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, 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:
 February
19, 2008
 Common
Stock: 40,759,323
 
 Transitional
Small Business Disclosure Format (check
one):                 Yes___           NoX
  
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEET
 DECEMBER
31, 2007
 (Unaudited)
 
 
 ASSETSCURRENT
      ASSETS:Cash
              
              $
              784,893Accounts
      receivable
              
              
              266,160Inventories
              
              
              405,546Prepaid
      expenses and sundry current assets
              
              
              140,095TOTAL
      CURRENT ASSETS
              
              
              1,596,694Property
      and equipment, net of accumulated depreciation
              
              
              19,679,401TOTAL
      ASSETS
              
              $
              21,276,095LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      bank borrowings
              
              $
              273,444Accounts
      payable
              
              
              737,030Loans
      payable – other
              
              
              677,013Due
      to stockholders
              
              
              679,438Accrued
      expenses and taxes payable
              
              
              2,617,711Loan
      payable – bank
              
              
              11,689,607TOTAL
      CURRENT LIABILITIES
              
              
              16,674,243CONVERTIBLE
      DEBENTURES
              
              
              1,798,316STOCKHOLDERS’
      EQUITY:Common
      stock, $0.001 par value,100,000,000
      shares authorized41,595,507
      shares issued and outstanding
              
              
              40,826Preferred
      stock, $0.001 par value300,000
      shares authorized277,018
      shares issued and outstanding
              
              
              277Additional
      paid-in capital
              
              
              9,990,759Deferred
      stock compensation
              
              
              (247,883
              )Accumulated
      deficit
              
              
              (7,584,410
              )Other
      comprehensive income
              
              
              603,967TOTAL
      STOCKHOLDERS’ EQUITY
              
              
              2,803,536TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              21,276,095
 
 See notes
to financial statements
 
 
 
  
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 THREE
      MONTHS ENDED DECEMBER 31,
              
              
              SIX
      MONTHS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Restated
              
              
              
              
              
              RestatedREVENUES
              
              $
              863,877
              
              
              $
              345,907
              
              
              $
              2,244,171
              
              
              $
              345,907COST
      OF SALES
              
              
              471,763
              
              
              
              157,567
              
              
              
              1,097,416
              
              
              
              157,567GROSS
      PROFIT
              
              
              392,114
              
              
              
              188,340
              
              
              
              1,146,755
              
              
              
              188,340COSTS AND EXPENSES (INCOME):Research and development costs
              
              
              46,392
              
              
              
              52,204
              
              
              
              103,654
              
              
              
              62,271General and administrative expenses
              
              
              949,138
              
              
              
              262,729
              
              
              
              1,764,241
              
              
              
              521,028Interest
      expense
              
              
              426,133
              
              
              
              589,646
              
              
              
              820,961
              
              
              
              918,677Depreciation
      and amortization
              
              
              119,583
              
              
              
              -
              
              
              
              238,395
              
              
              
              -TOTAL COSTS AND EXPENSES
              
              
              1,541,246
              
              
              
              904,579
              
              
              
              2,927,251
              
              
              
              1,501,976NET LOSS
              
              $
              (1,149,132
              )
              
              $
              (716,239
              )
              
              $
              (1,780,496
              )
              
              $
              (1,313,636
              )BASIC AND DILUTED EARNINGSPER SHARE
              
              $
              (0.03
              )
              
              $
              (0.02
              )
              
              $
              (0.04
              )
              
              $
              (0.03
              )WEIGHTED AVERAGE NUMBEROF SHARES OUTSTANDING
              
              
              41,612,319
              
              
              
              40,104,883
              
              
              
              40,580,356
              
              
              
              40,073,541
 
   
 See notes
to financial statements
  
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 SIX
      MONTHS ENDED DECEMBER 312007
              
              
              2006RestatedOPERATING
      ACTIVITIES:Net
      loss
              
              $
              (1,780,496
              )
              
              $
              (1,313,636
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              366,488
              
              
              
              178,993Amortization
      of loan discount
              
              
              236,446
              
              
              
              187,324Stocks
      issued for services
              
              
              334,442
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (148,775
              )
              
              
              (406,320
              )Inventories
              
              
              (176,469
              )
              
              
              (68,145
              )Prepaid
      expenses and sundry current assets
              
              
              (17,541
              )
              
              
              (172,004
              )Accounts
      payable
              
              
              (197,344
              )
              
              
              475,835Accrued
      expenses, taxes and sundry current liabilities
              
              
              608,326
              
              
              
              249,370NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (774,923
              )
              
              
              (868,583
              )INVESTING
      ACTIVITIES:Acquisition
      of property and equipment, net of disposition
              
              
              (10,904
              )
              
              
              (310,257
              )NET
      CASH USED IN INVESTING ACTIVITIES
              
              
              (10,904
              )
              
              
              (310,257
              )FINANCING
      ACTIVITIES:Repayment
      of bank borrowings
              
              
              -
              
              
              
              (64,100
              )Other
      borrowings
              
              
              156,661
              
              
              
              -Borrowings
      (repayment) of loans to stockholders
              
              
              (501,711
              )
              
              
              760,486Sale
      of convertible debentures
              
              
              315,000
              
              
              
              1,713,920Sale
      of common stock
              
              
              -
              
              
              
              127,000NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
              
              
              (30,050
              )
              
              
              2,537,306EFFECT
      OF EXCHANGE RATE ON CASH
              
              
              89,643
              
              
              
              25,179INCREASE
      (DECREASE) IN CASH
              
              
              (726,234
              )
              
              
              1,383,645CASH
      – BEGINNING OF PERIOD
              
              
              1,511,127
              
              
              
              777CASH
      – END OF PERIOD
              
              $
              784,893
              
              
              $
              1,384,422Supplemental
      disclosures of cash flow information:Non-cash
      financing activities:Conversion
      of convertible debentures into common stock
              
              $
              660,000
              
              
              $
              -
 
   See notes
to financial statements
  
  CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007
 (Unaudited)
 
 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
  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.
 
 
 
 
  
  (Unaudited)
 
 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 which are not insured or otherwise protected.
  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.
  
  
  
  
  
  (Unaudited)
  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 (RMB).    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.
  
  
  
  (Unaudited)
  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 December 31, 2007 is as
follows:
 AMOUNT
              
              LIFERight
      to use land
              $
      7,383,000
              
              Life
      of leaseBuilding
      and building improvements
              11,519,652
              
              39
      yearsMachinery
      and equipment
              1,998,733
              
              5-8
      yearsFurniture
      and office equipment
              322,893
              
              5-8
      yearsAutomobiles
              313,582
              
              3-5
      years21,537,860Accumulated
      depreciation and amortization
              1,858,459$19,679,401
 
 
 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.
 
 
 
  
  (Unaudited)
 
 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
              LOAN
      PAYABLE - BANK
 
 Loan
payable – bank consists of notes payable to a bank bearing interest at 5.58% per
annum and due as follows:
 Year
      ended June 30,2008
              
              $  7,177,7742009
              
              4,511,833$11,689,607
 
 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 $7,177,774 which was due
as of December 31, 2007.  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 Company has
recorded a discount on this debt which is being amortized as additional interest
expense.  The Company has restated prior years’ financial statements
to reflect a reallocation of the proceeds from the sale of debentures in prior
years.
  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 December
31, 2007, $977,000 convertible debentures were converted to common
stocks.
  
  
  
   (Unaudited)
  
  As of
December 31, 2007 the Company has sold $1,063,000 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$1,139,000
              
              10%
              
              January
      9, 20091,063,000
              
              8%
              
              From
      May 1st
      to August 2, 20102,202,000Less
      unamortized discount
              403,684$1,798,316
 
 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
 
 For the
six months ended December 31, 2007, the Company generated net losses of
$1,780,496.     As shown on the attached balance sheet,
the Company’s current liabilities exceeded its current assets by
$15,077,549.  In addition, the Company is in default on $7,177,774 of
loans from a bank.
 
 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
 
  
  (Unaudited)
 
 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. The Company maintains its
cash with various banks and trust companies located in China which are not
insured or otherwise protected. Should any of these institutions holding the
Company’s cash become insolvent, or if the Company unable to withdraw funds for
any reason, the Company could lose the cash on deposit with that institution. As
of December 31 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 first quarter of calendar year
2008.  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 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 efficacy and safety in reducing pain levels
for Chinese patients.  Furthermore, in November 2007, the China SFDA
granted the Company the designated manufacturer status to produce Tilidine
Tablets and Capsules in order to address significant unmet medical needs in
cancer pain management in China.
 
 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 first quarter of calendar 2008. 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.
 
 In
October 2007 the Company's operating subsidiary, Hebei Aoxing Pharmaceutical
Group Co. Ltd. ("Hebei Aoxing"), was approved to be eligible for preferential
enterprise income tax treatments by the relevant tax bureau of People's Republic
of China (PRC).  Under the PRC Enterprise Income Taxation Law (the
"EIT Law"), Hebei Aoxing is classified as a foreign-invested enterprise, or FIE,
in the business of manufacturing medicines. The Company is confirmed to enjoy
certain income tax treatments, including a flat tax rate of 15% for five years
after it becomes a profitable company, potentially starting from year 2008 with
increased sales and new product launches.  A flat tax rate of 15% for
five years granted to Hebei Aoxing is significantly lower than the uniform tax
rate of 25%, effective January 1, 2008 for all enterprises (including FIEs)
under the PRC EIT Law, which was enacted on March 16, 2007. For FIEs established
before the promulgation of the EIT Law, a five-year transition period is
provided during which reduced rates will apply but gradually be phased
out.
 
 In
November 2007, the China SFDA granted the Company and its partner, National
Institute of Drug Dependence at Beijing University, an important research and
development license of Buprenorphine/Naloxone sublingual combo tablet to treat
opioid dependence, a growing social and medical problem in
China.   The company is planning to conduct clinical study in
2008 and bring this effective medical treatment to China in early
2009
 
 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.  In November
2007, the China SFDA granted the Company the designated manufacturer status to
produce Tilidine Tablets and Capsules in order to address significant unmet
medical needs in cancer pain management in China.
 
 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 the
first company in China which 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.
 
 Opioid
dependence is a chronic, relapsing medical condition that requires long-term
treatment and patient support. Current standard maintenance therapies are
methadone and buprenorphine, both of which bind to the opioid receptors in the
brain.   A combo therapy was developed based on Naloxone, an
opioid receptor antagonist, alongside Buprenorphine, which is designed to limit
the potential for misuse and potentially lower the street value and the
incentive for diversion.  This combo theray was approved by the US FDA
in October 2002, and just became available in the UK in 2007, sold by a Forture
500 global pharmaceutical company.
 
 Since
1993, total manufacture of Buprenorphine 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.   In November 2007, the China SFDAgranted
the Company the designated manufacturer status to produce Pholcodine active
pharmaceutical ingredient (API).  Therefore the Company became one of
the only two producers of Pholcodine API in China.
 
 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
 
 China
Aoxing’s  research and development expenses were $103,654 and $,62,271
respectively during the six months ended December 31, 2007 and
2006.   During the three months ended December 31, 2007 and 2006,
the Company’s research and development expenses were $46,392, and
$52,204.  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 December 31, 2007, the Company reported product revenues
of $863,877 from the sales of Naloxone Hydrochloride injectable and
Shuanghuanglian Capsules.   The company had the product sales of
$345,907 during the three months ended December 31, 2006.  During the
six months ended December 31, 2007 and December 31, 2006, the company reported
product revenues of $2,244,171 and $   345,907,
respectively.
  The
Company’s largest expense during the three months ended December 31, 2007 was
general and administrative expenses in the amount of $949,138.  The
increase from the $262,729 in general and administration expense incurred in the
three 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.
  We
incurred interest expense of $426,133 during the quarter ended December 31,
2007.  At December 31, 2007we had over $13 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.
  Our net
loss for the three months ended December 31, 2007 totaled
$1,149,132.  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 December 31, 2007 (including the current portion
of the long-term debt) was about $13.  The Company is currently in active
negotiation with Bank of China to refinance its bank loans of $3,212,830 and
$3,964,944 which were due on Dec 31, 2006 and December 31, 2007,
respectively.  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 December 31, 2007, showed a working capital deficit of
$15,077,549.
 The greater portion of the deficit was represented by $11,689,607 due to
the Bank of China. Those payments are the current portion of two loans ,
$7,177,774 is in default and $4,511,833 is due in December 31, 2008..  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 December 31, 2007 we had $784,893 in cash and no other
liquid assets.  On the same date we had $16,674,243 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.  The Company is
currently in active negotiation with Bank of China to refinance its bank loan in
the amount of $11,689,607, which is due on December 31, 2008.  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 December 31, 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 December 31, 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 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
 
 the
fiscal quarter that ended on December 31, 2007, the Company sold to 2 investors
Senior 8% Convertible Debentures in the principal amount of
$155,000.  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 2nd 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 $3,212,830 and $3,964,944 due
to the Bank of China in Dec 31, 2006 and December 31, 2007.  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:
      February 19, 2008
              By:
              /s/
      Zhenjiang
      YueZhenjiang
      Yue,Chief
      Executive Officerand
      Chief Financial Officer