**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





þ
            Quarterly
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934





For
                the quarterly period ended:**March 31, 2007**





Or





o
            Transition
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934





For
                the transition period from ______________ to
                _______________





Commission
      File Number: **000-28153**




**SKYSTAR
                BIO-PHARMACEUTICAL COMPANY**(Exact
                name of registrant as specified in its
                charter)




**Nevada**
            
            **33-0901534**(State
                or other jurisdiction of incorporation of organization)
            
            (I.R.S.
                Employer Identification Number)





**Rm.
                10601, Jiezuo Plaza, No. 4, Fenghui Road South,**
              **Gaoxin
                District, Xian Province, P.R. China**
            
            N/A(Address
                of principal executive offices)
            
            (Zip
                code)




**(8629)
                8819-3188**(Registrant’s
                telephone number, including area
                code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.     Yes þ No o




The
      registrant is a shell company (as defined by Rule 12b-2 of the Exchange
      Act).     Yes o No þ




APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each issuer’s classes of common stock, as of
      the latest practicable date: 12,795,549 issued and outstanding as of May 9,
      2007.




Transitional
      Small Business Disclosure Form (Check one):   
Yes o No þ










**TABLE
      OF CONTENTS**


**TO
      QUARTERLY REPORT ON FORM 10-QSB**


**FOR
      QUARTER ENDED MARCH 31, 2007**




PagePART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets
            F-1Consolidated
                Statements of Income
            F-2Consolidated
                Statements of Shareholders’ Equity
            F-3Consolidated
                Statements of Cash Flows
            F-4Condensed
                Notes to Consolidated Financial Statements
            F-5Item
                2.
            Management’s
                Discussion and Analysis or Plan of Operation
            4Item
                3.
            Controls
                and Procedures
            19PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            20Item
                6.
            Exhibits
            21Signatures
            22




(REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK)  2




**CAUTION
      REGARDING FORWARD-LOOKING INFORMATION**





All
      statements contained in this Quarterly Report on Form 10-QSB (“Form 10-QSB”) for
      Skystar Bio-Pharmaceutical Company, other than statements of historical facts,
      that address future activities, events or developments are forward-looking
      statements, including, but not limited to, statements containing the words
      “believe,” “anticipate,” “expect” and words of similar import. These statements
      are based on certain assumptions and analyses made by us in light of our
      experience and our assessment of historical trends, current conditions and
      expected future developments as well as other factors we believe are appropriate
      under the circumstances. However, whether actual results will conform to the
      expectations and predictions of management is subject to a number of risks
      and
      uncertainties that may cause actual results to differ materially.





Such
      risks include, among others, the following: international, national and local
      general economic and market conditions: our ability to sustain, manage or
      forecast our growth; raw material costs and availability; new product
      development and introduction; existing government regulations and changes in,
      or
      the failure to comply with, government regulations; adverse publicity;
      competition; the loss of significant customers or suppliers; fluctuations and
      difficulty in forecasting operating results; changes in business strategy or
      development plans; business disruptions; the ability to attract and retain
      qualified personnel; the ability to protect technology; and other factors
      referenced in this and previous filings.





Consequently,
      all of the forward-looking statements made in this Form 10-QSB are qualified
      by
      these cautionary statements and there can be no assurance that the actual
      results anticipated by management will be realized or, even if substantially
      realized, that they will have the expected consequences to or effects on our
      business operations. As used in this Form 10-QSB, unless the context requires
      otherwise, “we” or “us” or “Skystar” or the “Company” means Skystar
      Bio-Pharmaceutical Company and its subsidiaries.




3


**PART
      I - FINANCIAL INFORMATION**





**Item
      1.**  **Financial
      Statements**




SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  CONSOLIDATED
          BALANCE SHEETS AS
            OF
            MARCH 31, 2007 AND DECEMBER 31, 2006
  March
                  31,
              
              December
                  31,2007
              
              2006UnauditedASSETSCURRENT
                  ASSETS:Cash
              
              $
              3,490,448
              
              $
              192,016Restricted
                  cash
              
              
              70,442
              
              
              69,610Accounts
                  receivable, trade, net of allowance for doubtful accounts of$11,572
                  and $14,426 as of March 31, 2007 and December 31, 2006,
                  respectively
              
              
              271,348
              
              
              131,599Inventories
              
              
              407,183
              
              
              528,566Deposits
                  and prepaid expenses
              
              
              31,658
              
              
              29,944Loans
                  receivable
              
              
              8,645
              
              
              8,558Other
                  receivables
              
              
              46,441
              
              
              38,881Total
                  current assets
              
              
              4,326,165
              
              
              999,174PLANT
                  AND EQUIPMENT, net
              
              
              11,244,626
              
              
              10,910,948OTHER
                  ASSETS:Deferred
                  debenture expense
              
              
              940,152
              
              
              -Prepaid
                  land use right, net
              
              
              314,368
              
              
              311,212Intangible,
                  net
              
              
              19,425
              
              
              25,640Total
                  other assets
              
              
              1,273,945
              
              
              336,852Total
                  assets
              
              $
              16,844,736
              
              $
              12,246,974LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Interest-bearing
                  short-term loan
              
              $
              38,850
              
              $
              38,460Non-interest
                  bearing loan from third party
              
              
              63,455
              
              
              62,818Accounts
                  payable
              
              
              65,502
              
              
              71,223Accrued
                  expenses
              
              
              258,410
              
              
              523,892Taxes
                  payable
              
              
              174,769
              
              
              218,231Other
                  payables
              
              
              568,708
              
              
              607,595Amount
                  due to related companies
              
              
              53,027
              
              
              16,025Total
                  current liabilities
              
              
              1,222,721
              
              
              1,538,244OTHER
                  LIABILITIES:Deferred
                  government grant
              
              
              971,250
              
              
              961,500Convertible
                  debenture, net of $3,983,082 discount
              
              
              91,918
              
              
              -Total
                  other liabilities
              
              
              1,063,168
              
              
              961,500Total
                  liabilities
              
              
              2,285,889
              
              
              2,499,744COMMITMENTS
                AND CONTINGENCIES
              
              
              -
              
              
              -SHAREHOLDERS'
                  EQUITY:Preferred
                  stock, $0.001 par value, 50,000,000 shares authorized,
                  2,000,000series"
                  A" shares issued and outstanding as of March 31, 2007 andDecember
                  31, 2006, respectively; Nil series"B" shares issuedand
                  outstanding as of March 31, 2007 and December 31, 2006,
                  respectively.
              
              
              2,000
              
              
              2,000Common
                  stock, $0.001 par value, 50,000,000 shares authorized;12,795,549
                  and 12,795,549 shares issued and outstanding as ofMarch
                  31, 2007 and December 31, 2006, respectively
              
              
              12,795
              
              
              12,795Paid-in-capital
              
              
              10,964,602
              
              
              6,246,325Deferred
                  compensation
              
              
              (344,978
              )
              
              (705,877
              )Statutory
                  reserves
              
              
              816,145
              
              
              779,624Retained
                  earnings
              
              
              2,545,104
              
              
              2,952,343Accumulated
                  other comprehensive income
              
              
              563,179
              
              
              460,020Total
                  shareholders' equity
              
              
              14,558,847
              
              
              9,747,230Total
                  liabilities and shareholders' equity
              
              $
              16,844,736
              
              $
              12,246,974





F-1




SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) FOR
            THE
            THREE MONTHS ENDED MARCH 31, 2007 AND 2006
  2007
              
              2006Unaudited
              
              UnauditedREVENUE
              
              $
              1,367,810
              
              $
              995,188COST
                  OF SALES
              
              
              697,035
              
              
              520,440GROSS
                  PROFIT
              
              
              670,775
              
              
              474,748RESEARCH
                  AND DEVELOPMENT COSTS
              
              
              31,655
              
              
              19,339AMORTIZATION
                  OF DEFERRED COMPENSATION
              
              
              360,899SELLING
                  EXPENSES
              
              
              109,428
              
              
              67,908GENERAL
                  AND ADMINISTRATIVE EXPENSES
              
              
              316,551
              
              
              206,236(LOSS)
                  INCOME FROM OPERATIONS
              
              
              (147,758
              )
              
              181,265OTHER
                  INCOME (EXPENSES)Interest
                  income
              
              
              7,160
              
              
              -Other
                  income
              
              
              -
              
              
              623Interest
                  expense
              
              
              (163,496
              )
              
              (839
              )(LOSS)
                  INCOME BEFORE PROVISION FOR INCOME TAXES
              
              
              (304,094
              )
              
              181,049PROVISION
                  FOR INCOME TAXES
              
              
              66,624
              
              
              27,157NET
                  (LOSS) INCOME
              
              
              (370,718
              )
              
              153,892OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              103,159
              
              
              46,261COMPREHENSIVE
                  (LOSS) INCOME
              
              $
              (267,559
              )
              $
              200,153(LOSS)
                  EARNINGS PER SHARE (EPS)-
                  Basic
              
              $
              (0.03
              )
              $
              0.02-
                  Diluted
              
              $
              (0.03
              )
              $
              0.02Weighted
                  average number of common shares used to compute
                  EPS:-
                  Basic
              
              
              12,795,549
              
              
              6,570,030-
                  Diluted
              
              
              12,795,549
              
              
              6,570,030




F-2




SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY FOR
            THE
            THREE MONTHS ENDED MARCH 31, 2007 AND 2006


AccumulatedothercomprehensivePreferred
                  stock
              
              Common
                  stock
              
              Paid-in
              
              Statutory
              
              Retained
              
              Deferred
              
              incomeShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              reserves
              
              earnings
              
              Compensation
              
              (loss)
              
              TotalBALANCE,
                  January 1, 2006
              
              
              50,000,000
              
              $
              50,000
              
              
              1,260,651
              
              $
              1,261
              
              $
              4,301,747
              
              $
              364,460
              
              $
              2,192,365
              
              $
              -
              
              $
              161,345
              
              $
              7,071,178Share
                  conversion
              
              
              (48,000,000
              )
              
              (48,000
              )
              
              10,745,548
              
              
              10,745
              
              
              37,255
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Share
                  issued for services
              
              
              
              
              
              
              
              
              600,000
              
              
              600
              
              
              1,571,400
              
              
              
              
              
              
              
              
              (1,572,000
              )
              
              
              
              
              -Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              46,261
              
              
              46,261Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              153,892
              
              
              
              
              
              
              
              
              153,892BALANCE,
                  March 31, 2006 (unaudited)
              
              
              2,000,000
              
              
              2,000
              
              
              12,606,199
              
              
              12,606
              
              
              5,910,402
              
              
              364,460
              
              
              2,346,257
              
              
              (1,572,000
              )
              
              207,606
              
              
              7,271,331Shares
                  issued for services
              
              
              
              
              
              
              
              
              189,350
              
              
              189
              
              
              335,923
              
              
              
              
              
              
              
              
              (336,112
              )
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,202,235
              
              
              
              
              
              1,202,235Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,021,250
              
              
              
              
              
              
              
              
              1,021,250Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              252,414
              
              
              252,414Adjustment
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              415,164
              
              
              (415,164
              )
              
              
              
              
              
              
              
              -BALANCE,
                  December 31, 2006
              
              
              2,000,000
              
              
              2,000
              
              
              12,795,549
              
              
              12,795
              
              
              6,246,325
              
              
              779,624
              
              
              2,952,343
              
              
              (705,877
              )
              
              460,020
              
              
              9,747,230Beneficial
                  conversion feature of debentures
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,130,575
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,130,575Warrants
                  issued to debenture holders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,944,425
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,944,425Warrants
                  issued to placement agent
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,277
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,277Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              360,899
              
              
              
              
              
              360,899Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              103,159
              
              
              103,159Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (370,718
              )
              
              
              
              
              
              
              
              (370,718
              )Statutory
                  reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              36,521
              
              
              (36,521
              )
              
              
              
              
              
              
              
              -BALANCE,
                  March 31, 2007 (unaudited)
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              10,964,602
              
              $
              816,145
              
              $
              2,545,104
              
              $
              (344,978
              )
              $
              563,179
              
              $
              14,558,847




F-3
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  CONSOLIDATED
            STATEMENTS OF CASH FLOWS FOR
              THE
              THREE MONTHS ENDED MARCH 31, 2007 AND 2006
  2007
                
                2006Unaudited
                
                UnauditedCASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    (loss) income
                
                $
                (370,178
                )
                $
                153,892Adjustments
                    to reconcile net (loss) income to cashprovided
                    by (used in) operating activities:Depreciation
                    and amortization
                
                
                33,519
                
                
                26,060Amortization
                    of deferred debenture expenses
                
                
                40,876
                
                
                -Amortization
                    of discount on debentures
                
                
                91,918
                
                
                -Amortization
                    of deferred compensation
                
                
                360,899
                
                
                -(Increase)
                    decrease in assets:Accounts
                    receivable, trade
                
                
                (137,891
                )
                
                (2,122
                )Inventories
                
                
                126,263
                
                
                (199,663
                )Deposits
                    and prepaid expenses
                
                
                (1,406
                )
                
                (21,935
                )Other
                    receivables
                
                
                (7,138
                )
                
                (539
                )Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                (6,419
                )
                
                933Accrued
                    expenses and other payables
                
                
                (343,669
                )
                
                192,790Taxes
                    payables
                
                
                (45,502
                )
                
                112,655Net
                    cash (used in) provided by operating activities
                
                
                (259,268
                )
                
                262,071CASH
                    FLOWS FROM INVESTING ACTIVITIES:Increase
                    in restricted cash
                
                
                (125
                )
                
                -Purchase
                    of property, plant and equipment
                
                
                (249,261
                )
                
                (467,311
                )Decrease
                    in amounts due from shareholders
                
                
                -
                
                
                23,090Net
                    cash used in investing activities
                
                
                (249,386
                )
                
                (444,221
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Increase
                    in amount due to shareholders
                
                
                36,700
                
                
                8,637Increase
                    in amount due to related companies
                
                
                -
                
                
                6,214Increase
                    in non-interest bearing loan from third party
                
                
                -
                
                
                251,667Proceeds
                    from government subsidies
                
                
                -
                
                
                124,280Proceeds
                    from convertible debentures, net
                
                
                3,737,250
                
                
                -Increase
                    (decrease) in non-interest bearing loan to third parties
                
                
                -
                
                
                (211,276
                )Net
                    cash provided by financing activities
                
                
                3,773,950
                
                
                179,522EFFECT
                    OF EXCHANGE RATE CHANGES ON CASH
                
                
                33,136
                
                
                234INCREASE
                    (DECREASE) IN CASH
                
                
                3,298,432
                
                
                (2,394
                )CASH,
                    beginning of period
                
                
                192,016
                
                
                38,498CASH,
                    end of period
                
                $
                3,490,448
                
                $
                36,104SUPPLEMENTAL
                    DISCLOSURE INFORMATIONInterest
                    expense paid
                
                $
                819
                
                $
                835Income
                    taxes paid
                
                $
                140,548
                
                $
                -Non-cash
                    transactionsWarrants
                    issued for services
                
                $
                643,277
                
                $
                -Stock
                    issued for services
                
                
                -
                
                
                1,572,000643,277
                
                
                1,572,000


F-4
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  **Note
          1- DESCRIPTION OF BUSINESS AND ORGANIZATION**
 
 Skystar
          Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
          Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
          name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
          2000, the Company changed its name to “The Cyber Group Network Corporation”. On
          February 15, 2006, the Company further changed its name to “Skystar
          Bio-Pharmaceutical Company” to reflect its current business
          operations.
 
 On
          November 7, 2005, the Company completed a stock exchange transaction with
          the
          stockholders of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Limited
          (“Skystar Cayman”), whereby 48,000,000 shares of the Company’s Series B
          preferred stock was issued to the stockholders of Skystar Cayman in exchange
          for
          100% of the common stock of Skystar Cayman. The 48,000,000 shares of Series
          B
          preferred stock issued to the stockholders of Skystar Cayman shall be
          convertible, in aggregate, into a number of shares of the Company’s common stock
          that would equal 89.5% of the outstanding shares of the Company’s common stock,
          if the shares were to be converted on the closing date of the stock exchange
          transaction which was November 7, 2005. In addition, Skystar Cayman paid
          $120,000 to Cyber, which was used to pay liabilities of Cyber.
 
 In
          connection with the stock exchange transaction, the Company appointed four
          new
          directors, Mr. Weibing Lu, Mr. Wei Wen, Mr. Xinya Zhang and Ms. Erna Gao,
          to the
          Company’s board of directors. Furthermore, concurrent with the closing of the
          stock exchange transaction, all of the Company’s former officers and a director,
          Mr. David Wassung resigned their positions and Mr. Weibing Lu was appointed
          the
          new chief executive officer, Ms. Erna Gao the new chief financial officer,
          and
          Mr. Wei Wen the new secretary.
 
 The
          stock
          exchange transaction has been accounted for as a reverse acquisition and
          recapitalization of the Company whereby Skystar Cayman is deemed to be
          the
          accounting acquirer (legal acquiree) and the Company to be the accounting
          acquiree (legal acquirer). The accompanying consolidated financial statements
          are in substance those of Skystar Cayman, with the assets and liabilities,
          and
          revenues and expenses, of the Company being included effective from the
          date of
          the stock exchange transaction. The Company is deemed to be a continuation
          of
          the business of Skystar Cayman. 2,000,000 shares of the Company’s preferred
          stock and 500,000,000 shares of its common stock outstanding prior to the
          stock
          exchange have been accounted for at their net book value at the time of
          the
          transaction.
 
 Skystar
          Cayman was incorporated under the laws of the Cayman Islands on January
          24,
          2005. It has not carried on any substantive operations of its own, except
          for
          the entering of certain exclusive agreements with Xian Tianxing
          Bio-Pharmaceutical Co., Limited (“Xian Tianxing”). Skystar Cayman through its
          variable interest entity (“VIE”), Xian Tianxing Bio-Pharmaceutical Co., Limited
          engages in research, development, production, marketing and sales of
          bio-pharmaceutical and veterinary products. All current operations of the
          Company are in the People’s Republic of China (“China” or the
“PRC”).
 F-5
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 Xian
          Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
          company without shares. On December 31, 2003, Xian Tianxing was restructured
          from a limited liability company without shares to a joint stock limited
          company. According to the PRC law, a “limited liability company” is a company
          whose shareholders shall assume liability towards the company to the extent
          of
          their respective capital contributions, whereas a joint stock limited company
          is
          a company having its total capital divided into equal shares and whose
          shareholders shall assume liability to the extent of their respective
          shareholdings.
 
 The
          paid-in capital of Xian Tianxing was funded by the majority shareholders
          of
          Skystar Cayman. PRC law currently has limits on foreign ownership of companies.
          To comply with these foreign ownership restrictions, on October 28, 2005,
          Skystar Cayman entered into certain exclusive agreements with Xian Tianxing
          and
          its shareholders. Xian Tianxing holds the licenses and approvals necessary
          to
          operate the bio-pharmaceutical business in China. Pursuant to these agreements,
          Skystar Cayman provides exclusive technology consulting and other general
          business operation services to Xian Tianxing in return for a consulting
          services
          fee which is equal to Xian Tianxing’s revenue. In addition, Xian Tianxing’s
          shareholders have pledged their equity interests in Xian Tianxing to Skystar
          Cayman, irrevocably granted Skystar Cayman an exclusive option to purchase,
          to
          the extent permitted under PRC law, all or part of the equity interests
          in Xian
          Tianxing and agreed to entrust all the rights to exercise their voting
          power to
          the person(s) appointed by Skystar Cayman. Through these contractual
          arrangements, Skystar Cayman has the ability to substantially influence
          Xian
          Tianxing’s daily operations and financial affairs, appoint its senior executives
          and approve all matters requiring shareholder approval.
 
 As
          a
          result of these contractual arrangements, which obligates Skystar Cayman
          to
          absorb a majority of the risk of loss from Xian Tianxing’s activities and enable
          Skystar Cayman to receive a majority of its expected residual returns,
          Skystar
          Cayman accounts for Xian Tianxing as a variable interest entity (“VIE”) under
          FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
          Entities, an Interpretation of ARB No. 51”. Accordingly, Skystar Cayman
          consolidates Xian Tianxing’s results, assets and liabilities.
 
 Because
          Skystar and Xian Tianxing are under common control, the consolidation of
          Skystar
          Cayman and Xian Tianxing has been accounted for at historical cost and
          prepared
          on the basis as if the aforementioned exclusive agreements between Skystar
          and
          Xian Tianxing had become effective as of the beginning of the first period
          presented in the accompanying consolidated financial statements.
  F-6
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  The
          Company’s consolidated assets do not include any collateral for Xian Tianxing’s
          obligations. The creditors of Xian Tianxing do not have recourse to the
          general
          credit of the Company.
 
 **Note
          2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Basis
          of presentation and consolidation
 
 The
          unaudited consolidated financial statements have been prepared by the Company,
          pursuant to the rules and regulations of the Securities and Exchange Commission.
          The information furnished herein reflects all adjustments (consisting of
          normal
          recurring accruals and adjustments) which are, in the opinion of management,
          necessary to fairly present the operating results for the respective periods.
          Certain information and footnote disclosures normally present in annual
          consolidated financial statements prepared in accordance with accounting
          principles generally accepted in the United States of America have been
          omitted
          pursuant to such rules and regulations. These consolidated financial statements
          should be read in conjunction with the audited financial statements and
          footnotes for the period ended December 31, 2006 included in the Company's
          Current Report on 10KSB filed with the Securities and Exchange Commission
          on May
          18, 2007. The results for the three months ending March 31, 2007 are not
          necessarily indicative of the results to be expected for the full year
          ending
          December 31, 2007.
 
 The
          accompanying consolidated financial statements are prepared in accordance
          with
          accounting principles generally accepted in the United States of
          America.
 
 The
          consolidated financial statements include the financial statements of the
          Company, its subsidiary, Skystar Cayman, and its variable interest entity,
          Xian
          Tianxing. All significant inter-company transactions and balances between
          the
          Company, its subsidiary and VIE are eliminated upon consolidation.
 
 Use
          of
          estimates
 
 The
          preparation of consolidated 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,
          disclosure of contingent assets and liabilities at the date of the financial
          statements, and the reported amounts of revenues and expenses during the
          reporting period. For example, the Company estimates its allowance for
          doubtful
          accounts and useful lives of fixed assets. Because of the use of estimates
          inherent in the financial reporting process, actual results could differ
          from
          those estimates.
 
 Fair
          values of financial instruments
 
 The
          Company values its financial instruments as required by Statement of Financial
          Accounting Standard (SFAS) No. 107, “Disclosures about Fair Value of Financial
          Instruments”. The estimated fair value amounts have been determined by the
          Company, using available market information and appropriate valuation
          methodologies. The estimates presented herein are not necessarily indicative
          of
          amounts that the Company could realize in a current market
          exchange.
  F-7
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 The
          Company’s financial instruments primarily consist of cash, accounts receivable,
          other receivables, accounts payable, accruals, other payables and short-term
          related party borrowings. As of the balance sheet dates, the estimated
          fair
          values of the financial instruments were not materially different from
          their
          carrying values as presented due to the short term maturities of these
          instruments and that the interest rates on the borrowings approximate those
          that
          would have been available for loans of similar remaining maturity and risk
          profile at respective period ends.
 
 Cash
 
 Cash
          includes cash on hand, demand deposits with banks and liquid investments
          with an
          original maturity of three months or less.
 
 Restricted
          cash
 
 The
          Company had restricted cash of $70,442 and $69,610 as of March 31, 2007
          and
          December 31, 2006, respectively. The restricted cash was received from
          the PRC
          government subsidies and set aside for the specific usages (see Note 10).
          The
          restricted funds are kept as bank deposits. Restricted cash is classified
          as
          current assets as of March 31, 2007 and December 31, 2006, based on the
          expected
          period when the funds will be put into their specific usages.
 
 Accounts
          and other receivables
 
 Accounts
          and other receivables are recorded at net realizable value consisting of
          the
          carrying amount less an allowance for uncollectible accounts, as needed.
 
 The
          Company uses the aging method to estimate the valuation allowance for
          anticipated uncollectible receivable balances. Under the aging method,
          bad debt
          percentages determined by management based on historical experience as
          well as
          current economic climate are applied to customers’ balances categorized by the
          number of months the underlying invoices have remained outstanding. The
          valuation allowance balance is adjusted to the amount computed as a result
          of
          the aging method. When facts subsequently become available to indicate
          that the
          allowance provided requires an adjustment, then the adjustment will be
          classified as a change in estimate.
   F-8
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  Inventories
 
 Inventories
          are stated at the lower of cost, as determined on a first-in, first-out
          basis,
          or market. Costs of inventories include purchases and related costs incurred
          in
          bringing the products to their present location and condition.
 
 Property,
          plant and equipment
 
 Plant
          and
          equipment are stated at cost less accumulated depreciation. Depreciation
          is
          computed using the straight-line method over the estimated useful lives
          of the
          assets. Estimated useful lives of the assets are as follows:
  Estimated
                      Useful LifeBuildings
                  
                  20
                      yearsMachinery
                      and equipment
                  
                  10
                      yearsComputer,
                      office equipment and furniture
                  
                  5
                      yearsAutomobiles
                  
                  5
                      years
 The
          carrying value of property, plant and equipment is assessed annually and
          when
          factors indicating impairment is present, the carrying value of the fixed
          assets
          is reduced by the amount of the impairment. The Company determines the
          existence
          of such impairment by measuring the expected future cash flows (undiscounted
          and
          without interest charges) and comparing such amount to the net asset carrying
          value. An impairment loss, if exists, is measured as the amount by which
          the
          carrying amount of the asset exceeds the fair value of the asset.
 
 Construction
          in progress
 
 Construction
          in progress includes direct costs of construction of a factory building.
          Interest incurred during the period of construction, if material, is
          capitalized. Construction in progress is not depreciated until such time
          as the
          assets are completed and put into service.
  Land
          use rights
 
 The
          Company has recorded as land use rights the costs paid to acquire a long-term
          interest to utilize the land underlying the Company’s facility. This type of
          arrangement is common for the use of land in the PRC. The land use rights
          are
          amortized on the straight-line method over the term of the land use rights
          of 50
          years.
  F-9
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  Intangibles
          - Technological Know-how
 
 Purchased
          technological know-how includes secret formulas, manufacturing processes,
          technical and procedural manuals and is amortized using the straight-line
          method
          over the expected useful economic life of 5 years, which reflects the period
          over which those formulas, manufacturing processes, technical and procedural
          manuals are kept secret to the Company as agreed between the Company and
          the
          selling party.
 
 Impairment
          of Long-Lived Assets
 
 The
          Company periodically evaluates the carrying value of long-lived assets
          to be
          held and used in accordance with the provisions of SFAS No. 144, “Accounting for
          the Impairment or Disposal of Long-Lived Assets”, which addresses financial
          accounting and reporting for the impairment or disposal of long-lived assets.
          SFAS No. 144 requires impairment losses to be recorded on long-lived assets
          used
          in operations when indicators of impairment are present and the undiscounted
          cash flows estimated to be generated by those assets are less than the
          assets’
carrying amounts. In that event, a loss is recognized based on the amount
          by
          which the carrying amount exceeds the fair market value of the long-lived
          assets. Loss on long-lived assets to be disposed of is determined in a
          similar
          manner, except that fair market values are reduced for the cost of disposal.
          Based on its review, the Company believes that, as of March 31, 2007 and
          December 31, 2006, there were no significant impairments of its long-lived
          assets.
 
 Comprehensive
          income
 
 SFAS
          No.
          130, “Reporting Comprehensive Income”, requires disclosure of all components of
          comprehensive income and loss on an annual and interim basis. Comprehensive
          income and loss is defined as the change in equity of a business enterprise
          during a period from transactions and other events and circumstances from
          non-owner sources. Accumulated other comprehensive income arose from the
          changes
          in foreign currency exchange rates.
 
 Revenue
          recognition
 
 Revenues
          of the Company include sales of bio-pharmaceutical and veterinary products
          in
          China. Sales are recognized when the following four revenue criteria are
          met:
          persuasive evidence of an arrangement exists, delivery has occurred, the
          selling
          price is fixed or determinable, and collectibility is reasonably assured.
          Sales
          are presented net of value added tax (VAT). No return allowance is made
          as
          product returns are insignificant based on historical experience.
 
 *(**a)*
                *Credit
                    sales:*Revenue
                    is recognized when the products have been delivered to the
                    customers.
 
 F-10
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 *(b)*
              *Full
                  payment before delivering*:Revenue
                  is recognized when the products have been delivered to
                  customers. 
 Research
          and development costs
 
 Research
          and development costs are expensed to operations as incurred and include
          salaries, professional fees and technical support fees.
 
 Income
          taxes
 
 The
          Company has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No.
          109
          requires the recognition of deferred income tax liabilities and assets
          for the
          expected future tax consequences of temporary differences between income
          tax
          basis and financial reporting basis of assets and liabilities. Provision
          for
          income taxes consists of taxes currently due plus deferred taxes. There
          are no
          deferred tax amounts at March 31, 2007 and December 31, 2006.
 
 The
          Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
          Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
          benefit only if it is “more likely than not” that the tax position would be
          sustained in a tax examination, with a tax examination being presumed to
          occur.
          The amount recognized is the largest amount of tax benefit that is greater
          than
          50% likely of being realized on examination. For tax positions not meeting
          the
“more likely than not” test, no tax benefit is recorded. The adoption had no
          affect on the Company’s financial statements.
 
 The
          charge for taxation is based on the results for the year as adjusted for
          items,
          which are non-assessable or disallowed. It is calculated using tax rates
          that
          have been enacted or substantively enacted by the balance sheet date.
 
 Deferred
          tax is accounted for using the balance sheet liability method in respect
          of
          temporary differences arising from differences between the carrying amount
          of
          assets and liabilities in the financial statements and the corresponding
          tax
          basis used in the computation of assessable tax profit. In principle, deferred
          tax liabilities are recognized for all taxable temporary differences, and
          deferred tax assets are recognized to the extent that it is probable that
          taxable profit will be available against which deductible temporary differences
          can be utilized.
 
 Deferred
          tax is calculated at the tax rates that are expected to apply to the period
          when
          the asset is realized or the liability is settled. Deferred tax is charged
          or
          credited in the income statement, except when related items are credited
          or
          charged directly to equity, in which case the deferred tax is also dealt
          with in
          equity.
 F-11
 SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
              31,
              2007
 (UNAUDITED)
 
 Deferred
          tax assets and liabilities are offset when they relate to income taxes
          levied by
          the same taxation authority and the Company intends to settle its current
          tax
          assets and liabilities on a net basis.
 
 Stock
          based compensation
 
 The
          Company has adopted Statement of Financial Accounting Standards No. 123R
          “Accounting for Stock-Based Compensation” (“SFAS 123”), which defines a
          fair-value-based method of accounting for stock based employee compensation
          and
          transactions in which an entity issues its equity instruments to acquire
          goods
          and services from non-employees. Stock compensation for stock granted to
          non-employees has been determined in accordance with SFAS 123R and the
          Emerging
          Issues Task Force consensus in Issue No. 96-18, "Accounting for Equity
          Instruments that are issued to Other than Employees for Acquiring, or in
          Conjunction with Selling Goods or Services" ("EITF 96-18"), as the fair
          value of
          the consideration received or the fair value of equity instruments issued,
          whichever is more reliably measured.
 
 Earnings
          per share
 
 Basic
          earnings per share (“EPS”) is computed by dividing income available to common
          shareholders by the weighted average number of common shares outstanding
          for the
          period. Diluted EPS includes the effect of the common share equivalents
          of the
          Company’s convertible preferred stock outstanding. The Company accounts for a
          stock dividend or split in accordance with SFAS No. 128, “Earnings Per Share”,
          which requires that a stock dividend or split be accounted for retrospectively
          if the stock dividend or split occurs during the period, or retroactively
          if the
          stock dividend or split occurs after the end of the period but before the
          release of the financial statements, by considering it outstanding for
          the
          entirety of each period presented.
 
 Foreign
          currency translation
 
 The
          Company uses the United States dollar (“U.S. dollars”) for financial reporting
          purposes. The Company’s subsidiary and VIE maintain their books and records in
          their functional currency, being the primary currency of the economic
          environment in which their operations are conducted.
 
 In
          general, for consolidation purposes, the Company translates the subsidiary’s and
          VIE’s assets and liabilities into U.S. dollars using the applicable exchange
          rates prevailing at the balance sheet date, and the statement of income
          and cash
          flows are translated at average exchange rates during the reporting period.
          As a
          result, amounts related to assets and liabilities reported on the statement
          of
          cash flows will not necessarily agree with changes in the corresponding
          balances
          on the balance sheet. Equity accounts are translated at historical rates.
          Adjustments resulting from the translation of the subsidiary’s and VIE’s
          financial statements are recorded as accumulated other comprehensive income.
 
 F-12
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 This
          quotation of the exchange rates does not imply free convertibility of RMB
          to
          other foreign currencies. All foreign exchange transactions continue to
          take
          place either through the People's Bank of China or other banks authorized
          to buy
          and sell foreign currencies at the exchange rate quoted by the People's
          Bank of
          China. The rate of exchange quoted by the People’s Bank of China on March 31,
          2007 was US$1.00 = RMB7.722. The weighted average translation rate of US$1.00
          =
          RMB7.7513 was applied to income statement accounts.
 
 Approval
          of foreign currency payments by the Bank of China or other institutions
          requires
          submitting a payment application form together with invoices, shipping
          documents
          and signed contracts. Transaction gains and losses that arise from exchange
          rate
          fluctuations on transactions denominated in a currency other than the functional
          currency are included in the results of operations as incurred.
 
 Recently
          issued accounting pronouncements
  In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced
          guidance for using fair value to measure assets and liabilities. This standard
          also responds to investors’ requests for expanded information about the extent
          to which companies measure assets and liabilities at fair value, the information
          used to measure fair value, and the effect of fair value measurements on
          earnings. The standard applies whenever other standards require (or permit)
          assets or liabilities to be measured at fair value. The standard does not
          expand
          the use of fair value in any new circumstances. SFAS 157 is effective for
          financial statements issued for fiscal years beginning after November 12,
          2007, and interim periods within those fiscal years. Early adoption is
          permitted. We are currently evaluating whether the adoption of SFAS157
          will have
          a material effect on our consolidated results of operations and financial
          condition.
 
 In
          February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
          Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
          Option for Financial Assets and Financials Liabilities — Including an Amendment
          of FASB Statement No. 115. This standard permits measurement of certain
          financial assets and financial liabilities at fair value. If the fair value
          option is elected, the unrealized gains and losses are reported in earnings
          at
          each reporting date. Generally, the fair value option may be elected on
          an
          instrument-by-instrument basis, as long as it is applied to the instrument
          in
          its entirety. The fair value option election is irrevocable, unless a new
          election date occurs. SFAS No. 159 requires prospective application and
          also
          establishes certain additional presentation and disclosure requirements.
          The
          standard is effective as of the beginning of the fiscal year that begins
          after
          November 15, 2007. The Company is currently evaluating the provisions
          of SFAS No. 159 to determine the potential impact, if any, the adoption
          will
          have on the Company’s financial statements.
 
 F-13
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  **Note
          3 -**  **CONCENTRATIONS
          AND CREDIT RISK**
 
 Financial
          instruments that potentially expose the Company to concentrations of credit
          risk
          consist of cash and accounts receivable and other receivables as of March
          31,
          2007 and December 31, 2006. The Company performs ongoing evaluations of
          its cash
          position and credit evaluations to ensure collections and minimize
          losses.
 
 As
          of
          March 31, 2007 and December 31, 2006, the Company’s bank deposits were all
          placed with banks in the PRC where there is currently no rule or regulation
          in
          place for obligatory insurance to cover bank deposits in the event of bank
          failure.
 
 For
          the
          period ended March 31, 2007 and year ended December 31, 2006, all of the
          Company’s sales arose in the PRC. In addition, all accounts receivable as at
          March 31, 2007 and December 31, 2006 also arose in the PRC.
 
 The
          Company’s five largest customers accounted for approximately 2.84%, of the
          Company’s total revenues for the three months ended March 31, 2007, while the
          Company’s five largest customers accounted for 5.8% of the Company’s total
          revenues for the three months ended March 31, 2006.
 
 The
          Company’s five largest vendors accounted for approximately 47.78% of the
          Company’s total purchases for the three months ended March 31, 2007, while the
          Company’s five largest vendors accounted for 70.82% of the Company’s total
          purchases for the three months ended March 31, 2006.
 
 The
          Company’s six major products accounted for approximately 52.8% of the Company’s
          total revenues for the three months ended March 31, 2007, while the Company’s
          four major products accounted for 54.3% of the Company’s total revenues for the
          three months ended March 31, 2006.
 
 The
          Company’s operations are all carried out in the PRC. Accordingly, the Company’s
          business, financial condition and results of operations may be influenced
          by the
          political, economic and legal environments in the PRC, and by the general
          state
          of the PRC’s economy.The Company’s operations in the PRC are subject to specific
          considerations and significant risks not typically associated with companies
          in
          the North America and Western Europe. These include risks associated with,
          among
          others, the political, economic and legal environments and foreign currency
          exchange. The Company’s results may be adversely affected by changes in
          governmental policies with respect to laws and regulations, anti-inflationary
          measures, currency conversion and remittance abroad, and rates and methods
          of
          taxation, among other things.
 
 F-14
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  **Note
          4 - RESTRICTED CASH**
 
 Restricted
          cash consists of the following:
  March
                      31,
                    2007
                  
                  December
                      31,
                    2006Funds
                      received from PRC government subsidies
                  
                  $
                  70,442
                  
                  $
                  69,610(See
                      Note 10)
 **Note
          5 - INVENTORIES**
 
 Inventories
          consist of the following:
  March
                      31,
                  
                  December
                      31,2007
                  
                  2006Raw
                      material
                  
                  $
                  165,058
                  
                  $
                  190,926Packing
                      materials
                  
                  
                  83,939
                  
                  
                  97,002Finished
                      goods
                  
                  
                  149,705
                  
                  
                  232,242Low
                      value consumables
                  
                  
                  8,481
                  
                  
                  8,396Total
                  
                  $
                  407,183
                  
                  $
                  528,566
  **Note
          6 - LOANS RECEIVABLE**
 
 The
          loans
          receivable of $8,645 and $8,558 as of March 31, 2007 and December 31, 2006,
          respectively, are unsecured, non-interest bearing and for terms less than
          one
          year. The Company has a long standing business relationship with these
          companies
          and in order to maintain these relationships, they have made these short
          term
          loans.
 
 **Note
          7 - PROPERTY, PLANT AND EQUIPMENT**
 
 Plant
          and
          equipment consists of the following:
  March
                      31,
                  
                  December
                      31,2007
                  
                  2006Building
                      and improvements
                  
                  $
                  355,507
                  
                  $
                  351,425Plant
                      and machinery
                  
                  
                  273,365
                  
                  
                  270,621Office
                      equipment
                  
                  
                  145,651
                  
                  
                  140,591Vehicles
                  
                  
                  158,904
                  
                  
                  128,134Construction
                      in progress
                  
                  
                  10,647,689
                  
                  
                  10,326,391Total
                  
                  
                  11,581,116
                  
                  
                  11,217,162Less:
                      accumulated depreciation
                  
                  
                  (336,490
                  )
                  
                  (306,214
                  )Plant
                      and equipment, net
                  
                  $
                  11,244,626
                  
                  $
                  10,910,948
 F-15
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 Construction
          in progress included above was the construction of a production base which
          operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
          The construction work commenced in late 2004 and was completed in February,
          2007. The Company obtained its certificate of GMP on January 8, 2007 and
          its
          Manufacture permit on February 7, 2007. The new factory has been in the
          process
          of test production since the beginning of 2007. The Company anticipates
          that the
          new factory can generate sufficient cash flows and therefore management
          has
          concluded there is no impairment loss on the construction in
          progress.
 
 Depreciation
          expense was $27,068 and $21,325 for the periods ended March 31, 2007 and
          2006,
          respectively.
 
 **Note
          8 - INTANGIBLES**
 
 The
          Company has recorded as land use rights the costs paid to acquire a long-term
          interest to utilize the land underlying the Company’s facilities. This type of
          arrangement is common for the use of land in the PRC. The land use rights
          are
          being amortized using the straight-line method over the term of the land
          use
          rights of 50 years. The total costs of the land use rights as of March
          31, 2007
          and December 31, 2006 amounted to $314,368 and $311,212, net of accumulated
          amortization of $21,738 and $19,865, respectively
 
 Intangibles
          consist of the following:
  March
                      31,
                  
                  December
                      31,2007
                  
                  2006Land
                      use rights
                  
                  $
                  334,434
                  
                  $
                  331,077Technological
                      know-how
                  
                  
                  129,500
                  
                  
                  128,100Total
                  
                  
                  463,934
                  
                  
                  459,177Less:
                      accumulated amortization
                  
                  
                  (130,141
                  )
                  
                  (122,325
                  )Intangible
                      assets, net
                  
                  $
                  333,793
                  
                  $
                  336,852
  F-16
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 Amortization
          expense for intangibles was $6,451 and $4,735 for the periods ended March
          31,
          2007 and 2006, respectively.
 
 **Note
          9 - INTEREST-BEARING SHORT-TERM LOAN**
 
 The
          short-term loan of $38,850 and $38,460 as of March 31, 2007 and December
          31,
          2006, respectively, was for a term of one year from August 10, 2005 to
          August
          10, 2006, is secured by a guarantee given by a third party, and bears interest
          at 0.8835% per month. During the third quarter of 2006, the short term
          loan was
          renewed for a term of one year from August 10, 2006 to August 10, 2007,
          is
          secured by a guarantee given by a third party and bears interest at 0.92625%
          per
          month.
 
 Interest
          expense for the periods ended March 31, 2007 and 2006 amounted to $819
          and $835,
          respectively.
 
 **Note
          10 - DEFERRED GOVERNMENT GRANT**
 
 The
          amounts represent subsidies for GMP projects granted by the PRC government.
          A
          subsidy in the amount of $641,000 was approved by the PRC government to
          be
          granted to the Company for the purpose of constructing a new factory which
          operations will meet the GMP Standard. In 2003, $516,500 was received by
          the
          Company and the remaining $124,500 was received in the first quarter of
          2006.
          According to the PRC’s government regulations for these types of grants, the
          funds being granted may be treated as capital contributed by the company
          appointed by the PRC government (“contributing company”) or as a loan from such
          company, which the Company will be required to repay. However, no agreement
          has
          been reached with the contributing company regarding the final treatment
          of this
          subsidy.
 
 Also
          in
          2003, another subsidy of $256,400 was received for financing the Company’s
          research and development activities. In 2006, the Company applied and utilized
          $186,644 in paying for the construction of the new plant facility. The
          Company
          expects that the final arrangement with the Government may not be confirmed
          within the year 2007.
 
 F-17
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 In
          2005,
          another subsidy of $64,100 was received for the Company’s research and
          development activities. This amount was put into use during the period.
          The
          final treatment of these funds may not be confirmed in 2007.
 
 **Note
          11 - CAPITAL TRANSACTIONS**
 
 On
          February 15, 2006, the Company effected a one-for-three hundred ninety
          seven
          (1:397) reverse stock split of the outstanding shares of the Company’s common
          stock. As a result, the total number of outstanding shares of the Company’s
          common stock was reduced from 500,000,000 to 1,260,651 issued and outstanding.
 
 On
          February 15, 2006, the Company also affected a one-for-ten (1:10) reverse
          stock
          split of the Company’s authorized shares of the Company’s preferred stock. As a
          result, the total number of authorized shares was reduced from 500,000,000
          to
          50,000,000.
 
 Per
          the
          conversion rights set forth in the certificate of designation for the series
“B”
convertible preferred stock, at the same time that the amendment to the
          Company’s articles of incorporation was filed that created sufficient authorized
          shares of common stock to permit full conversion of all 48,000,000 series
“B”
preferred shares, all of the series “B” preferred shares automatically were
          converted into 10,745,548 shares of common stock that equaled to 89.5%
          of the
          total issued and outstanding shares.
 
 In
          March
          2006, the Company issued a total of 600,000 shares of the Company’s common stock
          to consultants, as more fully described in Note 15.
 
 In
          November 2006, the Company issued a total of 139,350 shares of the Company’s
          common stock to consultants and non-executive director, as more fully described
          in Note 15.
 
 In
          November 2006, the Company issued another 50,000 shares of the Company’s common
          stock to a consultant whereas the shares were fully transferred in January
          2007
          as more fully described in Note 15.
 
 **Note
          12 - CONVERTIBLE DEBENTURES**
 
 On
          February 27, 2007, the Company entered into a Securities Purchase Agreement
          (the
“Agreement”), with several institutional and accredited investors (the
“Purchasers”) pursuant to which the Company sold to the Purchasers $4.075
          million 8% convertible debentures due February 28, 2009 (the “Debentures”), and
          warrants to purchase 4,075,000 shares of the common stock of the Company
          (the
“Warrants”), (collectively referred to as the “Transaction”). The initial
          conversion price of the debentures is $1.00 per share. The initial exercise
          price of the warrants is $1.20 per share with a life of three years. The
          conversion price and warrant exercise price are subject to downward
          adjustments should
          the Company issue more shares of common stock or securities convertible
          into
          common stock for capital raising activities for less than the conversion
          price
          or exercise price .
          Additional interest of 15% begins in June 2007 and continues through February
          2008 after which the additional interest increases to 25% through the maturity
          date of the note.
 
 F-18
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 The
          transaction closed on February 27, 2007. Gross proceeds from the sale to
          the
          Company were $4.075 million, of which $285,250 was paid to Pacific Ridge
          Capital
          who served as placement agent for the transaction and $52,500 was paid
          to
          consultants for the Purchaser in connection with the transaction. The Company
          also issued to the Placement Agent a warrant to purchase an aggregate of
          570,500
          shares with an exercise price of $1.00 per share with a life of five years.
          The
          value of the warrants issued to the placement agent was calculated as $643,277
          using the Binomial Model. The total amount of the cash payments and the
          fair
          value of the warrants amounted to $981,027, which was recorded as deferred
          debenture expenses. These costs will be amortized to interest expense over
          the
          two year life of the convertibles debentures. For the three months ended
          March
          31, 2007, $40,876 was amortized to interest expense.
 
 The
          Company determined the value of the warrants using a binomial Model with
          a
          volatility of approximately 75%, which is calculated by using the historical
          closing prices of the Company’s common stock. According to APB No. 14,
          Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
          EITF-98-5, and EITF-00-27, the Company allocated the proceeds using relative
          fair value method and determined that the convertible debentures were issued
          with beneficial conversion feature. As a result, on February 27, the allocated
          value of the warrants amounted to $1,944,425 and the beneficial conversion
          feature amounted to $2,130,575. The allocated value of the warrants and
          beneficial conversion feature totaling $4,075,000, was recorded as discount
          (or
          reduction in the carrying amount) of convertible debentures and additional
          paid-in capital and will be amortized over the two year life of the convertible
          debentures using interest method. For the period ended March 31, 2007,
          $91,918
          was amortized as interest expenses. As of March 31, 2007, the carrying
          value of
          the convertible debentures was $91,918 accordingly.
 
 In
          connection to the issuance of the debentures, the Company enter into a
          Registration Rights Agreement, in which a registration statement registering
          the
          resale of the common stock into which the Debentures are convertible and
          for
          which the Warrants are exercisable, as well as certain other shares of
          the
          Company's common stock is required to be filed with the Securities and
          Exchange
          Commission not later than April 13, 2007 and be declared effective by the
          SEC
          not later than May 28, 2007 if there is no SEC review of the Registration
          Statement, and June 27, 2007 if there is an SEC review. Failure to meet
          these
          deadlines will result in liquidated damages of 2% of the aggregate purchase
          price of the Debentures and Warrants per month, pro rated for partial periods.
          Since the Company has not filed the registration statement, the accrual
          of the
          liquidated damages is made starting from April 13, 2007. The accrual amount
          is
          estimated to be $81,500 per month.
 Pursuant
            to the Agreement, starting in June 2007, The Company shall pay on a monthly
            basis, 4.77% of the principal of the Debenture (“Principal Repayment Amount”),
            and all accrued interest. At the Company's option, payment shall be in
            cash or
            shares of common stock with certain equity conditions are met, which
            include,
            among other things, the effectiveness of the Registration Statement.
            The
            following is the repayment
            schedule of the principal of the debt :
 Amount2007
                    
                    $
                    1,360,6462008
                    
                    
                    2,332,5362009
                    
                    
                    381,818Thereafter
                    
                    
                    -$
                    4,075,000
  F-19
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  **Note
          13 - STATUTORY RESERVES**
 
 Statutory
          reserves represent restricted retained earnings. Based on the legal formation
          of
          the entities, Tianxing is required to set aside 10% of its net income as
          reported in its statutory accounts on an annual basis to the Statutory
          Surplus
          Reserve Fund. Once the total Statutory Surplus Reserve reaches 50% of the
          registered capital of the respective subsidiaries, further appropriations
          are
          discretionary. The Statutory Surplus Reserve can be used to increase the
          registered capital and eliminate future losses of the respective companies
          under
          PRC GAAP. The Company’s Statutory Surplus Reserve is not distributable to
          shareholders except in the event of liquidation.
 
 Before
          January 1, 2006, Tianxing is also required on an annual basis to set aside
          at least 5% of after-tax profit, calculated in accordance with PRC accounting
          standards and regulations, to the Statutory Surplus Welfare Fund, which
          can be
          used for staff welfare of the Company. Effective from January 1, 2006, the
          appropriation to the Statutory Surplus Welfare Fund is no longer required.
          If
          the PRC subsidiaries provided the Statutory Surplus Welfare Fund, such
          amount
          shall be determined at the discretion of its board of directors.
 
 The
          Reserve Fund can be used to increase the registered capital upon approval
          by
          relevant government authorities and eliminate future losses of the respective
          companies upon a resolution by the board of directors.
 
 Appropriations
          to the above statutory reserves are accounted for as a transfer from retained
          earnings to statutory reserves. During the period ended March 31, 2007,
          and
          2006, the Company made total appropriations to these statutory reserves
          of
          $36,520, and $415,164, respectively.
 
 There
          are
          no legal requirements in the PRC to fund these statutory reserves by transfer
          of
          cash to any restricted accounts, and the Company does not do so. These
          reserves
          are not distributable as cash dividends.
 
 **Note
          14 - 2006 CONSULTANT STOCK PLAN**
 
 On
          February 22, 2006, the Company adopted the 2006 Consultant Stock Plan (the
          "Plan") under which 1,199,648 shares of common stock are available for
          issuance
          with respect to awards granted to independent consultants who are crucial
          to the
          future growth and success of the Company and its subsidiaries and affiliates.
          For the year ended December 31, 2006, a total of 789,350 shares were issued
          pursuant to the Plan.
  F-20
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  On
          March
          14, 2006, the Company entered into two-year consulting agreement with an
          independent consultant. The services to be rendered include consultation
          and
          advisory services relating to marketing of the Company as mutually agreed
          upon
          between the parties. As consideration for the services to be rendered,
          the
          Company issued 240,000 shares of common stock to the consultant on March
          31,
          2006. These shares were issued pursuant to the 2006 consultant stock plan.
          The
          fair market value of the Company's common stock as of March 14, 2006 was
          $2.65
          per share.
 
 On
          March
          27, 2006, the Company entered into a one-year
          consulting agreement with another independent consultant. The services
          to be
          rendered include consultation and advisory services relating to financing
          and
          restructuring of the Company as mutually agreed upon between the parties.
          As
          consideration for the services to be rendered, the Company issued 360,000
          shares
          of common stock to the consultant on March 31, 2006. These shares were
          issued
          pursuant to the 2006 consultant stock plan. The fair market value of the
          Company's common stock as of March 27, 2006 was $2.60 per share.
 
 On
          October 24, 2006, the Company entered into three-month consulting agreement
          with
          another independent consultant. The services to be rendered include consultation
          and advisory services relating to investor relationship of the Company
          as
          mutually agreed upon between the parties. As consideration for the services
          to
          be rendered, the Company issued 28,750 shares of common stock to the consultant
          on October 24, 2006. These shares were issued pursuant to the 2006 consultant
          stock plan. The fair market value of the Company's common stock as of October
          24, 2006 was $1.75 per share.
 
 On
          October 27, 2006, the Company entered into three-month consulting agreement
          with
          another independent consultant. The services to be rendered include financial
          and business consultation of the Company as mutually agreed upon between
          the
          parties. As consideration for the services to be rendered, the Company
          issued
          15,600 shares of common stock to the consultant on October 27, 2006. These
          shares were issued pursuant to the 2006 consultant stock plan. The fair
          market
          value of the Company's common stock as of October 27, 2006 was $1.75 per
          share.
 
 On
          November 15, 2006, the Company entered into three-month consulting agreement
          with another independent consultant. The services to be rendered include
          marketing of the Company as mutually agreed upon between the parties. As
          consideration for the services to be rendered, the Company issued 25,000
          shares
          of common stock to the consultant on November 15, 2006. These shares were
          issued
          pursuant to the 2006 consultant stock plan. The fair market value of the
          Company's common stock as of November 15, 2006 was $1.8 per share.
   F-21
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
  On
          November 15, 2006, the Company passed a resolution to issue 70,000 shares
          of
          common stock as salary to a non-executive director. These shares were issued
          pursuant to the 2006 consultant stock plan. The fair market value of the
          Company's common stock as of November 15, 2006 was $1.8 per share.
 
 On
          December 11, 2006, the Company entered into one-year consulting agreement
          with
          another independent consultant. The service to be rendered includes equity
          research of the Company as mutually agreed upon between the parties. As
          consideration for the services to be rendered, the Company issued 50,000
          shares
          of common stock to the consultant on December 11, 2006. These shares were
          issued
          pursuant to the 2006 consultant stock plan. The fair market value of the
          Company's common stock as of December 11, 2006 was $1.75 per share.
 
 In
          accordance with SFAS 123R and EITF 96-18, the Company has accounted for
          the
          consulting agreements based on the fair market value of the Company's common
          stock at the commencement date of the individual consulting agreements.
          For the periods
          ended March 31, 2007 ,
          the
          Company charged $ 360,899 to
          expense associated with consulting agreements and recorded deferred consulting
          fees of $ 344,978
          a t March
          31,
          2007 .
 
 The
          deferred consulting fees will be charged to expenses as follows:
 
 Years
          ending December 31
 Amount2007
                  
                  $
                  282,2492008
                  
                  
                  62,729Total
                  
                  $
                  344,978
 **Note
          15 - TAXES**
 
 The
          Company is registered in the State of Nevada whereas its subsidiary, Skystar
          is
          a tax exempted company incorporated in the Cayman Islands and conducts
          all of
          its business through its PRC VIE, Xian Tianxing.
 
 Xian
          Tianxing is subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income
          Tax Laws, Enterprise Income Taxes is generally imposed at a statutory rate
          of
          33%, which comprises 30% national income tax and 3% local income tax. However,
          the Company has been approved as a new technology enterprise and under
          PRC
          Income Tax Laws, it is entitled to a preferential tax rate of 15%.
  F-22
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 For
          the
          three month period ended March 31, 2007 and 2006, the provision for taxes
          on
          earnings consisted of:
 
 2007
                
                2006Current
                    PRC income tax expenseEnterprise
                    income tax
                
                $
                66,624
                
                $
                27,157
  The
          following table reconciles the U.S. statutory rates to the Company's effective
          tax rate as of March 31:
 2007
                  
                  2006U.S.
                      Statutory rate
                  
                  
                  34.0
                  %
                  
                  34.0
                  %Foreign
                      income not recognized in USA
                  
                  
                  (34.0
                  )
                  
                  (34.0
                  )China
                      income taxes
                  
                  
                  15.0
                  
                  
                  15.0Total
                      provision for income taxes
                  
                  
                  15.0
                  %
                  
                  15.0
                  %
  The
          estimated tax savings due to the reduced tax rate for the periods ended
          March
          31, 2007 and 2006 amounted to $77,730 and $32,589, respectively. The net
          effect
          on earnings per share if the income tax had been applied would decrease
          earnings
          per share for March 31, 2007 and 2006 to ($0.035) and $0.02,
          respectively
 
 Skystar
          Bio-Pharmaceutical Company was incorporated in the United States and has
          incurred net operating loss for income tax purpose for 2007. The net operating
          loss carry forwards for United States income tax purposes amounted to $2,460,560
          which may be available to reduce future years’ taxable income. These carry
          forwards will expire, if not utilized, through 2026. Management believes
          that
          the realization of the benefits arising from this loss appears to be uncertain
          due to Company’s limited operating history and continuing losses for United
          States income tax purposes. Accordingly, the Company has provided a 100%
          valuation allowance at March 31, 2007. The valuation allowance at March
          31, 2007
          was $836,590. Management will review this valuation allowance periodically
          and
          make adjustment as warranted.
 
 **Note
          16 - EARNINGS PER SHARE**
 
 Basic
          earnings per share (EPS) for the periods ended March 31, 2007 and 2006
          were
          determined by dividing net income for the years by the weighted average
          number
          of common shares outstanding. Diluted earnings per share for the periods
          ended
          March 31, 2006 included the effect of 48,000,000 shares of the Company’s series
“B” convertible preferred stock, which were issued pursuant to the stock
          exchange transaction on November 7, 2005, as fully described in Note 1,
          and
          conferred with the right of conversion into common shares that equal 89.5%
          of
          the total issued and outstanding common stock, as more fully described
          in Note
          12. The weighted average number of common shares outstanding was adjusted
          to
          account for the effects of the share exchange transaction as a reverse
          acquisition as fully described in Note 1.
  F-23
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 The
          Company has retroactively adjusted the weighted average number of common
          shares
          outstanding by deeming that the one-for-three hundred ninety seven (1:397)
          and
          the one for ten (1:10) reverse stock split effective on February 15, 2006
          had
          occurred as of the beginning of the earliest period presented.
 
 Since
          the
          company recorded a net loss for the three months ended March 31, 2007,
          basic and
          diluted earnings per share are identical because the effects of the convertible
          debentures and warrants are anti-dilutive.
  **Note
          17 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS**
 
 *Related
          party receivables and payables*
  Amounts
          receivable from and payable to related parties are summarized as
          follows:
 March
                      31,
                  
                  December
                      31,2007
                  
                  2006Amount
                      due to shareholders:Ms.
                      Aixia Wang
                  
                  
                  5,751
                  
                  
                  -Mr.
                      WeiBing Lu
                  
                  
                  31,089
                  
                  
                  -Total
                  
                  $
                  36,840
                  
                  $
                  -Amount
                      due to a related company:TainXing
                      digital-a company owned by a director
                  
                  $
                  16,187
                  
                  $
                  16,025
 F-24
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 The
          total
          short term non-interest bearing amount of $53,027 was due to related parties
          for
          temporary operating cash flow needs and will be repaid in cash within twelve
          months.
 
 **Note
          18 - COMMITMENTS AND CONTINGENCIES**
 
 (a)  *Lease
          commitments*
 
 The
          Company recognizes lease expense on a straight line basis over the term
          of the
          lease in accordance to SFAS. 13, “Accounting for leases.” The Company has
          entered into a tenancy agreement for the lease of factory premises for
          a period
          of ten years from October 1, 2004 to September 30, 2014 with an annual
          rent of
          $11,062, which is subject to a 10% increase every four subsequent years.
          The
          Company’s commitments for minimum rental payments under this lease for the next
          five years and thereafter are as follows:
  Years
                      ending December 31:2007
                  
                  $
                  8,3502008
                  
                  
                  11,2162009
                  
                  
                  12,2472010
                  
                  
                  12,2472011
                  
                  
                  12,247Thereafter
                  
                  
                  36,126$
                  92,433
 Rental
          expense for the periods ended March 31, 2007 and 2006 amounted to $2,480
          and
          $2,886, respectively.
 
 (b)  *Legal
          proceedings*
  The
          Company has learned that Gregory Evans (“Plaintiff”) filed suit against the
          Company, R. Scott Cramer, Steve Lowe and David Wassung (“Defendants”) in State
          of Nevada District Court in Clark Country, Nevada, alleging causes of action
          for
“Refusing to Call Vote of Shareholders” and “Conversion” on or about November
          18, 2005. The Company has not been served with a summons or complaint in
          the
          matter. The Company denies the Plaintiff’s claims and intends to vigorously
          defend against them if such complaint is properly served on the
          Company.
  F-25
 
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (UNAUDITED)
 
 Other
          than the above described legal proceeding, the Company is not aware of
          any legal
          proceedings in which purchasers, any director, officer, or any owner of
          record
          or beneficial owner of more than five percent of any class of voting securities
          of the Company, or any affiliate of purchaser, or of any such director,
          officer,
          affiliate of the Company, or security holder, is a party adverse to Company
          or
          has a material interest adverse to the Company. No provision has been made
          in
          the consolidated financial statements for the above contingencies.
 
 *(c)* *Ownership
          of leasehold property*
 In
          2005,
          one of the shareholders contributed a leasehold office building as additional
          capital of Xian Tianxing. However, the title of the leasehold property
          had not
          passed to the Company. Management believes, there should be no legal barriers
          for the shareholder to transfer the ownership to the Company.
 
 However,
          in the event that the Company fails to obtain the ownership certificate
          for the
          leasehold building, there is the risk that the buildings need to be vacated
          as
          illegitimate ownership. Management believes that this possibility while
          present
          is very remote. As a result, no provision has been made in the financial
          statements for this potential occurrence.
  **Note
          19 - SUBSEQUENT EVENT**
 
 In
          connection to the issuance of the debentures on February 27, 2007, the
          Company
          entered into a Registration Rights Agreement, in which a registration statement
          registering the resale of the common stock into which the Debentures are
          convertible and for which the Warrants are exercisable, as well as certain
          other
          shares of the Company's common stock is required to be filed with the Securities
          and Exchange Commission not later than April 13, 2007 and be declared effective
          by the SEC not later than May 28, 2007, if there is no SEC review of the
          Registration Statement, and June 27, 2007 if there is a SEC review. Failure
          to
          meet these deadlines will result in liquidated damages of 2% of the aggregate
          purchase price of the Debentures and Warrants per month, pro rated for
          partial
          periods. Since the Company has not filed the registration statement, the
          accrual
          of the liquidated damages is made starting from April 13, 2007. The accrual
          amount is estimated to be $81,500 per month.
   F-26




**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operation.**





*The
      following management’s discussion and analysis should be read in conjunction
      with our consolidated financial statements and the notes thereto and the other
      financial information appearing elsewhere in this item. In addition to
      historical information, the following discussion contains certain
      forward-looking statements within the “safe harbor” provisions of the Private
      Securities Litigation Reform Act of 1995. These statements relate to our future
      plans, objectives, expectations and intentions. These statements may be
      identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
      terms or terminology, or the negative of such terms or other comparable
      terminology. Although we believe the expectations expressed in these
      forward-looking statements are based on reasonable assumptions within the bound
      of our knowledge of our business, our actual results could differ materially
      from those discussed in these statements. Factors that could contribute to
      such
      differences include, but are not limited to, those discussed in the “Risk
      Factors” section of this Quarterly Report on Form 10-QSB. We undertake no
      obligation to update publicly any forward-looking statements for any reason
      even
      if new information becomes available or other events occur in the future.*





*Our
      financial statements are prepared in US Dollars and in accordance with
      accounting principles generally accepted in the United States. See “Exchange
      Rates” below for information concerning the exchanges rates at which Renminbi
      were translated into US Dollars at various pertinent dates and for pertinent
      periods.*





**Overview**





Skystar
      Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
      Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
      name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
      2000, the Company changed its name to “The Cyber Group Network Corporation”. On
      February 15, 2006, the Company further changed its name to “Skystar
      Bio-Pharmaceutical Company” to reflect its current business
      operations.





On
      November 7, 2005, the Company acquired Skystar Bio-Pharmaceutical (Cayman)
      Holdings Co., Ltd (“Skystar Cayman”) and, as a result, Skystar Cayman’s variable
      interest entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Limited (“Xian
      Tianxing”) by way of the exchange of 48,000,000 shares of the Company’s Series B
      preferred stock for 100% of the issued and outstanding common stock of Skystar
      Cayman. We accounted for this share exchange transaction as a reverse
      acquisition and recapitalization and, as a result, our consolidated financial
      statements are in substance those of Skystar Cayman, with the assets and
      liabilities, and revenues and expenses, of Cyber being included effective from
      the date of the stock exchange transaction. Please see Note 1 to our unaudited
      consolidated financial statements included in this report for further details
      of
      this stock exchange transaction.





Having
      no
      substantive operation of its own, Skystar Cayman, through its VIE, Xian
      Tianxing, engages in research, development, production, marketing and sales
      of
      bio-pharmaceutical and veterinary products in the People’s Republic of China
      (“China” or the “PRC”).





**Recent
      Developments**





On
      February 27, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Agreement”), with several institutional and accredited investors (collectively
      the “Purchasers”) pursuant to which the Company sold to the Purchasers $4.075
      million in aggregate principal amount of 8% convertible debentures due February
      28, 2009 (the “Debentures”), and warrants to purchase 4,075,000 shares of the
      common stock of the Company (the “Warrants”), in a private placement pursuant to
      Regulation D under the Securities Act of 1993 (the “Transaction”).


Pursuant
        to the Agreement, starting in June 2007, we shall pay on a monthly basis,
        4.77%
        of the principal of the Debenture (“Principal Repayment Amount”), and all
        accrued interest. At the Company's option, payment shall be in cash or shares
        of
        common stock. If the Company pays in cash it shall also pay a 15% premium
        to the
        Principal Repayment Amount during the first 12 months of the Debenture, and
        a
        25% premium thereafter. We may pay this mandatory prepayment amount with
        common
        stock, if certain equity conditions are met, which include, among other things,
        the effectiveness of the Registration Statement. If the Company chooses to
        pay
        interest and principal with common stock, it will be based on the lower of
        (i) a
        30% discount to the volume weighted average price for the immediately preceding
        five consecutive trading days and (ii) the fixed conversion price in effect
        on
        such principal payment date.





In
      connection to the issuance of the Debentures and Warrants, we also entered
      into
      a Registration Rights Agreement with the holders of the Debentures and Warrants.
      As of the date of this report, the Company has not filed a registration
      statement pursuant to the Registration Rights Agreement, and we have accrued
      liquidated damages under the terms of the Registration Rights Agreement
      beginning on April 13, 2007. The accrual amount of liquidated damages is
      estimated to be $81,500 per month.





**Critical
      Accounting Policies**





In
      preparing the consolidated financial statements in accordance with accounting
      principles generally accepted in the United States, we make estimates and
      assumptions about the effect of matters that are inherently uncertain and may
      change in subsequent periods. The resulting accounting estimates will, by
      definition, may vary from the related actual results. We consider the following
      to be the most critical accounting policies:




4




·
              Revenue
                  recognition: Revenues of the Company include sales of bio-pharmaceutical
                  and veterinary products in China. Sales are recognized when the
                  following
                  four revenue criteria are met: persuasive evidence of an arrangement
                  exists, delivery has occurred, the selling price is fixed or determinable,
                  and collectibility is reasonably assured. Sales are presented net
                  of value
                  added tax (VAT). No return allowance is made as product returns
                  are
                  insignificant based on historical
                  experience.
 *(a)*
                *Credit
                    sales:*Revenue
                    is recognized when the products have been delivered to the
                    customers.
  *(b)*
                *Full
                    payment before delivering:*Revenue
                    is recognized when the products have been delivered to
                    customers.


·
            Accounts
                receivable: We perform ongoing credit evaluations of our customers
                and
                adjust credit limits based upon payment history and the customers’ current
                credit worthiness, as determined by a review of their current credit
                information. We continuously monitor collections and payments from
                our
                customers and maintain a provision for estimated credit losses based
                upon
                historical experience and any specific customer collection issues
                that
                have been identified. While such credit losses have historically
                been
                within our expectations and the provisions established, we cannot
                guarantee that we will continue to experience the same credit loss
                rates
                that have been experienced in the past.


·
            The
                Debentures and the Warrants: We have adopted APB No. 14, Accounting
                for
                Convertible Debt and Debt Issued with Stock Purchase Warrants, FAS
                133,
                EITF-98-5, and EITF-00-27, for valuation and accounting treatment
                of the
                Debentures and Warrants.·
            Liquidated
                damages: We have adopted FAS 5 and EITF 00-19-2 in connection with
                the
                liquidated damages we are accruing pursuant to the terms of the
                Registration Rights Agreement.





**Results
      of Operations - Three months ended March 31, 2007 as compared to three months
      ended March 31, 2006**





REVENUES.
      All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in the PRC. During the three months ended March 31, 2007, we had
      revenues of $1,367,810 as compared to revenues of $995,188 during the three
      months ended March 31, 2006, an increase of approximately 37%. In general,
      this
      increase is attributable to our increased sales revenue. Our customers tend
      to
      use more and more products , which are used in poultry breeding for the
      promotion of growth and prevention of disease , the demand for our products
      for
      poultry feeding and immunization has soared. In particular, among other
      products, our sales of “microorganism series”, which is used in poultry breeding
      for the promotion of growth and prevention of disease, increased by 29% to
      $696,824 for the three months ended March 31, 2007, from $540,968 for the three
      months ended March 31, 2006. We believe that our sales will continue to grow
      because we are strengthening our sales force and we will be launching more
      new
      products.





GROSS
      PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
      manufacturing overhead, were $697,035 for the three months ended March 31,
      2007
      as compared to $520,440 for the three months ended March 31, 2006. Gross profit
      was $670,775 for the three months ended March 31, 2007 as compared to $474,748
      for the three months ended March 31, 2006, representing gross profit margins
      of
      approximately 49% and 48%, respectively. The decrease in our gross profit margin
      is attributable to an increase in the cost of raw materials. We believe that
      this is a short term trend and we will have better cost control in the future.





SELLING
      EXPENSES. Selling expenses, which consist of commission, advertising and
      promotion expenses, freight charges and salaries totaled $109,428 for the three
      months ended March 31, 2007 as compared to $67,908 for the three months ended
      March 31, 2006, an increase of approximately 61%. This increase is primarily
      attributable to our expanding sales team and activities, which are, in turn,
      reflected in our increased sales. We believe that our selling expenses will
      continue to increase as our sales continue to grow.




5




GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled $316,
      551 for the three months ended March 31, 2007, as compared to $206,236 for
      the
      three months ended March 31, 2006, an increase of approximately 53%. This
      increase is primarily attributable to the expansion of our operations.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, totaled $31,655 for the three months
      ended March 31, 2007, as compared to $19,339 for the three months ended March
      31, 2006, an increase of approximately 64%. The increase is attributable to
      our
      continued improvement of existing products and development for new
      products.





INCOME
      FROM OPERATIONS. We recorded a loss of $147,758 from operations for the three
      months ended March 31, 2007 as compared to an income of $181,265 for the same
      period in 2006, representing a decrease of approximately 182%. The decrease
      is
      resulted from the amortization of shares issued for services in 2006. For the
      three months ended March 31, 2007, $360,899 is amortized and recorded as
      compensation expenses.





NET
      INCOME. Skystar had a net loss of $ 370,718 for the three months ended March
      31,
      2007 as compared to net income of $153,892 for the three months ended March
      31,
      2006. The decrease in net income is attributable to the amortization of the
      financing costs and interest related to the convertible debentures and warrants
      pursuant to the Securities Purchase Agreement on February 27, 2007. For the
      three months ended March 31, 2007, a total amount of $162,677 is amortized
      and
      recorded as interest expense. Skystar’s management believes that net income will
      increase as our sales increase in the coming quarters.





**Liquidity**





For
      the
      three months ended March 31, 2007, cash used in operating activities is $259,268
      as compared to $262,071 cash generated from operating activities for the three
      months ended March 31, 2006. The decrease is primarily attributable to bulk
      purchase of raw materials, which was used for the production in the second
      quarter. We also paid off some of the accrued expenses of 2006. We used $
      249,386 for the three months ended March 31, 2007, as compared to $444,221
      in
      investing activities for the three months ended March 31, 2006. The expenditure
      in investing activities for 2007 consisted of, among others, payment of $249,261
      for the purchases of property, plant and equipment (net of decrease in deposits
      paid) as the construction of our new plant has been in full swing and is
      expected to be completed at the end of second quarter of 2007. On the other
      hand, from financing activities, we generated $3,773,950 mainly from
      issuance of convertible debentures and warrants on February 27, 2007 as compared
      to $179,522 for 2006.





As
      of
      March 31, 2007, the Company had cash of $3,490,448. Our total current assets
      were $4,326,165 and our total current liabilities were $1,291,109, which
      resulted in a net working capital of $3,035,056, which indicates that the
      Company has the ability to meet cash requirements for its operations in order
      to
      continue as a going concern. Management believes the Company’s ability to
      continue as a going concern is dependent upon its ability to maintain profitable
      operations and to obtain additional financing or refinancing as may be required.
      Our management believes that the Company will generate sufficient cash flow
      to
      meet its obligations on a timely basis in the foreseeable future.





**Capital
      Resources**





We
      have
      received proceeds from the above mentioned Securities Purchase Agreement on
      March 9, 2007. Of the capital raised, we estimate that $2,000,000 will be spent
      on the construction of the new plant, $1,000,000 will be spent on research
      and
      development of the new products, and any remaining balance will be used to
      expand company’s sales network and as a reserve for company’s working capital
      needs.





Our
      manufacturing plant has obtained the GMP certificate and plans to be fully
      operational by the end of second quarter of 2007. Currently we have already
      obtained product serial permit number for 51 products that will result in higher
      sales revenue and profit margin for the company in third quarter of
      2007.





**Plan
      of Operations**





Over
      the
      next 12 months, we plan to continue to market and sell the company’s products
      and to develop new products.





In
      addition, in 2003, the Company received approval from the State Council of
      China
      to expand its production facilities and construct a new Good Manufacturing
      Practice (“GMP”) standard plant. The entire expansion project will cost
      approximately RMB 69,410,000 ($8,500,000). The Company’s total investment in
      this project includes approximately $7,000,000 for the facilities and $1,500,000
      for working capital. The construction work commenced in late 2004 and is
      expected to be completed by the end of second quarter of 2007. The new plant
      will occupy approximately 31,350 sq. meters and have a total area of
      approximately 14,000 sq. meters.




6




**Product
      Research and Development**





We
      believe that Xian Tianxing will continue developing several products including
      new bio-pharmaceutical products for animal immunization, non-pathogenic
      micro-organisms for the cure and prevention of livestock disease, complex enzyme
      preparations as animal feed additives, and other new veterinary medicine
      products within the next 12 months.




**Off-Balance
      Sheet Arrangements**





As
      of the
      date of this report, we do not have any outstanding financial guarantees
      or commitments to guarantee the payment obligations of any third parties.
      We have not entered into any derivative contracts that are indexed to our shares
      and classified as shareholder’s equity or that are not reflected in our
      consolidated financial statements. Furthermore, we do not have any retained
      or
      contingent interest in assets transferred to an unconsolidated entity that
      serves as credit, liquidity or market risk support to such entity. We do not
      have any variable interest in any unconsolidated entity that provides financing,
      liquidity, market risk or credit support to us or engages in leasing, hedging
      or
      research and development services with us.





**Exchange
      Rates**





Xian
      Tianxing maintains its books and records in Renminbi (“RMB”), the lawful
      currency of the PRC. In general, for consolidation purposes, the Company
      translates Xian Tianxing’s assets and liabilities into US Dollars using the
      applicable exchange rates prevailing at the balance sheet date, and the
      statement of income is translated at average exchange rates during the reporting
      period. Adjustments resulting from the translation of Xian Tianxing’s financial
      statements are recorded as accumulated other comprehensive income.





Until
      July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00.
      On
      July 21, 2005, the PRC government reformed the exchange rate system into a
      managed floating exchange rate system based on market supply and demand with
      reference to a basket of currencies. In addition, the exchange rate of RMB
      to
      US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
      China announces the closing price of a foreign currency such as US$ traded
      against RMB in the inter-bank foreign exchange market after the closing of
      the
      market on each working day, which will become the unified exchange rate for
      the
      trading against RMB on the following working day. The daily trading price of
      US$
      against RMB in the inter-bank foreign exchange market is allowed to float within
      a band of ± 0.3%
      around the unified exchange rate published by the People’s Bank of China. This
      quotation of exchange rates does not imply free convertibility of RMB to other
      foreign currencies. All foreign exchange transactions continue to take place
      either through the Bank of China or other banks authorized to buy and sell
      foreign currencies at the exchange rates quoted by the People’s Bank of China.
      Approval of foreign currency payments by the Bank of China or other institutions
      required submitting a payment application form together with invoices, shipping
      documents and signed contracts.





The
      exchange rates used to translate amounts in RMB into US Dollars for the purposes
      of preparing the consolidated financial statements or otherwise stated in this
      MD&A were as follows:





**March
                31, 2007**
            
            **December
                31, 2006**
            
            **March
                31, 2006**Assets
                and liabilities
            
            
            USD0.12950:RMB1
            
            
            USD0.12820:RMB1
            
            
            USD0.1248:RMB1Statements
                of operations and cash flows for the period/year ended
            
            
            USD0.12901:RMB1
            
            
            USD0.12557:RMB1
            
            
            USD0.12428:RMB1




7




No
      representation is made that RMB amounts have been, or would be, converted into
      US$ at the above rates.





**INFLATION**





We
      believe that inflation has not had a material effect on our operations to
      date.





**RISK
      FACTORS**





***FACTORS
      THAT MAY AFFECT FUTURE PERFORMANCE***




Before
      investing in our common stock you should carefully consider the following risk
      factors, the other information included herein and the information included
      in
      our other reports and filings.  Our business, financial condition, and the
      trading price of our common stock could be adversely affected by these and
      other
      risks.




***Our
      limited operating history makes it difficult to evaluate our future prospects
      and results of operations.***




We
      have a
      limited operating history. Xian Tianxing commenced operations in 1997 and first
      achieved profitability in the quarter ended 1999. Accordingly, you should
      consider our future prospects in light of the risks and uncertainties
      experienced by early stage companies in evolving industries such as the
      bio-pharmaceutical industry in China. Some of these risks and uncertainties
      relate to our ability to:




·
            maintain
                our position as one of the market leaders in
                China;





·
            offer
                new and innovative products to attract and retain a larger customer
                base;




·
            attract
                additional customers and increase spending per
                customer;




·
            increase
                awareness of our brand and continue to develop user and customer
                loyalty;





·
            respond
                to competitive market conditions;




·
            respond
                to changes in our regulatory
                environment;





·
            manage
                risks associated with intellectual property
                rights;




·
            maintain
                effective control of our costs and
                expenses;





·
            raise
                sufficient capital to sustain and expand our
                business;




·
            attract,
                retain and motivate qualified personnel;
                and




·
            upgrade
                our technology to support additional research and development of
                new
                products.




If
      we are
      unsuccessful in addressing any of these risks and uncertainties, our business
      may be materially and adversely affected.





***We
      May Need to Obtain Additional Financing to Execute Our Business
      Plan***




The
      revenues from the production and sale of bio-pharmaceutical products and the
      projected revenues from these products are not adequate to support our expansion
      and product development programs.  Despite our recent financing, we may
      need additional funds to complete our new production facilities, pursue further
      research and development, obtain regulatory approvals; file, prosecute, defend
      and enforce our intellectual property rights and market our products. 
Should such need arises, we will seek additional funds through public or private
      equity or debt financing, strategic transactions and/or from other
      sources.  We could enter into collaborative arrangements for the
      development of particular products that would lead to our relinquishing some
      or
      all rights to the related technology or products.




8




There
      are
      no assurances that future funding will be available on favorable terms or at
      all.  If additional funding is not obtained, we will need to reduce, defer
      or cancel development programs, planned initiatives or overhead expenditures,
      to
      the extent necessary.  The failure to fund our capital requirements would
      have a material adverse effect on our business, financial condition and results
      of operations.




***Our
      Success Depends On Collaborative Partners, Licensees and Other Third Parties
      Over Whom We Have Limited Control***




Due
      to
      the complexity of the process of developing bio-pharmaceuticals, our core
      business depends on arrangements with bio-pharmaceutical institutes, corporate
      and academic collaborators, licensors, licensees and others for the research,
      development, clinical testing, technology rights, manufacturing, marketing
      and
      commercialization of our products. We have various research collaborations
      and
      outsource other business functions.  Our license agreements could obligate
      us to diligently bring potential products to market, make milestone payments
      and
      royalties that, in some instances, could be substantial, and incur the costs
      of
      filing and prosecuting patent applications.  There are no assurances that
      we will be able to establish or maintain collaborations that are important
      to
      our business on favorable terms, or at all.




A
      number
      of risks arise from our dependence on collaborative agreements with third
      parties.  Product development and commercialization efforts could be
      adversely affected if any collaborative partner:




·
            terminates
                or suspends its agreement with us




·
            causes
                delays




·
            fails
                to timely develop or manufacture in adequate quantities a substance
                needed
                in order to conduct clinical trials




·
            fails
                to adequately perform clinical
                trials




·
            determines
                not to develop, manufacture or commercialize a product to which it
                has
                rights or




·
            otherwise
                fails to meet its contractual
                obligations.




Our
      collaborative partners could pursue other technologies or develop alternative
      products that could compete with the products we are developing.




***The
      Profitability of Our Products Will Depend in Part on Our Ability to Protect
      Proprietary Rights and Operate Without Infringing the Proprietary Rights of
      Others***




The
      profitability of our products will depend in part on our ability to obtain
      and
      maintain patents and licenses and preserve trade secrets, and the period our
      intellectual property remains exclusive.  We must also operate without
      infringing the proprietary rights of third parties and without third parties
      circumventing our rights. The patent positions of bio-pharmaceutical and
      biotechnology enterprises, including ours, are uncertain and involve complex
      legal and factual questions for which important legal principles are largely
      unresolved.  For example, no consistent policy has emerged regarding the
      breadth of biotechnology patent claims that are granted by the U.S. Patent
      and
      Trademark Office or enforced by the U.S. federal courts.  In addition, the
      scope of the originally claimed subject matter in a patent application can
      be
      significantly reduced before a patent is issued.  The biotechnology patent
      situation outside the U.S. is even more uncertain, is currently undergoing
      review and revision in many countries, and may not protect our intellectual
      property rights to the same extent as the laws of the U.S.  Because patent
      applications are maintained in secrecy in some cases, we cannot be certain
      that
      we or our licensors are the first creators of inventions described in our
      pending patent applications or patents or the first to file patent applications
      for such inventions.




9




Other
      companies may independently develop similar products and design around any
      patented products we develop.  We cannot assure you that:




·
            any
                of our patent applications will result in the issuance of
                patents




·
            we
                will develop additional patentable
                products




·
            the
                patents we have been issued will provide us with any competitive
                advantages




·
            the
                patents of others will not impede our ability to do business;
                or




·
            third
                parties will not be able to circumvent our
                patents.




A
      number
      of pharmaceutical, biotechnology, research and academic companies and
      institutions have developed technologies, filed patent applications or received
      patents on technologies that may relate to our business.  If these
      technologies, applications or patents conflict with ours, the scope of our
      current or future patents could be limited or our patent applications could
      be
      denied.  Our business may be adversely affected if competitors
      independently develop competing technologies, especially if we do not obtain,
      or
      obtain only narrow, patent protection.  If patents that cover our
      activities are issued to other companies, we may not be able to obtain licenses
      at a reasonable cost, or at all; develop our technology; or introduce,
      manufacture or sell the products we have planned.




Patent
      litigation is becoming widespread in the biotechnology industry.  Such
      litigation may affect our efforts to form collaborations, to conduct research
      or
      development, to conduct clinical testing or to manufacture or market any
      products under development.  There are no assurances that our patents would
      be held valid or enforceable by a court or that a competitor’s technology or
      product would be found to infringe our patents in the event of patent
      litigation.  Our business could be materially affected by an adverse
      outcome to such litigation.  Similarly, we may need to participate in
      interference proceedings declared by the U.S. Patent and Trademark Office or
      equivalent international authorities to determine priority of invention. 
We could incur substantial costs and devote significant management resources
      to
      defend our patent position or to seek a declaration that another company’s
      patents are invalid.




Much
      of
      our know-how and technology may not be patentable, though it may constitute
      trade secrets. There are no assurances that we will be able to meaningfully
      protect our trade secrets.  We cannot assure you that any of our existing
      confidentiality agreements with employees, consultants, advisors or
      collaborators will provide meaningful protection for our trade secrets, know-how
      or other proprietary information in the event of any unauthorized use or
      disclosure.  Collaborators, advisors or consultants may dispute the
      ownership of proprietary rights to our technology, for example by asserting
      that
      they developed the technology independently.




***We
      May Encounter Difficulties in Manufacturing our
      Products***




Before
      our products can be profitable, they must be produced in commercial quantities
      in a cost-effective manufacturing process that complies with regulatory
      requirements, including GMP, production and quality control regulations. 
If we cannot arrange for or maintain commercial-scale manufacturing on
      acceptable terms, or if there are delays or difficulties in the manufacturing
      process, we may not be able to conduct clinical trials, obtain regulatory
      approval or meet demand for our products. Production of our products could
      require raw materials which are scarce or which can be obtained only from a
      limited number of sources.  If we are unable to obtain adequate supplies of
      such raw materials, the development, regulatory approval and marketing of our
      products could be delayed.




***We
      Could Need More Clinical Trials or Take More Time to Complete Our Clinical
      Trials Than We Have Planned***





Clinical
      trials vary in design by factors including dosage, end points, length, and
      controls.  We may need to conduct a series of trials to demonstrate the
      safety and efficacy of our products.  The results of these trials may not
      demonstrate safety or efficacy sufficiently for regulatory authorities to
      approve our products. Further, the actual schedules for our clinical trials
      could vary dramatically from the forecasted schedules due to factors including
      changes in trial design, conflicts with the schedules of participating
      clinicians and clinical institutions, and changes affecting product supplies
      for
      clinical trials.


10


We
      rely
      on collaborators, including academic institutions, governmental agencies and
      clinical research organizations, to conduct, supervise, monitor and design
      some
      or all aspects of clinical trials involving our products.  Since these
      trials depend on governmental participation and funding, we have less control
      over their timing and design than trials we sponsor.  Delays in or failure
      to commence or complete any planned clinical trials could delay the ultimate
      timelines for our product releases.  Such delays could reduce investors’
confidence in our ability to develop products, likely causing our share price
      to
      decrease.




***We
      May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
      Necessary to Commercialize Our Products***




The
      PRC
      and other countries impose significant statutory and regulatory obligations
      upon
      the manufacture and sale of bio-pharmaceutical products.  Each regulatory
      authority typically has a lengthy approval process in which it examines
      pre-clinical and clinical data and the facilities in which the product is
      manufactured.  Regulatory submissions must meet complex criteria to
      demonstrate the safety and efficacy of the ultimate products.  Addressing
      these criteria requires considerable data collection, verification and
      analysis.  We may spend time and money preparing regulatory submissions or
      applications without assurances as to whether they will be approved on a timely
      basis or at all.




Our
      product candidates, some of which are currently in the early stages of
      development, will require significant additional development and pre-clinical
      and clinical testing prior to their commercialization. These steps and the
      process of obtaining required approvals and clearances can be costly and
      time-consuming.  If our potential products are not successfully developed,
      cannot be proven to be safe and effective through clinical trials, or do not
      receive applicable regulatory approvals and clearances, or if there are delays
      in the process:




·
            the
                commercialization of our products could be adversely
                affected;





·
            any
                competitive advantages of the products could be diminished;
                and





·
            revenues
                or collaborative milestones from the products could be reduced or
                delayed.




Governmental
      and regulatory authorities may approve a product candidate for fewer indications
      or narrower circumstances than requested or may condition approval on the
      performance of post-marketing studies for a product candidate.  Even if a
      product receives regulatory approval and clearance, it may later exhibit adverse
      side effects that limit or prevent its widespread use or that force us to
      withdraw the product from the market.




Any
      marketed product and its manufacturer will continue to be subject to strict
      regulation after approval.  Results of post-marketing programs may limit or
      expand the further marketing of products.  Unforeseen problems with an
      approved product or any violation of regulations could result in restrictions
      on
      the product, including its withdrawal from the market and possible civil
      actions.




In
      manufacturing our products we will be required to comply with applicable good
      manufacturing practices regulations, which include requirements relating to
      quality control and quality assurance, as well as the maintenance of records
      and
      documentation.  We cannot comply with regulatory requirements, including
      applicable good manufacturing practice requirements, we may not be allowed
      to
      develop or market the product candidates.  If we or our manufacturers fail
      to comply with applicable regulatory requirements at any stage during the
      regulatory process, we may be subject to sanctions, including fines, product
      recalls or seizures, injunctions, refusal of regulatory agencies to review
      pending market approval applications or supplements to approve applications,
      total or partial suspension of production, civil penalties, withdrawals of
      previously approved marketing applications and criminal
      prosecution.




***Competitors
      May Develop and Market Bio-pharmaceutical Products That Are Less Expensive,
      More
      Effective or Safer, Making Our Products Obsolete or
      Uncompetitive***




Some
      of
      our competitors and potential competitors have greater product development
      capabilities and financial, scientific, marketing and human resources than
      we
      do.  Technological competition from biopharmaceutical companies and
      biotechnology companies is intense and is expected to increase.  Other
      companies have developed technologies that could be the basis for competitive
      products.  Some of these products have an entirely different approach or
      means of accomplishing the desired curative effect than products we are
      developing.  Alternative products may be developed that are more effective,
      work faster and are less costly than our products.  Competitors may succeed
      in developing products earlier than us, obtaining approvals and clearances
      for
      such products more rapidly than us, or developing products that are more
      effective than ours.  In addition, other forms of treatment may be
      competitive with our products. Over time, our technology or products may become
      obsolete or uncompetitive.


11


***Our
      Products May Not Gain Market Acceptance***




Our
      products may not gain market acceptance in the agricultural community.  The
      degree of market acceptance of any product depends on a number of factors,
      including establishment and demonstration of clinical efficacy and safety,
      cost-effectiveness, clinical advantages over alternative products, and marketing
      and distribution support for the products.  Limited information regarding
      these factors is available in connection with our products or products that
      may
      compete with ours.




To
      directly market and distribute our bio-pharmaceutical products, we or our
      collaborators require a marketing and sales force with appropriate technical
      expertise and supporting distribution capabilities.  We may not be able to
      further establish sales, marketing and distribution capabilities or enter into
      arrangements with third parties on acceptable terms.  If we or our partners
      cannot successfully market and sell our products, our ability to generate
      revenue will be limited.




***Our
      Operations and the Use of Our Products Could Subject Us to Damages Relating
      to
      Injuries or Accidental Contamination***




Our
      research and development processes involve the controlled use of hazardous
      materials.  We are subject to federal, provincial and local laws and
      regulations governing the use, manufacture, storage, handling and disposal
      of
      such materials and waste products.  The risk of accidental contamination or
      injury from handling and disposing of such materials cannot be completely
      eliminated. In the event of an accident involving hazardous materials, we could
      be held liable for resulting damages.  We are not insured with respect to
      this liability. Such liability could exceed our resources.  In the future
      we could incur significant costs to comply with environmental laws and
      regulations.





***If
      We Were Successfully Sued For Product Liability, We Could Face Substantial
      Liabilities That May Exceed Our Resources.***




We
      may be
      held liable if any product we develop, or any product which is made using our
      technologies, causes injury or is found unsuitable during product testing,
      manufacturing, marketing, sale or use. These risks are inherent in the
      development of agricultural and bio-pharmaceutical products. We currently do
      not
      have product liability insurance. We are not insured with respect to this
      liability. If we choose to obtain product liability insurance but cannot obtain
      sufficient insurance coverage at an acceptable cost or otherwise protect against
      potential product liability claims, the commercialization of products that
      we
      develop may be prevented or inhibited. If we are sued for any injury caused
      by
      our products, our liability could exceed our total assets.





***We
      Have No Business Liability or Disruption Insurance Coverage***





The
      insurance industry in China is still at an early stage of development. Insurance
      companies in China offer limited business insurance products. We do not have
      any
      business liability or disruption insurance coverage for our operations in China.
      Any business disruption, litigation or natural disaster may result in our
      incurring substantial costs and the diversion of our resources.





***Our
      Success Depends On Attracting and Retaining Qualified
      Personnel***




We
      depend
      on a core management and scientific team.  The loss of any of these
      individuals could prevent us from achieving our business objective of
      commercializing our product candidates.  Our future success will depend in
      large part on our continued ability to attract and retain other highly qualified
      scientific, technical and management personnel, as well as personnel with
      expertise in clinical testing and government regulation.  We face
      competition for personnel from other companies, universities, public and private
      research institutions, government entities and other organizations.  If our
      recruitment and retention efforts are unsuccessful, our business operations
      could suffer.


12


**Risks
      Related to Our Corporate Structure**




***PRC
      laws and regulations governing our businesses and the validity of certain of
      our
      contractual arrangements are uncertain. If we are found to be in violation,
      we
      could be subject to sanctions. In addition, changes in such PRC laws and
      regulations may materially and adversely affect our business.***




There
      are
      substantial uncertainties regarding the interpretation and application of PRC
      laws and regulations, including, but not limited to, the laws and regulations
      governing our business, or the enforcement and performance of our contractual
      arrangements with our affiliated Chinese entity, Xian Tianxing, and its
      shareholders. We are considered a foreign person or foreign invested enterprise
      under PRC law. As a result, we are subject to PRC law limitations on foreign
      ownership of Chinese companies. These laws and regulations are relatively new
      and may be subject to change, and their official interpretation and enforcement
      may involve substantial uncertainty. The effectiveness of newly enacted laws,
      regulations or amendments may be delayed, resulting in detrimental reliance
      by
      foreign investors. New laws and regulations that affect existing and proposed
      future businesses may also be applied retroactively.




The
      PRC
      government has broad discretion in dealing with violations of laws and
      regulations, including levying fines, revoking business and other licenses
      and
      requiring actions necessary for compliance. In particular, licenses and permits
      issued or granted to us by relevant governmental bodies may be revoked at a
      later time by higher regulatory bodies. We cannot predict the effect of the
      interpretation of existing or new PRC laws or regulations on our businesses.
      We
      cannot assure you that our current ownership and operating structure would
      not
      be found in violation of any current or future PRC laws or regulations. As
      a
      result, we may be subject to sanctions, including fines, and could be required
      to restructure our operations or cease to provide certain services. Any of
      these
      or similar actions could significantly disrupt our business operations or
      restrict us from conducting a substantial portion of our business operations,
      which could materially and adversely affect our business, financial condition
      and results of operations.




***We
      may be adversely affected by complexity, uncertainties and changes in PRC
      regulation of bio-pharmaceutical business and companies, including limitations
      on our ability to own key assets.***




The
      PRC
      government regulates the bio-pharmaceutical industry including foreign ownership
      of, and the licensing and permit requirements pertaining to, companies in the
      bio-pharmaceutical industry. These laws and regulations are relatively new
and
      evolving, and their interpretation and enforcement involve significant
      uncertainty. As a result, in certain circumstances it may be difficult to
      determine what actions or omissions may be deemed to be a violation of
      applicable laws and regulations. Issues, risks and uncertainties relating to
      PRC
      government regulation of the bio-pharmaceutical industry include the
      following:





·
            we
                only have contractual control over Xian Tianxing. We do not own it
                due to
                the restriction of foreign investment in Chinese businesses;
                and





·
            uncertainties
                relating to the regulation of the bio-pharmaceutical business in
                China,
                including evolving licensing practices, means that permits, licenses
                or
                operations at our company may be subject to challenge. This may disrupt
                our business, or subject us to sanctions, requirements to increase
                capital
                or other conditions or enforcement, or compromise enforceability
                of
                related contractual arrangements, or have other harmful effects on
                us.





The
      interpretation and application of existing PRC laws, regulations and policies
      and possible new laws, regulations or policies have created substantial
      uncertainties regarding the legality of existing and future foreign investments
      in, and the businesses and activities of, bio-pharmaceutical businesses in
      China, including our business.




***In
      order to comply with PRC laws limiting foreign ownership of Chinese companies,
      we conduct our bio-pharmaceutical business through Xian Tianxing by means of
      contractual arrangements. If the PRC government determines that these
      contractual arrangements do not comply with applicable regulations, our business
      could be adversely affected.***




The
      PRC
      government restricts foreign investment in bio-pharmaceutical businesses in
      China. Accordingly, we operate our business in China through Xian Tianxing,
      a Chinese joint stock company. Xian Tianxing holds the licenses and
      approvals necessary to operate our website and our online advertising business
      in China. We have contractual arrangements with Xian Tianxing and its
      shareholders that allow us to substantially control Xian Tianxing. We cannot
      assure you, however, that we will be able to enforce these contracts.




Although
      we believe we comply with current PRC regulations, we cannot assure you that
      the
      PRC government would agree that these operating arrangements comply with PRC
      licensing, registration or other regulatory requirements, with existing policies
      or with requirements or policies that may be adopted in the future. If the
      PRC
      government determines that we do not comply with applicable law, it could revoke
      our business and operating licenses, require us to discontinue or restrict
      our
      operations, restrict our right to collect revenues, require us to restructure
      our operations, impose additional conditions or requirements with which we
      may
      not be able to comply, impose restrictions on our business operations or on
      our
      customers, or take other regulatory or enforcement actions against us that
      could
      be harmful to our business.


13


***Our
      contractual arrangements with Xian Tianxing and its shareholders may not be
      as
      effective in providing control over these entities as direct ownership.***




Since
      PRC
      law limits foreign equity ownership in bio-pharmaceutical companies in China,
      we
      operate our business through Xian Tianxing. We have no equity ownership interest
      in Xian Tianxing and rely on contractual arrangements to control and operate
      such businesses. These contractual arrangements may not be as effective in
      providing control over Xian Tianxing as direct ownership. For example, Xian
      Tianxing could fail to take actions required for our business despite its
      contractual obligation to do so. If Xian Tianxing fails to perform under their
      agreements with us, we may have to rely on legal remedies under PRC law, which
      may not be effective. In addition, we cannot assure you that either of Xian
      Tianxing’s shareholders would always act in our best interests.





***The
      Chairman of the Board of Directors of Xian Tianxing has potential conflicts
      of
      interest with us, which may adversely affect our business.***




Weibing
      Lu, our Chief Executive Officer, is also the Chairman of the Board of Directors
      of Xian Tianxing. Conflicts of interests between his duties to our company
      and
      Xian Tianxing may arise. As Mr. Lu is a director and executive officer of our
      company, he has a duty of loyalty and care to us under U.S. and Cayman Islands
      law when there are any potential conflicts of interests between our company
      and
      Xian Tianxing. We cannot assure you, however, that when conflicts of interest
      arise, Mr. Lu will act completely in our interests or that conflicts of
      interests will be resolved in our favor. In addition, Mr. Lu could violate
      his
      legal duties by diverting business opportunities from us to others. If we cannot
      resolve any conflicts of interest between us and Mr. Lu, we would have to rely
      on legal proceedings, which could result in the disruption of our business.




**Risks
      Related to Doing Business in China**




***Adverse
      changes in economic and political policies of the PRC government could have
      a
      material adverse effect on the overall economic growth of China, which could
      adversely affect our business.***





Substantially
      all of our business operations are conducted in China. Accordingly, our results
      of operations, financial condition and prospects are subject to a significant
      degree to economic, political and legal developments in China. China’s economy
      differs from the economies of most developed countries in many respects,
      including with respect to the amount of government involvement, level of
      development, growth rate, control of foreign exchange and allocation of
      resources. While the PRC economy has experienced significant growth in the
      past
      20 years, growth has been uneven across different regions and among various
      economic sectors of China. The PRC government has implemented various measures
      to encourage economic development and guide the allocation of resources. Some
      of
      these measures benefit the overall PRC economy, but may also have a negative
      effect on us. For example, our financial condition and results of operations
      may
      be adversely affected by government control over capital investments or changes
      in tax regulations that are applicable to us. Since early 2004, the PRC
      government has implemented certain measures to control the pace of economic
      growth. Such measures may cause a decrease in the level of economic activity
      in
      China, which in turn could adversely affect our results of operations and
      financial condition.




***If
      PRC law were to phase out the preferential tax benefits currently being extended
      to foreign invested enterprises and “new or high-technology enterprises” located
      in a high-tech zone, we would have to pay more taxes, which could have a
      material and adverse effect on our financial condition and results of
      operations.***




Under
      PRC
      laws and regulations, a foreign invested enterprise may enjoy preferential
      tax
      benefits if it is registered in a high-tech zone and also qualifies as “new or
      high-technology enterprise”. As a foreign invested enterprise as well as a
      certified “new or high-technology enterprise” located in a high-tech zone in
      Xian, the Company has been approved as a new technology enterprise and under
      PRC
      Income Tax Laws, it is entitled to a preferential tax rate of 15%. If the PRC
      law were to phase out preferential tax benefits currently granted to “new or
      high-technology enterprises” and technology consulting services, we would be
      subject to the standard statutory tax rate, which currently is 33%, and we
      would
      be unable to obtain business tax refunds for our provision of technology
      consulting services. Loss of these preferential tax treatments could have a
      material and adverse effect on our financial condition and results of
      operations.


14


***Xian
      Tianxing are subject to restrictions on making payments to us.***




We
      are a
      holding company incorporated in the Cayman Islands and do not have any assets
      or
      conduct any business operations other than our investments in our affiliated
      entity in China, Xian Tianxing. As a result of our holding company structure,
      we
      rely entirely on payments from Xian Tianxing under our contractual arrangements.
      The PRC government also imposes controls on the conversion of RMB into foreign
      currencies and the remittance of currencies out of China. We may experience
      difficulties in completing the administrative procedures necessary to obtain
      and
      remit foreign currency. See “Government control of currency conversion may
      affect the value of your investment.” Furthermore, if our affiliated entity in
      China incurs debt on their own in the future, the instruments governing the
      debt
      may restrict their ability to make payments. If we are unable to receive all
      of
      the revenues from our operations through these contractual or dividend
      arrangements, we may be unable to pay dividends on our ordinary
      shares.




***Uncertainties
      with respect to the PRC legal system could adversely affect us.***




We
      conduct our business primarily through our affiliated Chinese entity, Xian
      Tianxing. Our operations in China are governed by PRC laws and regulations.
      We
      are generally subject to laws and regulations applicable to foreign investments
      in China and, in particular, laws applicable to wholly foreign-owned
      enterprises. The PRC legal system is based on written statutes. Prior court
      decisions may be cited for reference but have limited precedential value.




Since
      1979, PRC legislation and regulations have significantly enhanced the
      protections afforded to various forms of foreign investments in China. However,
      China has not developed a fully integrated legal system and recently enacted
      laws and regulations may not sufficiently cover all aspects of economic
      activities in China. In particular, because these laws and regulations are
      relatively new, and because of the limited volume of published decisions and
      their nonbinding nature, the interpretation and enforcement of these laws and
      regulations involve uncertainties. In addition, the PRC legal system is based
      in
      part on government policies and internal rules (some of which are not published
      on a timely basis or at all) that may have a retroactive effect. As a result,
      we
      may not be aware of our violation of these policies and rules until some time
      after the violation. In addition, any litigation in China may be protracted
      and
      result in substantial costs and diversion of resources and management attention.





***You
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based on United States
      or other foreign laws against us, our management or the experts named in the
      prospectus.***




We
      conduct substantially all of our operations in China and substantially all
      of
      our assets are located in China. In addition, all of our senior executive
      officers reside within China. As a result, it may not be possible to effect
      service of process within the United States or elsewhere outside China upon
      our
      senior executive officers, including with respect to matters arising under
      U.S.
      federal securities laws or applicable state securities laws. Moreover, our
      PRC
      counsel has advised us that the PRC does not have treaties with the United
      States or many other countries providing for the reciprocal recognition and
      enforcement of judgment of courts.




***Governmental
      control of currency conversion may affect the value of your investment.***




The
      PRC
      government imposes controls on the convertibility of RMB into foreign currencies
      and, in certain cases, the remittance of currency out of China. We receive
      substantially all of our revenues in RMB. Under our current structure, our
      income is primarily derived from payments from Xian Tianxing. Shortages in
      the
      availability of foreign currency may restrict the ability of our PRC
      subsidiaries and our affiliated entity to remit sufficient foreign currency
      to
      pay dividends or other payments to us, or otherwise satisfy their foreign
      currency denominated obligations. Under existing PRC foreign exchange
      regulations, payments of current account items, including profit distributions,
      interest payments and expenditures from trade-related transactions, can be
      made
      in foreign currencies without prior approval from the PRC State Administration
      of Foreign Exchange by complying with certain procedural requirements. However,
      approval from appropriate government authorities is required where RMB is to
      be
      converted into foreign currency and remitted out of China to pay capital
      expenses such as the repayment of bank loans denominated in foreign currencies.
      The PRC government may also at its discretion restrict access in the future
      to
      foreign currencies for current account transactions. If the foreign exchange
      control system prevents us from obtaining sufficient foreign currency to satisfy
      our currency demands, we may not be able to pay dividends in foreign currencies
      to our shareholders.




***Fluctuation
      in the value of RMB may have a material adverse effect on your investment.***




The
      value
      of RMB against the U.S. dollar and other currencies may fluctuate and is
      affected by, among other things, changes in political and economic conditions.
      Our revenues and costs are mostly denominated in RMB, while a significant
      portion of our financial assets are denominated in U.S. dollars. We rely
      entirely on fees paid to us by our affiliated entity in China. Any significant
      fluctuation in value of RMB may materially and adversely affect our cash flows,
      revenues, earnings and financial position, and the value of, and any dividends
      payable on, our stock in U.S. dollars. For example, an appreciation of RMB
      against the U.S. dollar would make any new RMB denominated investments or
      expenditures more costly to us, to the extent that we need to convert U.S.
      dollars into RMB for such purposes. An appreciation of RMB against the U.S.
      dollar would also result in foreign currency translation losses for financial
      reporting purposes when we translate our U.S. dollar denominated financial
      assets into RMB, as RMB is our reporting currency.


15


***We
      face risks related to health epidemics and other outbreaks.***




Our
      business could be adversely affected by the effects of SARS or another epidemic
      or outbreak. China reported a number of cases of SARS in April 2004. Any
      prolonged recurrence of SARS or other adverse public health developments in
      China may have a material adverse effect on our business operations. For
      instance, health or other government regulations adopted in response may require
      temporary closure of our production facilities or of our offices. Such closures
      would severely disrupt our business operations and adversely affect our results
      of operations. We have not adopted any written preventive measures or
      contingency plans to combat any future outbreak of SARS or any other epidemic.




**Risks
      Related to an Investment in Our Securities**




***To
      Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will be Paid
      in
      the Foreseeable Future.***





We
      do not
      anticipate paying cash dividends on our common stock in the foreseeable future
      and we may not have sufficient funds legally available to pay dividends. Even
      if
      the funds are legally available for distribution, we may nevertheless decide
      not
      to pay any dividends. We intend to retain all earnings for the company’s
      operations.




***The
      Application of the “Penny Stock” Rules Could Adversely Affect the Market Price
      of Our Common Stock and Increase Your Transaction Costs to Sell Those Shares.***





As
      long
      as the trading price of our common shares is below $5 per share, the open-market
      trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of securities and have received
      the
      purchaser’s written consent to the transaction before the purchase.
      Additionally, for any transaction involving a penny stock, unless exempt, the
      broker-dealer must deliver, before the transaction, a disclosure schedule
      prescribed by the Securities and Exchange Commission relating to the penny
      stock
      market. The broker-dealer also must disclose the commissions payable to both
      the
      broker-dealer and the registered representative and current quotations for
      the
      securities. Finally, monthly statements must be sent disclosing recent price
      information on the limited market in penny stocks. These additional burdens
      imposed on broker-dealers may restrict the ability or decrease the willingness
      of broker-dealers to sell our common shares, and may result in decreased
      liquidity for our common shares and increased transaction costs for sales and
      purchases of our common shares as compared to other securities.





***Our
      Common Shares are Thinly Traded and, You May be Unable to Sell at or Near Ask
      Prices or at All if You Need to Sell Your Shares to Raise Money or Otherwise
      Desire to Liquidate Your Shares.***





The
      Company cannot predict the extent to which an active public market for its
      common stock will develop or be sustained. However, the Company does not rule
      out the possibility of applying for listing on the Nasdaq National Market or
      other exchanges.




Our
      common shares have historically been sporadically or “thinly-traded” on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
      in purchasing our common shares at or near bid prices at any given time may
      be
      relatively small or non-existent. This situation is attributable to a number
      of
      factors, including the fact that we are a small company which is relatively
      unknown to stock analysts, stock brokers, institutional investors and others
      in
      the investment community that generate or influence sales volume, and that
      even
      if we came to the attention of such persons, they tend to be risk-averse and
      would be reluctant to follow an unproven company such as ours or purchase or
      recommend the purchase of our shares until such time as we became more seasoned
      and viable. As a consequence, there may be periods of several days or more
      when
      trading activity in our shares is minimal or non-existent, as compared to a
      seasoned issuer which has a large and steady volume of trading activity that
      will generally support continuous sales without an adverse effect on share
      price. We cannot give you any assurance that a broader or more active public
      trading market for our common stock will develop or be sustained, or that
      current trading levels will be sustained.


16
  The
        market price for our common stock is particularly volatile given our status
        as a
        relatively small company with a small and thinly traded “float” and lack of
        current revenues that could lead to wide fluctuations in our share price.
        The
        price at which you purchase our common stock may not be indicative of the
        price
        that will prevail in the trading market. You may be unable to sell your common
        stock at or above your purchase price if at all, which may result in substantial
        losses to you.





The
      market for our common shares is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      The volatility in our share price is attributable to a number of factors. First,
      as noted above, our common shares are sporadically and/or thinly traded. As
      a
      consequence of this lack of liquidity, the trading of relatively small
      quantities of shares by our shareholders may disproportionately influence the
      price of those shares in either direction. The price for our shares could,
      for
      example, decline precipitously in the event that a large number of our common
      shares are sold on the market without commensurate demand, as compared to a
      seasoned issuer which could better absorb those sales without adverse impact
      on
      its share price. Secondly, we are a speculative or “risky” investment due to our
      lack of revenues or profits to date and uncertainty of future market acceptance
      for our current and potential products. As a consequence of this enhanced risk,
      more risk-adverse investors may, under the fear of losing all or most of their
      investment in the event of negative news or lack of progress, be more inclined
      to sell their shares on the market more quickly and at greater discounts than
      would be the case with the stock of a seasoned issuer. The following factors
      may
      add to the volatility in the price of our common shares: actual or anticipated
      variations in our quarterly or annual operating results; adverse outcomes;
      the
      termination of our contractual agreements with Xian Tianxing; and additions
      or
      departures of our key personnel, as well as other items discussed under this
      “Risk Factors” section, as well as elsewhere in this Form 10-KSB. Many of these
      factors are beyond our control and may decrease the market price of our common
      shares, regardless of our operating performance. We cannot make any predictions
      or projections as to what the prevailing market price for our common shares
      will
      be at any time, including as to whether our common shares will sustain their
      current market prices, or as to what effect that the sale of shares or the
      availability of common shares for sale at any time will have on the prevailing
      market price. However, the Company does not rule out the possibility of applying
      for listing on the Nasdaq National Market or other exchanges.




Shareholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.





***Volatility
      in Our Common Share Price May Subject Us to Securities Litigation.***





The
      market for our common stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In the past, plaintiffs have often initiated securities class action litigation
      against a company following periods of volatility in the market price of its
      securities. We may, in the future, be the target of similar litigation.
      Securities litigation could result in substantial costs and liabilities and
      could divert management’s attention and resources.





***Our
      corporate actions are substantially controlled by our principal shareholders
      and
      affiliated entities.***




Our
      principal shareholders and their affiliated entities will own approximately
      81%
      of our outstanding ordinary shares, representing approximately 81% of our voting
      power. These shareholders, acting individually or as a group, could exert
      substantial influence over matters such as electing directors and approving
      mergers or other business combination transactions. In addition, because of
      the
      percentage of ownership and voting concentration in these principal shareholders
      and their affiliated entities, elections of our board of directors will
      generally be within the control of these shareholders and their affiliated
      entities. While all of our shareholders are entitled to vote on matters
      submitted to our shareholders for approval, the concentration of shares and
      voting control presently lies with these principal shareholders and their
      affiliated entities. As such, it would be difficult for shareholders to propose
      and have approved proposals not supported by management. There can be no
      assurances that matters voted upon by our officers and directors in their
      capacity as shareholders will be viewed favorably by all shareholders of the
      company.


17
  ***The
        Elimination of Monetary Liability Against our Directors, Officers and Employees
        under Nevada law and the Existence of Indemnification Rights to our Directors,
        Officers and Employees may Result in Substantial Expenditures by our Company
        and
        may Discourage Lawsuits Against our Directors, Officers and Employees.***





Our
      articles of incorporation do not contain any specific provisions that eliminate
      the liability of our directors for monetary damages to our company and
      shareholders, however we are prepared to give such indemnification to our
      directors and officers to the extent provided by Nevada law. We may also have
      contractual indemnification obligations under our employment agreements with
      our
      officers. The foregoing indemnification obligations could result in our company
      incurring substantial expenditures to cover the cost of settlement or damage
      awards against directors and officers, which we may be unable to recoup. These
      provisions and resultant costs may also discourage our company from bringing
      a
      lawsuit against directors and officers for breaches of their fiduciary duties,
      and may similarly discourage the filing of derivative litigation by our
      shareholders against our directors and officers even though such actions, if
      successful, might otherwise benefit our company and shareholders.




***Legislative
      Actions, Higher Insurance Costs and Potential New Accounting Pronouncements
      may
      Impact our Future Financial Position and Results of
      Operations.***





There
      have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
      there may potentially be new accounting pronouncements or additional regulatory
      rulings that will have an impact on our future financial position and results
      of
      operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
      proposed legislative initiatives following the Enron bankruptcy are likely
      to
      increase general and administrative costs and expenses. In addition, insurers
      are likely to increase premiums as a result of high claims rates over the past
      several years, which we expect will increase our premiums for insurance
      policies. Further, there could be changes in certain accounting rules. These
      and
      other potential changes could materially increase the expenses we report under
      generally accepted accounting principles, and adversely affect our operating
      results.





***Past
      Activities Of The Company And Its Affiliates May Lead To Future Liability For
      The Company.***





Prior
      to
      our entry into the contractual arrangements with Xian Tianxing on October 28,
      2005, the Company engaged in businesses unrelated to its current operations.
      Although the CGPN Shareholders are providing certain indemnifications against
      any loss, liability, claim, damage or expense arising out of or based on any
      breach of or inaccuracy in any of their representations and warranties made
      regarding such acquisition, any liabilities relating to such prior business
      against which Skystar is not completely indemnified may have a material adverse
      effect on the Company.




***The
      market price for our stock may be volatile.***




The
      market price for our stock may be volatile and subject to wide fluctuations
      in
      response to factors including the following:





·
            actual
                or anticipated fluctuations in our quarterly operating
                results;





·
            changes
                in financial estimates by securities research
                analysts;





·
            conditions
                in bio-pharmaceutical and agricultural
                markets;





·
            changes
                in the economic performance or market valuations of other
                bio-pharmaceutical companies;





·
            announcements
                by us or our competitors of new products, acquisitions, strategic
                partnerships, joint ventures or capital
                commitments;





·
            addition
                or departure of key personnel;


18


·
            fluctuations
                of exchange rates between RMB and the U.S.
                dollar;





·
            intellectual
                property litigation; and





·
            general
                economic or political conditions in
                China.




In
      addition, the securities market has from time to time experienced significant
      price and volume fluctuations that are not related to the operating performance
      of particular companies. These market fluctuations may also materially and
      adversely affect the market price of our stock.




***We
      may need additional capital, and the sale of additional shares or other equity
      securities could result in additional dilution to our shareholders.***




We
      believe that our current cash and cash equivalents, anticipated cash flow from
      operations and the net proceeds from this offering will be sufficient to meet
      our anticipated cash needs for the near future. We may, however, require
      additional cash resources due to changed business conditions or other future
      developments, including any investments or acquisitions we may decide to pursue.
      If our resources are insufficient to satisfy our cash requirements, we may
      seek
      to sell additional equity or debt securities or obtain a credit facility. The
      sale of additional equity securities could result in additional dilution to
      our
      shareholders. The incurrence of indebtedness would result in increased debt
      service obligations and could result in operating and financing covenants that
      would restrict our operations. We cannot assure you that financing will be
      available in amounts or on terms acceptable to us, if at all.





***If
      we fail to maintain an effective system of internal controls, we may not be
      able
      to accurately report our financial results or prevent fraud.***




We
      are
      subject to reporting obligations under the U.S. securities laws. The Securities
      and Exchange Commission, or the SEC, as required by Section 404 of the
      Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
      include a management report on such company’s internal controls over financial
      reporting in its annual report, which contains management’s assessment of the
      effectiveness of the company’s internal controls over financial reporting. In
      addition, an independent registered public accounting firm must attest to and
      report on management’s assessment of the effectiveness of the company’s internal
      controls over financial reporting. Our management may conclude that our internal
      controls over our financial reporting are not effective. Moreover, even if
      our
      management concludes that our internal controls over financial reporting are
      effective, our independent registered public accounting firm may still decline
      to attest to our management’s assessment or may issue a report that is qualified
      if it is not satisfied with our controls or the level at which our controls
      are
      documented, designed, operated or reviewed, or if it interprets the relevant
      requirements differently from us. Our reporting obligations as a public company
      will place a significant strain on our management, operational and financial
      resources and systems for the foreseeable future. Effective internal controls,
      particularly those related to revenue recognition, are necessary for us to
      produce reliable financial reports and are important to help prevent fraud.
      As a
      result, our failure to achieve and maintain effective internal controls over
      financial reporting could result in the loss of investor confidence in the
      reliability of our financial statements, which in turn could harm our business
      and negatively impact the trading price of our stock. Furthermore, we anticipate
      that we will incur considerable costs and use significant management time and
      other resources in an effort to comply with Section 404 and other requirements
      of the Sarbanes-Oxley Act.




***We
      will incur increased costs as a result of being a public company.***




As
      a
      public company, we will incur significant legal, accounting and other expenses
      that we did not incur as a private company. In addition, the Sarbanes-Oxley
      Act,
      as well as new rules subsequently implemented by SEC have required changes
      in
      corporate governance practices of public companies. We expect these new rules
      and regulations to increase our legal, accounting and financial compliance
      costs
      and to make certain corporate activities more time-consuming and costly. In
      addition, we will incur additional costs associated with our public company
      reporting requirements. We are currently evaluating and monitoring developments
      with respect to these new rules, and we cannot predict or estimate the amount
      of
      additional costs we may incur or the timing of such costs.





**Item
      3.**  **Controls
      And Procedures**





(a) *Evaluation
      of disclosure controls and procedures* .
      As of
      the end of the period covered by this report, we carried out an evaluation,
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures, as defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
      as
      amended. Based upon that evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective as of the end of the applicable period to ensure that the information
      required to be disclosed by the Company in reports that it files or submits
      under the Exchange Act (i) is recorded, processed, summarized and reported
      within the time periods specified in Securities and Exchange Commission rules
      and forms and (ii) is accumulated and communicated to our management, including
      our Chief Executive Officer and Chief Financial Officer, as appropriate to
      allow
      timely decisions regarding required disclosures.





(b) *Changes
      in internal controls over financial reporting* .
      There
      was no change in our internal control over financial reporting during our most
      recent fiscal quarter that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.




19


**PART
      II - OTHER INFORMATION**





**Item 1.
      Legal Proceedings.**





There
      have been no material changes to the Legal Proceedings described in our Annual
      Report on Form 10-KSB filed with the Commission on May 18, 2007





**Item 2.
      Unregistered Sales of Equity Securities and Use of Proceeds.**





Reference
      is made to our Current Report on Form 8-K filed with the Commission on March
      5,
      2007.





**Item 3.
      Defaults upon Senior Securities.**





None.





**Item 4.
      Submission of Matters to a Vote of Securities Holders.**





None.





**Item 5.
      Other Information** .





None.


20





**Item
      6. Exhibits**





**Exhibit
                Number**
            
            **Description**2.1
            
            Share
                Purchase Agreement by and between The Cyber Group Network, Inc. and
                Howard
                L. Allen and Donald G. Jackson (shareholders of Hollywood Entertainment
                Network, Inc.) dated May 12, 2000 (1)2.2
            
            Plan
                of Merger Agreement between The Cyber Group Network Corp. and CGN
                Acquisitions Corporation dated December 7, 2000 (2)2.3
            
            Share
                Exchange Agreement between The Cyber Group Network Corporation, R.
                Scott
                Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical,
                and the
                Skystar Shareholders dated September 20, 2005 (3)3.1
            
            Charter
                of The Cyber Group Network Corporation as filed with the State of
                Nevada
                (4)3.2
            
            Certificate
                of Amendment and Certificate of Change (6)3.3
            
            Company
                Bylaws (5)10.1
            
            Form
                of Securities Purchase Agreement, dated as of February 26, 2007 by
                and
                among the Company and the Purchasers (7)10.2
            
            Form
                of Class A Convertible Debenture (7)10.3
            
            Form
                of Class B Convertible Debenture (7)10.4
            
            Form
                of Class A Warrant (7)10.5
            
            Form
                of Class B Warrant (7)10.6
            
            Form
                of Registration Rights Agreement, dated as of February 26, 2007 by
                and
                among the Company and the Purchasers (7)10.7
            
            Form
                of Company Principal Lockup Agreement (7)31.1
            
            Section
                302 Certification by the Corporation’s Chief Executive Officer
                (8)31.2
            
            Section
                302 Certification by the Corporation’s Chief Financial Officer
                (8)32.1
            
            Section
                906 Certification by the Corporation’s Chief Executive Officer
                (8)32.2
            
            Section
                906 Certification by the Corporation’s Chief Financial Officer
                (8)







(1)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on June 1,
      2000.





(2)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on January
      12, 2001.


(3)  Incorporated
        by reference from the Registrant’s Current Report on Form 8-K filed on September
        26, 2005.





(4)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on November
      14, 2005.





(5)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on December 16,
      2005.





(6)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on January
      27, 2006.





(7)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on March 5,
      2007.





(8)  Filed
      herewith.




21


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**SKYSTAR
                BIO-PHARMACEUTICAL COMPANY**
              (Registrant)Date:
              May 21, 2007
            By:
            /s/
              Weibing
              LuWeibing
                Lu
              Chief
                Executive Officer  Date:
                May 21, 2007
              By:
              /s/
                Erna
                GaoErna
                    Gao
                  Chief
                    Financial Officer
 22