Naloxone Hydrochloride,
        which are opioid antagonists.  It has the technology in place to
        produce oxycodone, a semi-synthetic opioid.  And it has been licensed
        to conduct clinical tests of Tilidine, an opioid analog.
 
 *Naloxone
        Series.*  As an opioid antagonist, Naloxone has curative effects
        for pain, shock, alcoholism, and cerebral infarction.  Naloxone has
        shown limited side effects, and is widely applied in clinical
        treatment.  Naloxone or Naloxone Hydrochloride is recommended by the
        WHO (World Health Organization) to treat acute alcoholism and acute poisoning
        of
        opiod and non-opioid drugs. The Company’s application for a license to develop
        facilities to manufacture Naloxone was approved by China’s SFDA in January 2005
        followed by the final production approval of the Naloxone
        injectable.  We introduced the product to the market in February
        2007.
 
  
  Naloxone
        Hydrochloride was developed by the DuPont Company, and was introduced into
        the
        US market in the 1970’s. Since then it has been introduced into the additional
        markets of Britain, Germany, France and Italy.  The Beijing Academy of
        Military Medical Sciences first used Naloxone Hydrochloride as morphine
        antagonist to ease the indication of breath suppression and awakening after
        a
        morphine-based anesthesia.
 
 *Oxycodone
        Series.*  Oxycodone is a derivative of the semi-synthetic opioid,
        alkaloid thebaine. Its pharmacological properties are similar to those of
        morphine. It is an activator of the opiod receptor, and is able to relieve
        acute
        pain.
 
 Global
        manufacture of Oxycodone rose gradually during the 1990s, amounting to 11.5
        tons
        in 1998.  Since 1999, the growth of manufacture has accelerated,
        reaching the record level of 56.5 tons in 2005. The United States manufactured
        40.3 tons in 2005 and accounted for 71 percent of the world total. The
        manufacture of Oxycodone also grew steadily in the United Kingdom and France,
        contributing 19 percent (10.9 tons) and 8 percent (4.4 tons) respectively
        to the
        global total. Three other countries, Switzerland, Japan and Slovakia,
        manufactured Oxycodone in smaller quantities of between 100 and 500
        kg.
 
 Global
        consumption has also risen steadily, reflecting the increased use of
        controlled-release preparations containing Oxycodone for the treatment of
        moderate to severe pain. In 2005 global consumption reached the highest level
        ever recorded, 42.3 tons, mainly as a result of increased consumption in
        the
        United States, which continued to be the largest consumer of Oxycodone,
        accounting for 83 per cent of the world total. Other major consumer countries
        in
        2005 (all reporting increased consumption) were Canada (3 tons), Germany
        (1.6
        tons), Australia (774 kg) and the United Kingdom (501 kg), together accounting
        for 14 percent of global consumption. Consumption of Oxycodone has spread
        to
        more than 50 other countries, including developing countries.
 
 In
        1980’s, after the World Health Organization introduced the Three Step Principle
        in Cancer Pain Treatment, the production and consumption of Oxycodone increased
        quickly in the world. The effectiveness and safeness of Oxycodone in treating
        cancer pain have been acknowledged by the Chinese medicine
        community.  But since China does not produce Oxycodone in bulk, the
        clinical application of Oxycodone is still impossible.  Although the
        SFDA had granted import licenses for Oxycodone controlled-release tablets
        (Oxycontin) and the composite capsule of Oxycodone and paracetamol (Tylox),
        most
        patients in China cannot afford the imported drugs.  Therefore the
        Chinese government is heavily committed to producing Oxycodone pharmaceuticals
        in bulk domestically. Hebei Aoxing recently submitted additional information
        to
        the SFDA and is currently waiting for a clinical trial license to be issued
        by
        the SFDA.
 
 *Tilidine
        Series*.  Tilidine is a leading opioid analgesic drug in Europe,
        used in the treatment of moderate to severe pain associated with cancer,
        post
        surgery, and other forms of pain.  Tilidine is widely prescribed in
        Europe, with Germany, Ireland, Switzerland and Belgium as major
        users.  Based on the “Narcotic Drugs” reported by the International
        Narcotics Control Board in year 2006, global Tilidine manufacture followed
        a
        generally increasing trend after 1993, from 8.2 tons in that year to a peak
        of
        45.2 tons in 2004.  Global consumption of Tilidine has continued to
        increase, reaching its peak in 2005, with 28.9 tons.
 
  
  Tilidine
        is not currently manufactured in China.  As a result, the per capita
        consumption of Tilidine in China is less than 1% of the average level in
        other
        industrialized countries. China Aoxing is currently the only government approved
        domestic manufacturer for Tilidine capsules and tablets.  We are
        currently seeking to obtain capital to fund our development of manufacturing
        facilities for Tilidine production, with the goal of meeting the domestic
        demand
        for the product.
 
 *Buprenorphine
        Series*.  Buprenorphine is an opioid that has been used as an
        analgesic. The increasing consumption of Buprenorphine in recent years is
        mainly
        the result of its use in detoxification and substitution treatment of opioid
        dependence in a growing number of countries.
  Hebei
        Aoxing is working on a tablet formulation of Buprenorphine combined with
        Naloxone for drug abuse treatment.  At present, more than 40 countries
        are importing Buprenorphine for that purpose.  Since 1993, total
        manufacture of the substance increased steadily and significantly. During
        the
        period 2003-2005, average global manufacture amounted to nearly 2 tons, double
        the amount manufactured in the late 1990s. The United Kingdom accounts for
        75
        per cent of global manufactures and is also the world’s leading exporter of
        Buprenorphine. France and Germany are the main importers of Buprenorphine,
        accounting for 60 per cent of global imports. Both France and Germany utilize
        Buprenorphine mainly for substitution treatment.
 
 Products
        – Cough and Congestion
 
 Hebei
        Aoxing has also developed a number of products that relieve symptoms of cough
        and cold.  It is estimated that cold and flu medicines account for
        approximately USD$625 million in sales annually in China.  The Company
        intends to capitalize on this opportunity with a safe, effective product
        that
        caters to a large and growing market.  The Company expects to receive
        the government permit to market these products in 2008 and 2009:
 
 Compound
        Pholcodine Syrup.   This Syrup tranquilizes cough, removes
        phlegm, and eases nasal congestion.  It also has a limited capacity to
        relieve asthma symptoms. The Syrup can be used in treating coughs caused
        by
        acute bronchitis and respiratory infections.   Preclinical
        research on acute and chronic toxicity shows that Pholcodine’s toxicity is lower
        than that of codeine.
 
 Codeine
        Phosphate.   China Aoxing is developing an oral solution
        consisting of Guaifenesin, Pseudoephedrine Hudrochloride and Codeine Phosphate.
        This drug is an effective opioid cough medicine in Western countries, which
        just
        became available in China in 2006. This formulation is widely prescribed
        in
        continental Europe and other regions, including major markets like Australia,
        New Zealand and Canada. It is also available without prescription in combination
        preparations in limited doses in some countries.
 
 Research
        and Development
 
 Its
        research and development expenses were $57,262 and $10,067 respectively during
        the three months ended September 30, 2007 and 2006.  The company
        conducts its research and development programs through a combination of internal
        and collaborative programs. We rely on arrangements with universities, our
        collaborators, contract research organizations and clinical research sites
        for a
        significant portion of our product development efforts.
 
  
  The
        Market
 
 China
        entered the “Single Convention on Narcotic Drugs, 1961” in 1985, which resulted
        in the gradual loosening of government policy toward the control of analgesic
        supplies.  Before 2000, the average consumption of analgesics in China
        was less than 1% of the consumption in industrialized countries. There were
        only
        six varieties of analgesics available in production.  By 2005, Chinese
        government had approved the production of 11 varieties of
        analgesics.  In the near future, patients in China will find 30
        varieties and over 80 specifications of different types of analgesics. Since
        1993, the annual growth rate of analgesic sales in China has been, on average,
        35%. If the drug consumption per capita in China reaches the level of
        industrialized countries, the market size will exceed $50 billion.
 
 For
        the
        foreseeable future, Hebei Aoxing intends to focus its marketing efforts
        exclusively in China.  Because China is only now developing a domestic
        supply of bulk analgesics, the market potential is sufficient to fully occupy
        the Company’s efforts.
  **Results
        of Operations**
  During
        the three months ended September 30, 2007, the Company reported product revenues
        of $1,380,294 from the sales of Naloxone Hydrochloride injectable and
        Shuanghuanglian Capsules.   The company had no product sales
        during the three months ended September 30, 2006.
  The
        Company’s largest expense during the three months ended September 30, 2007 was
        general and administrative expenses in the amount of $815,103.  The
        increase from the $201,386 in general and administration expense incurred
        in the
        three months ended September 30, 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.
  We
        incurred interest expense of $259,303 during the quarter ended September
        30,
        2007.  At September 30, 2007 we had over $15.7 million in debt, long
        and short-term, that we incurred to build our facilities and develop our
        product
        line.  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,” which
        amounted to $519,915 in the three months ended September 30, 2007 – 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-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.
  
  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 three months ended September 30, 2007 totaled
        $1,015,754.  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, and other loans.  The
        balance of our borrowings as of September 30, 2007 (including the current
        portion of the long-term debt) totaled $15,245,000.  The Company is
        currently in active negotiation with Bank of China to refinance its bank
        loan in
        the amount of $3,125, 859, which was due on December 31, 2006.  The
        Company expects, but is not assured, that it willreach an agreement
        on
        refinance terms in near future.
  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 September 30, 2007, showed a working capital deficit
        of
        $9,725,176.  The greater portion of the deficit was represented by
        $3,125,859 and $3,857,614 due to the Bank of China in Dec 31, 2006 and December
        31, 2007, respectively. Those payments are the current portion of two loans
        totaling $11,373,172 that call for annual payments over the next two 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 of additional products
        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.
  In
        September 2007 China Aoxing modified its agreement with Mr. Yue under which
        China Aoxing will acquire an additional 35% interest in Hebei Aoxing from
        Mr.
        Yue.  The acquisition was approved by the government of China on July 4,
        2007.  Under the modified agreement, in exchange for the 35% interest in
        Hebei Aoxing, the Company will issue to Mr. Yue a junior subordinated note
        in
        the principal amount of $3,080,000, bearing interest at a rate of 5.0% per
        annum.  The principal and accrued interest will be payable on December 31,
        2012, except that China Aoxing will be required to prepay accrued interest
        and
        principal to the extent of any positive cash flow from its operations.  The
        acquisition will take place when China Aoxing has raised $5,000,000 from
        the
        sale of its equity.  If the acquisition has not occurred by September 14,
        2008, the purchase agreement will terminate on that date and have no further
        force or effect.
  
  **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 September 30, 2007 we had $1,030,721 in cash and no other
        liquid assets.  On the same date we had $11,434,568 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.  The Company is currently in active
        negotiation with Bank of China to refinance its bank loan in the amount of
        $3,125,859, which was due on December 31, 2006.  The Company expects,
        but is not assured, that it will reach an agreement on refinance terms in
        near
        term.
 
 *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 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.
 
 *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.
 
 *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.
 
 **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.
 
  **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 September 30,
        2007.  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 September 30, 2007 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 first
        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.  Unregistered Sale of Equity Securities and Use of
        Proceeds*
  (c)
        Unregistered sales of equity securities
 
 In
        July
        2007 the Company issued 12,302 shares of common stock to 8 holders of its
        10%
        Convertible Debentures.  The shares were issued in satisfaction of
        China Aoxing’s interest payment obligations, and were valued at $2.10 per share,
        per the terms of the Debentures.  The sale of the shares 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 shares 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.
 
  
  During
        the fiscal quarter that ended on September 30, 2007, the Company sold to
        five
        investors Senior 8% Convertible Debentures in the principal amount of
        $160,000.  The Debentures were sold at par.  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 shares 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 1st quarter
        of fiscal
        2008.
 
 *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 $3,125,859 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, but is
        not
        assured, that it will reach agreement on refinancing terms in near
        term.
 
 *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:
                  November 14, 2007
              By:
              /s/
                  Zhenjiang YueZhenjiang
                  Yue, Chief Executive Officerand
                  Chief Financial Officer