United
States


Securities
and Exchange Commission


Washington,
D. C. 20549





FORM
10-Q





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




For
      the quarterly period ended September 30,
2009





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


For the
transition period from _____ to _____





Commission
File No. 0-24185





CHINA
AOXING PHARMACEUTICAL COMPANY, INC.


(Exact
Name of Registrant as Specified in its Charter)





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





15 Exchange Place, Suite
500, Jersey City, NJ 08302


(Address
of Principal Executive Offices)





Issuer's
Telephone Number: (646) 367-1747





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





YesX                  No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files.)  Yes No
___




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




Large
accelerated filerAccelerated filerNon-accelerated filer Small reporting companyX





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





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


November
20, 2009


Common
Stock: 91,669,562








CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSSeptember
      30,
              
              
              June
      30,2009
              
              
              2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
              
              $
              6,417,281
              
              
              $
              1,271,922Accounts
      receivable
              
              
              1,296,787
              
              
              
              1,064,381Inventory
              
              
              872,483
              
              
              
              712,521Deposits
      with suppliers
              
              
              289,339
              
              
              
              261,780Deferred
      tax assets
              
              
              4,140,298
              
              
              
              3,331,045Prepaid
      exenses and sundry current assets
              
              
              408,121
              
              
              
              302,449TOTAL
      CURRENT ASSETS
              
              
              13,424,309
              
              
              
              6,944,098LONG
      - TERM ASSETSProperty
      and equipment, net of accummulated depreciation
              
              
              24,578,597
              
              
              
              29,324,362Other
      intengible assets
              
              
              1,521,608
              
              
              
              1,549,497Goodwill
              
              
              18,943,519
              
              
              
              18,926,527TOTAL
      LONG-TERM ASSETS
              
              
              45,043,724
              
              
              
              49,800,386TOTAL
      ASSETS
              
              $
              58,468,033
              
              
              $
              56,744,484LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Short-Term
      borrowings
              
              $
              292,500
              
              
              $
              292,193Accounts
      payable
              
              
              2,814,029
              
              
              
              2,816,711Deposit
      payable
              
              
              -
              
              
              
              3,871,552Current
      portion of long term debt - other
              
              
              46,800
              
              
              
              144,635Current
      portion of long term debt - stockholders
              
              
              111,202
              
              
              
              4,494,629Loan
      payable - Bank
              
              
              6,100,846
              
              
              
              6,094,428Accrued
      expenses and taxes payable and other sundry current
      liabilities
              
              
              2,632,868
              
              
              
              2,403,185TOTAL
      CURRENT LIABILITIES
              
              
              11,998,245
              
              
              
              20,117,333LONG-TERM
      DEBT-- STOCKHOLDERS
              
              
              4,108,523
              
              
              
              4,104,201--
      OTHER
              
              
              3,382,520
              
              
              
              3,491,113CONVERTIBLE
      DEBENTURES
              
              
              1,068,513
              
              
              
              1,023,733WARRANT
      AND DERIVATIVE LIABILITIES
              
              
              5,511,061
              
              
              
              3,368,901Common
      stock, par value $0.001,100,000,000
      shares authorized,91,669,562
      and 82,827,999 shares issued and outstandingat
      September 30,2009 and June 30, 2009, respectively
              
              
              91,670
              
              
              
              82,828Preferred
      stock, par value $0.001300,000
      shares authorized277,018
      shares issued and outstandingat
      September 30,2009 and June 30, 2009, respectively
              
              
              277
              
              
              
              277Additional
      paid in capital
              
              
              49,128,541
              
              
              
              39,104,309Accumulated
      deficit
              
              
              (17,303,837
              )
              
              
              (15,065,203
              )Other
      compensive income
              
              
              498,695
              
              
              
              461,017TOTAL
      STOCKHOLDERS' EQUITY
              
              
              32,415,346
              
              
              
              24,583,228NONCONTROLLING
      INTEREST IN SUBSIDIARIES
              
              
              (16,175
              )
              
              
              55,975TOTAL
      EQUITY
              
              
              32,399,171
              
              
              
              24,639,203TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              58,468,033
              
              
              $
              56,744,484







See Notes
to the Financial Statements





1


CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
    (LOSS)(Unaudited)For
      the three months endedSeptember
      30,2009
              
              
              2008SALES
              
              $
              1,446,663
              
              
              $
              3,598,065COST
      OF SALES
              
              
              450,143
              
              
              
              1,937,345GROSS
      PROFIT
              
              
              996,520
              
              
              
              1,660,720COSTS
      AND EXPENSES:Research
      and development expenses
              
              
              113,303
              
              
              
              266,329General
      and administrative expenses
              
              
              877,484
              
              
              
              1,192,892Selling
      expenses
              
              
              260,894
              
              
              
              631,018Depreciation
      and amortization
              
              
              109,217
              
              
              
              144,458TOTAL
      COSTS AND EXPENSES
              
              
              1,360,898
              
              
              
              2,234,697LOSS
      FROM OPERATIONS
              
              
              (364,378
              )
              
              
              (573,977
              )OTHER
      INCOME (EXPENSE):Interest
      expense
              
              
              (592,084
              )
              
              
              (475,494
              )Change
      in fair value of warrant and derivative liabilities
              
              
              (2,142,159
              )
              
              
              147,727Gain
      on foreign currency transactions
              
              
              -
              
              
              
              203,037Loss
      on disposal of assets
              
              
              (21,416
              )
              
              
              -Forgiveness
      of debt
              
              
              -
              
              
              
              1,459,751TOTAL
      OTHER INCOME (EXPENSE)
              
              
              (2,755,659
              )
              
              
              1,335,021INCOME
      (LOSS) BEFORE INCOME TAXES
              
              
              (3,120,037
              )
              
              
              761,044Income
      taxes (credit)
              
              
              (809,253
              )
              
              
              79,693NET
      INCOME ( LOSS)
              
              
              (2,310,784
              )
              
              
              681,351Minority
      interest in income (losses) of subsidiary
              
              
              (16,175
              )
              
              
              55,232INCOME
      (LOSS) ATTRIBUTABLE TO THE COMPANY
              
              
              (2,294,609
              )
              
              
              626,119OTHER
      COMPREHENSIVE INCOME ( LOSS) :Foreign
      currency translation adjustment
              
              
              37,678
              
              
              
              26,349COMPREHENSIVE
      INCOME (LOSS)
              
              $
              (2,273,106
              )
              
              
              652,468BASIC
      AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE
              
              
              (0.03
              )
              
              
              0.008WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
              
              
              87,411,323
              
              
              
              81,205,779







See Notes
to the Financial Statements


2


CHINA
      AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the three months endedSeptember
      30,2009
              
              
              2008OPERATING
      ACTIVITIES:Net
      income (loss)
              
              $
              (2,294,609
              )
              
              $
              626,119Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              284,634
              
              
              
              311,599Deferred
      tax assets
              
              
              (809,253
              )
              
              
              -Loss
      on disposal of assets
              
              
              21,416Forgiveness
      of debt
              
              
              -
              
              
              
              (1,459,751
              )Non-cash
      interest expense related todebentures and warrants
              
              
              44,780
              
              
              
              81,030Stocks
      issued for services
              
              
              202,227Change
      in fair value of warrants and derivative liability
              
              
              2,142,159
              
              
              
              (147,727
              )Minority
      interest
              
              
              (16,175
              )
              
              
              55,232Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (241,022
              )
              
              
              (267,123
              )Inventories
              
              
              (159,213
              )
              
              
              170,019Prepaid
      expenses and sundry current assets
              
              
              (18,417
              )
              
              
              (107,574
              )Accounts
      payable
              
              
              115,423
              
              
              
              56,269Accrued
      expenses, taxes and sundry current liabilities
              
              
              485,074
              
              
              
              61,415NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (242,976
              )
              
              
              (620,492
              )INVESTING
      ACTIVITIES:Acquisition
      of property and equipment
              
              
              (293,018
              )
              
              
              (55,975
              )Proceeds
      from sale of assets
              
              
              950,626NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
              
              
              657,608
              
              
              
              (55,975
              )FINANCING
      ACTIVITIES:Other
      borrowings
              
              
              (210,257
              )
              
              
              (1,458,417
              )Loans
      from stockholders
              
              
              (1,121
              )
              
              
              1,759,460Sale
      of common stock
              
              
              5,000,000
              
              
              
              -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              4,788,622
              
              
              
              301,043EFFECT
      OF EXCHANGE RATE ON CASH
              
              
              (57,895
              )
              
              
              109,486INCREASE IN
      CASH
              
              
              5,145,359
              
              
              
              265,938CASH
      – BEGINNING OF PERIOD
              
              
              1,271,922
              
              
              
              1,565,213CASH
      – END OF PERIOD
              
              $
              6,417,281
              
              
              
              1,299,275Supplemental
      disclosures of cash flow information:Non-cash
      financing activities:Conversion
      of 33MM RMB AOB loan  and accrued interest into common
      stock
              
              
              4,830,847
              
              
              
              -Conversion
      of convertible debentures into common stock
              
              
              -
              
              
              
              290,000Common
      stock issued as payment for accrued interest
              
              
              -
              
              
              
              25,570






See Notes
to the Financial Statements


3





CHINA
AOXING PHARMACEUTICAL CO., INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





September
30, 2009





1        
     BASIS OF PRESENTATION


The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and with the instructions to Form 10-Q and Article 8 of Regulation S-X relating
to smaller reporting companies.  Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles (“GAAP”) for complete financial statements.  In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included.  Operating results for the three month period ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2009.
  The
balance sheet at June 30, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for complete financial statements.
  Certain
amounts included in the 2008 financial statements have been reclassified to
conform to the September 30, 2009 financial statement presentation.
  For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended June 30, 2009 filed on October 14, 2009.




2        
     BUSINESS DESCRIPTION




China
Aoxing Pharmaceutical Co., Inc. (“the Company” or ‘China Aoxing”) is a specialty
pharmaceutical company specializing in research, development, manufacturing and
distribution of a variety of narcotics and pain-management products. As of June
30, 2009, the Company had one operating subsidiary: Hebei Aoxing Pharmaceutical
Co., Inc. (“Hebei”), which is
organized under the laws of the People’s Republic of China
(“PRC”).  During the year ended June 30, 2009, Hebei integrated into
itself the business operations of Shijazhuang Lerentang Pharmaceutical Company,
Ltd. (“LRT”), which had been an operating subsidiary acquired by Hebei in May
2008.





Since
2002, Hebei has been engaged in developing narcotics and pain management
products, building its facilities and obtaining the requisite licenses from the
Chinese Government.  Headquartered in Shijiazhuang City, the
pharmaceutical capital of China, outside of Beijing, Hebei now has China's
largest and the most advanced manufacturing facility for highly regulated
narcotic medicines, addressing a very under-served and fast-growing market in
China. Its facility is one of the few GMP facilities licensed for manufacturing
narcotics medicines. The Company is working closely with the Chinese government
and SFDA to assure the strictly regulated availability to medical professionals
throughout China of its narcotic drugs and pain medicines.








3 SIGNIFICANT
ACCOUNTING POLICIES





Use
of estimates in the preparation of financial statements




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of net revenue and expenses during each reporting
period.  Actual results could differ from those
estimates.





4





Impairment
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, 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.




New
Accounting Pronouncements





In
May 2009, FASB issued new guidance establishing general standards of
accounting for disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued, or
subsequent events. An entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. Adoption of this standard
does not have a material impact on the Company’s results of operations or
financial position.





In June 2009, FASB established
Accounting Standards Codification TM (“ASC”) as the singlesource of authoritative accounting
principles recognized by the FASB in the preparation of financial statements in
conformity with the GAAP. The Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. We adopted
the new guidance for the quarter ended September 30, 2009, which changed the way
we reference accounting standards in our disclosures. Adoption of the
Codification is not expected to have a material impact on the Company’s results
of operations or financialposition.





In August
2009, the FASB updated the accounting standards to provide additional guidance
on estimating the fair value of a liability in a hypothetical transaction where
the liability is transferred to a market participant. The standard is effective
for the first reporting period, including interim periods, beginning after
issuance. The Company does not expect the adoption to have a material effect on
its consolidated results of operations and financial condition








4 NOTES
PAYABLE – BANK





Note
payable – bank bears interest at 5.58%, is due December 31, 2008, is
collateralized by a first security interest in substantially all assets of the
Company and guaranteed by a vendor of the Company.





According
to this agreement, the loan matures as follows:





December
      31, 2008
            
            $
            2,925,003June
      30, 2009
            
            
            1,462,501December
      31, 2009
            
            
            1,713,342$
            6,100,846





Bank
loans were restructured in October 2009. (see note 7)





5




5  
           STOCKHOLDERS’
EQUITY




On August
6, 2009, the Company closed a private placement with a total of fifteen
institutional and other accredited investors of 5,263,158 of shares of the
Company’s common stock at a purchase price of $0.95 per share, for gross
proceeds of $5 million.





On August
27, 2009, the Company issued 3,578,405 shares of common stock by exercising its
option to pay the AOB note and accrued interest in the total amount of 33
million RMB, or $4,830,847. As of September 30, 2009, AOB owns 33,578,405
shares, or 37% of the Company’s common stock.








6         
    VULNERABILITY DUE TO OPERATIONS IN PRC





The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC.  Although the PRC
government has been pursuing economic reform policies for more than twenty
years, no assurance can be given that the PRC government will continue to pursue
such policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRCs political, economic and social
conditions.  There is also no guarantee that the PRC government’s
pursuit of economic reforms will be consistent or effective.





Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible.  The Peoples Bank of China or other banks are authorized
to buy and sell foreign currencies at the exchange rates quoted by the Peoples
Bank of China.  Approval of foreign currency payments by the Peoples
Bank of China or other institutions requires submitting a payment application
form together with suppliers’ invoices, shipping documents and signed
contracts.





Since the
Company has its primary operations in the PRC, the majority of its revenues will
be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency
exchanges that exist in the PRC, the Company’s ability to use revenue generated
in RMB to pay any dividend payments to its shareholders outside of China may be
limited.





The
Company’s business depends on maintaining licenses of its current products from
the China State Food and Drug Administration.  Obtaining licenses for
additional products can be expensive and is usually time
consuming.  Failure to obtain the necessary licenses when needed can
cause the Company’s business plan to be delayed.  If the delays
prevent the Company from generating positive cash flow or introducing a
significant number of products, there will be a material adverse effect on the
Company.





In
September 2006, PRC changed the laws regarding transfer of equity in PRC
companies in exchange for equity in non-PRC companies.  Approvals and
registrations for such transfers are required and penalties may be imposed if
the requirements are not met.





Concentration
of Credit Risk





Financial
instruments that potentially subject the Company to significant concentration of
credit risk are primarily cash and cash equivalents.





6





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.







7            
 SUBSEQUENT EVENTS





Restructuring
of Bank of China loans





In
October 2009, the Company reached a restructuring agreement with Eastern Asset
Management Company “(“EAMC”), a nationwide investment company based in China
which acquired the ownership of the loan from Bank of China.  Prior to
the restructuring, the outstanding balance of the debt was 54,092,916 RMB
including 41,715,142 RMB of principal and 12,377,774 RMB of accrued
interest.  Under the restructuring agreement, the Company received the
forgiveness from EAMC in the amount of 24,892,316 RMB (approximately
$3,640,505), including 12,514,542 of principal and 12,377,774 RMB of accrued
interest. The total outstanding balance of the debt was reduced to 29,200,600
RMB (approximately $4,270,592) as of October 1, 2009. The Company paid off this
debt in October 2009 after it refinanced with a 36-month bridge
loan.





In order
to restructure the Bank of China loans, on October 1, 2009, the Company obtained
a bridge loan in the principal amount of 32 million RMB (approximately $4.68
million) from a group of seven individuals.  The maturity date of the
loan is September 30, 2012.  The loan bears interest at 12% for the
six month period ended March 31, 2010, then the interest rate is reduced to 9.6%
per annum until the maturity date of September 30, 2012.   The
Company has the option to pay part or the entirety of the loan prior to the
maturity date without penalty.  The loan is collateralized with two
buildings by Hebei Aoxing’s facility.











7




ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS




PRELIMINARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS




This
quarterly report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“China Aoxing believes,” “management believes” and similar language. The
forward-looking statements are based on the current expectations of China Aoxing
and are subject to certain risks, uncertainties and assumptions, including those
set forth in our Annual Report on Form 10-K for the fiscal year ended June 30,
2009 under Item 1A:  “Risk Factors.” Actual results may differ
materially from results anticipated in these forward-looking statements. We base
the forward-looking statements on information currently available to us, and we
assume no obligation to update them.






Outline
of Our Business




We are a
specialized pharmaceutical company focusing on research, development,
manufacturing and marketing of a broad range of narcotics and pain management
pharmaceutical products. Our product line is comprised of prescription and
over-the-counter pharmaceutical products.  Our pharmaceutical products
have been approved by the Chinese State Food and Drug Administration, or SFDA,
based on demonstrated safety and efficacy. We sell our products primarily to
hospitals, clinics, pharmacies and retail in most of the provinces of China,
including rural areas and major cities.




Pharmaceutical
Industry in China: According to a recent ISI Emerging Markets Report, the
pharmaceutical industry in China was approximately $27.7 billion in 2005 and
China is forecast to become the world’s fifth largest pharmaceutical market by
2010. This growth is being driven by several factors, including improving
standards of living,an increase in
disposable income fueled by the growing economy, the aging population, the
increasing participation in the State Basic Medical Insurance System, as well as
the increase in government spending on public health care. The Chinese
government pledged $4 billion for healthcare spending in 2007, an 81% increase
from the $2.2 billion in 2006.




In
August, 2009, the Ministry of Health (MoH) of China released an Essential Drug
List of 300 drugs to be sold at controlled prices as part of its US$124 billion
health care reform. The EDL includes both Western and Chinese medicines,
targeting common antibiotics, pain relievers, high blood pressure, and
etc.  Thirty one products of our company are listed on the
EDL.  The Company, therefore, expects sales to MoH-related agencies to
represent a significant source of revenue growth in future
periods.  The Company is working closely and negotiating with related
government agencies on the product supply and purchase in the next several
years.




Narcotics
Industry in China: Currently, the pharmaceutical market in China is highly
fragmented. We believe there are over 3,000 small enterprises currently engaged
in the development, manufacture and sale of pharmaceutical products, and we
expect significant consolidation of pharmaceutical business, products and
technologies in China in near future.  However, based on recent
statistics provided by the China SFDA, there are only 13 pharmaceutical
companies designated by the China SFDA as the narcotic drug producers in
China.





8




Each of our pharmaceutical products has
certain medicinal functions and has demonstrated safety and efficacy in
accordance with the China SFDA requirements for the treatment of at least one or
more therapeutic indications.  Our products are produced in various
formulations, such as injection, tablets, capsules, oral solution and
powders.  Our manufacturing facility in China is GMP certified, fully
integrated with manufacturing support systems including quality assurance,
quality control and regulatory compliance. We have developed our own independent
quality control systems in accordance with SFDA regulations. Our quality
assurance team devotes significant attention to quality control for designing,
manufacturing and testing our products, and is also responsible for ensuring
that we are in compliance with all applicable national and local regulations and
standards, as well as our internal policies. Our senior management team is also
actively involved in setting quality assurance policies and managing internal
and external quality performance. These support systems enable us to maintain
high standards of quality for our products and deliver reliable products to our
customers on a timely basis.







Results
of Operations




Revenues
for the three months ended September 30, 2009 were $1,446,663, a 60% decrease
from the revenues of $3,598,065 realized during the three months ended September
30, 2008.  The decrease in revenue was caused by the impact of our
relocation of the LRT manufacturing facility in the summer of
2009.  The consolidation of the LRT facility with our own necessitated
that we obtain GMP re-certification of six formulations at the new
facility.  This has delayed our fulfillment of certain purchase
orders.   During the three months ended September 30, 2009, our
new facility successfully passed the GMP re-certification on capsule, tablet,
granule and oral solution formulations.  We expect that sales of pill
and tincture formulations will continue to be adversely affected by the GMP
re-certification process until June 2010.





Our cost
of sales was $450,143 for three months ended September 30, 2009, which was 77%
less than the $1,937,345 in costs incurred during the three month ended
September 30, 2008.   The gross margin ratio was increased from 46% in
the three months ended September 30, 2008 to 69% in the three months ended
September 30, 2009.  The primary reason for the improvement in gross
margin was that Zhongtongan, our leading product for dental pain in the market,
became a much more significant contributor to our
revenue.  Zhongtongan has a much higher gross margin compared to some
other products.





During
the three months ended September 30, 2009, gross profit was $996,520, which was
40% lower than the $1,660,720 gross profit realized during the three months
ended September 30, 2008.  This drop reflected less net sales as a
result of temporarily low production output caused by the relocation of our
manufacturing function.





Research
and development expenses decreased from $266,329 during the three months ended
September 30, 2008 to $113,303 during the three months ended September 30, 2008,
a 57% decrease.  Our R&D expenses will tend to fluctuate from
period to period, reflecting the progress of our various development
projects.





9





General
and administrative expenses decreased from $1,192,892 in the three months ended
September 30, 2008 to $877,484 during the three months ended September 30, 2009,
a 26% decrease, reflecting our continuous efforts in cost
control..   During the three months ended September 30, 2009,
stock-based compensation for services decreased to $202,227 from $399,423 during
the three months ended September 30, 2008.





Selling
expenses in the amount of $260,894 during the three months ended September 30,
2009 were a 62% decrease from the $631,018 spent on selling during the three
months ended September 30, 2008.  The decrease was primarily due to
the consolidation of LRT’s selling expenses with ours and general cost control
measures undertaken by our company.





Depreciation
and amortization expense decreased from $144,458 in three months ended September
30, 2008 to $109,217 in three months ended September 30, 2009, or a decrease of
24%, partially due to divesture of fixed assets of LRT during the last reporting
period.





Our loss
from operations decreased to $364,378 during the three months ended September
30, 2009 from $573,977 during the three months ended September 30,
2008.  The 37% decrease in the loss was primarily due to the
improvement of operation efficiency as well as greater control of operational
expenditures.





Our net
loss for the three months ended September 30, 2009 was
$2,294,609.  This included, however, an expense of $2,142,159
attributable to the increase in the fair value of our outstanding financial
derivatives.  In comparison, during the three months ended September
30, 2008, the Company achieved net income in the amount of
$626,119.  This, however, included a $1,459,751 forgiveness of debt by
the Bank of China and a $147,727 gain on the fair value of financial
derivatives. We expect that the change of fair value of financial derivatives
could continue to significantly impact our net income or loss over the next 24
months, depending on the volatility of the market price for our common
stock.







Liquidity and Capital
Resources




Our
operations during the three months ended September 30, 2009 consumed $242,976 in
cash, which reflected significant improvement as compared to a negative cash
flow from operations in the amount of $620,492 during the three months ended
September 30, 2008.  However, we continued to incur negative cash flow
from operations as the gross profit from our product sales is not
sufficient  to offset the cash demands of our ongoing business
expansion.





Our cash
flows from investing activities amounted to $657,608 during the three months
ended September 30, 2009.  We received $950,626 in cash from our sale
of the real estate previously owned by LRT - the sale had been recorded on our
financial statements for the quarter ended June 30, 2009.  On the
other hand, we used $293,018 to purchase additional property and
equipment.





Our cash
flows from financing activities amounted to $4,788,622 during the three months
ended September 30, 2009.  During that period, we completed a private
placement with a total of fifteen institutional and other accredited investors
of 5,263,158 of shares of the Company’s common stock at a purchase price of
$0.95 per share, for gross proceeds of $5 million.





10




During the three months ended September
30, 2009, we significantly improved our working capital position. At September
30, 2009, we had working capital of $1,426,064 as compared to a working capital
deficit of $13,173,235 at June 30, 2009.  The improvement of our
working capital condition was attributable to (1) the $5 million private
placement in August 2009; (2) conversion to common stock of $4,830,847 owed on
account of a note that we issued to American Oriental Bioengineering, and (3)
cash realization through the divesture of the land and building of LRT. We expect to continue
to improve our liquidity as well as our capital structure in the coming
year.




In
October 2009, the Company reached a restructuring agreement with Eastern Asset
Management Company “(“EAMC”), a nationwide investment company based in China
which acquired the ownership of the loan from Bank of China.  Prior to
the restructuring, the outstanding balance of the debt was 54,092,916 RMB
including 41,715,142 RMB of principal and 12,377,774 RMB of accrued
interest.  Under the restructuring agreement, the Company received the
forgiveness from EAMC in the amount of 24,892,316 RMB (approximately
$3,640,505), including 12,514,542RMB of principal and 12,377,774 RMB of accrued
interest. The total outstanding balance of the debt was reduced to 29,200,600
RMB (approximately $4,270,592) as of October 1, 2009. The Company paid off this
debt in October 2009 after it refinanced with a 36-month bridge
loan.





In order
to restructure the Bank of China loans, on October 1, 2009 the Company obtained
a bridge loan in the principal amount of 32 million RMB (approximately $4.68
million) from a group of seven individuals.  The maturity date of the
loan is September 30, 2012.  The loan bears interest at 12% for the
six month period ended March 31, 2010, then interest is reduced to 9.6% per
annum until the maturity date of September 30, 2012.   The
Company has the option to pay part or the entirety of the loan prior to the
maturity date without penalty.  The loan is collateralized by two
buildings at Hebei Aoxing’s facility.





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







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.








ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.





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ITEM
4.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures.  Our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of September 30, 2009.  Pursuant
to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, “disclosure controls and procedures”
means controls and other procedures that are designed to insure that information
required to be disclosed by China Aoxing in the reports that it files with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time limits specified in the Commission’s
rules.  “Disclosure controls and procedures” include, without
limitation, controls and procedures designed to insure that information China
Aoxing is required to disclose in the reports it files with the Commission is
accumulated and communicated to our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding required
disclosure.  Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that China Aoxing’s system of disclosure
controls and procedures was effective as of September 30, 2009 for the purposes
described in this paragraph.





Changes in Internal
Controls.  There was no change in internal controls over
financial reporting (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act or 1934) identified in connection with the evaluation
described in the preceding paragraph that occurred during China Aoxing’s 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
1A. Risk Factors.




There
have been no material changes from the risk factors included in the Annual
Report on Form 10-K for the year ended June 30, 2009.





Item
2.    Unregistered Sale of Securities and Use of
ProceedsRegistrant





(a) Unregistered sales of
equity securities





The
Company’s private placement of 5,263,158 common shares on August 6, 2009 was
previously reported in a Current Report on Form 8-K filed on August 12,
2009.





(c) 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 2010.





Item
6.    Exhibits





31.1
            Rule
      13a-14(a) Certification – CEO31.2
            Rule
      13a-14(a) Certification – CFO32
            Rule
      13a-14(b) Certification




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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 20, 2009
            By: 
      /s/ Zhenjiang
      YueZhenjiang
      Yue, Chief Executive OfficerDate:
      November 20, 2009
            By: 
      /s/ Hongyue
      HaoHongyue
      Hao, Acting Chief  Financial
Officer









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