**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**




þ
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
                the quarterly period ended**March
                31, 2008**




 ̈
            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 small business issuer as specified in its charter)





**Nevada**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **33-0901534**
              (I.R.S.
                employer
              identification
                number)**Room
                10601, Jiezuo Plaza, No.4, Fenghui Road South,**
              **Gaoxin
                District, Xian Province, P.R. China**
              (Address
                of principal executive offices and zip code)
              **(8629)
                8819-3188**
              (Registrant’s
                telephone number, including area
                code)





Securities
      registered pursuant to Section 12(b) of the Act: ****  **None**


Securities
      registered pursuant to Section 12(g) of the Act: ****  **Common
      Stock, par value $0.001 per share**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No þ





Indicate
      by check mark whether the registrant is required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes þ No o





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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained to the best
      of
      the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





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




Large Accelerated Filer o
            
            Accelerated Filer oNon-accelerated filer o
            
            Smaller reporting company þ














Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes o No þ





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





As
      of May
      7, 2008, the Registrant had 18,639,103 shares of Common Stock outstanding.













**SKYSTAR
      BIO-PHARMACEUTICAL COMPANY**


**FORM 10-Q**




**INDEX**




Page
              Number**SPECIAL
                NOTE REGARDING FORWARD-LOOKING STATEMENTS**
            3**PART
                I. FINANCIAL INFORMATION**
            4Item
                1.
            Financial
                Statements (unaudited)
            4Consolidated
                Balance Sheet as of March 31, 2008 and December 31, 2007
            4Consolidated
                Statements of Operations and Other Comprehensive Income (Loss) for
                the
                Three Months Ended March 31, 2008 and 2007
            5Consolidated
                Statements of Shareholders’ Equity
            6Consolidated
                Statements of Cash Flows for the Three Months Ended March 31, 2008
                and
                2007
            7Notes
                to the Consolidated Financial Statements as of March 31,
                2008
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            30Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            36Item4.
            Controls
                and Procedures
            36**PART
                II. OTHER INFORMATION**
            38Item
                1.
            Legal
                Proceedings
            38Item
                1A.
            Risk
                Factors
            38Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            50Item
                3.
            Defaults
                Upon Senior Securities
            50Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            50Item
                5.
            Other
                Information
            50Item
                6.
            Exhibits
            52**SIGNATURES**
            53





2


**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains forward-looking statements. All forward-looking statements
      are
      inherently uncertain as they are based on current expectations and assumptions
      concerning future events or future performance of the Company. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      are only predictions and speak only as of the date hereof. Forward-looking
      statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
      risks and uncertainties. In evaluating such statements, prospective investors
      should carefully review various risks and uncertainties identified in this
      Report, including the matters set forth under the captions “Risk Factors” and in
      the Company’s other SEC filings. These risks and uncertainties could cause the
      Company’s actual results to differ materially from those indicated in the
      forward-looking statements. The Company undertakes no obligation to update
      or
      publicly announce revisions to any forward-looking statements to reflect future
      events or developments.




Although
      forward-looking statements in this Quarterly Report on Form 10-Q reflect the
      good faith judgment of our management, such statements can only be based on
      facts and factors currently known by us. Consequently, forward-looking
      statements are inherently subject to risks and uncertainties, and actual results
      and outcomes may differ materially from the results and outcomes discussed
      in or
      anticipated by the forward-looking statements. Factors that could cause or
      contribute to such differences in results and outcomes include, without
      limitation, those specifically addressed under the heading “Risks Relating to
      Our Business” below, as well as those discussed elsewhere in this Quarterly
      Report. Readers are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this Quarterly Report. We file
      reports with the SEC. You can read and copy any materials we file with the
      SEC
      at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549 on
      official business days during the hours of 10 a.m. to 3 p.m. You can obtain
      additional information about the operation of the Public Reference Room by
      calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
      site (www.sec.gov) that contains reports, proxy and information statements,
      and
      other information regarding issuers that file electronically with the SEC,
      including the Company.




*We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      Quarterly Report. Readers are urged to carefully review and consider the various
      disclosures made throughout the entirety of this annual report, which attempt
      to
      advise interested parties of the risks and factors that may affect our business,
      financial condition, results of operations and prospects.*





3


**PART
      I.** **FINANCIAL
      INFORMATION**





**ITEM
      1.** **FINANCIAL
      STATEMENTS.**


SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETSAS
                  OF MARCH 31, 2008 AND DECEMBER 31,
                  2007
  ASSETSMarch
                  31, 2008
              
              December
                  31, 2007(Unaudited)CURRENT
                  ASSETS:Cash
              
              $
              389,300
              
              $
              771,492Restricted
                  cash
              
              
              78,232
              
              
              74,969Accounts
                  receivable, net of allowance for doubtful accountsof
                  $ 119,639 and $119,639 as of March 31, 2008 andDecember
                  31, 2007, respectively.
              
              
              1,745,986
              
              
              1,356,094Inventories
              
              
              3,730,847
              
              
              2,242,611Deposits
                  and prepaid expenses
              
              
              1,635,584
              
              
              806,657Loans
                  receivable
              
              
              466,492
              
              
              968,852Other
                  receivables
              
              
              40,219
              
              
              43,800Other
                  receivables-shareholder
              
              
              23,726
              
              
              59,462Total
                  current assets
              
              
              8,110,386
              
              
              6,323,937PLANT
                  AND EQUIPMENT, net
              
              
              12,223,972
              
              
              11,793,967OTHER
                  ASSETS:Long
                  term prepayment
              
              
              1,270,920
              
              
              1,220,190Deferred
                  financing costs
              
              
              79,998
              
              
              101,815Intangible,
                  net
              
              
              1,015,735
              
              
              1,011,236Total
                  other assets
              
              
              2,366,653
              
              
              2,333,241Total
                  assets
              
              $
              22,701,011
              
              $
              20,451,145LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Interest-bearing
                  short-term loan from third party
              
              $
              171,360
              
              $
              -Accounts
                  payable
              
              
              267,857
              
              
              126,754Accrued
                  expenses
              
              
              553,509
              
              
              502,871Deposits
                  from customers
              
              
              71,876
              
              
              61,706Taxes
                  payable
              
              
              890,588
              
              
              568,797Other
                  payables
              
              
              80,314
              
              
              81,221Amount
                  due to related companies
              
              
              7,113
              
              
              49,954Amount
                  due to shareholders and directors
              
              
              31,673
              
              
              31,616Total
                  current liabilities
              
              
              2,074,290
              
              
              1,422,919OTHER
                  LIABILITIES:Deferred
                  government grant
              
              
              1,071,000
              
              
              1,028,250Convertible
                  debenture, net of $291,548 and $398,171 discountas
                  of March 31, 2008 and December 31, 2007,
                  respectively.
              
              
              191,375
              
              
              84,752Total
                  other liabilities
              
              
              1,262,375
              
              
              1,113,002Total
                  liabilities
              
              
              3,336,665
              
              
              2,535,921CONTINGENT
                  LIABILITIES
              
              
              -
              
              
              -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, 2008 and December31,
                  2007, respectively; Nil series"B" shares issued and outstandingas
                  of March 31, 2008 and December 31,2007,
                  respectively.
              
              
              2,000
              
              
              2,000Common
                  stock, $0.001 par value, 50,000,000 shares authorized ;17,111,200
                  shares issued and outstanding as of March 31, 2008
                  andDecember
                  31, 2007, respectively.
              
              
              17,111
              
              
              17,111Paid-in-capital
              
              
              14,741,278
              
              
              14,741,278Deferred
                  compensation
              
              
              -
              
              
              (62,758
              )Statutory
                  reserves
              
              
              1,742,403
              
              
              1,652,720Retained
                  earnings
              
              
              648,939
              
              
              122,271Accumulated
                  other comprehensive income
              
              
              2,212,615
              
              
              1,442,602Total
                  shareholders' equity
              
              
              19,364,346
              
              
              17,915,224Total
                  liabilities and shareholders' equity
              
              $
              22,701,011
              
              $
              20,451,145
  The
        accompanying notes are an integral part of this statement.
  4





SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
                THE THREE MONTHS ENDED MARCH 31, 2008 and 2007(Unaudited)




Three
                months endedMarch
                312008
            
            2007REVENUE
            
            $
            2,686,354
            
            $
            1,367,810COST
                OF SALES
            
            
            1,297,419
            
            
            697,035GROSS
                PROFIT
            
            
            1,388,935
            
            
            670,775OPERATING
                EXPENSESResearch
                and development
            
            
            47,299
            
            
            31,655Selling
                expenses
            
            
            189,844
            
            
            109,428General
                and administrative expenses
            
            
            190,977
            
            
            316,551Amortization
                of deferred compensation
            
            
            62,758
            
            
            360,899Total
                operating expenses
            
            
            490,878
            
            
            818,533INCOME
                (LOSS) FROM OPERATIONS
            
            
            898,057
            
            
            (147,758
            )OTHER
                EXPENSE (INCOME)Other
                expense
            
            
            363
            
            
            -Interest
                income
            
            
            (11,316
            )
            
            (7,160
            )Interest
                expense
            
            
            139,452
            
            
            163,496Total
                other expense
            
            
            128,499
            
            
            156,336INCOME
                (LOSS) BEFORE PROVISION FOR INCOME TAXES
            
            
            769,558
            
            
            (304,094
            )PROVISION
                FOR INCOME TAXES
            
            
            153,207
            
            
            66,624NET
                INCOME (LOSS)
            
            
            616,351
            
            
            (370,718
            )OTHER
                COMPREHENSIVE INCOME :Foreign
                currency translation adjustment
            
            
            770,013
            
            
            103,159COMPREHENSIVE
                INCOME (LOSS)
            
            $
            1,386,364
            
            $
            (267,559
            )EARNINGS
                PER SHAREBasic
            
            $
            0.04
            
            $
            (0.03
            )Diluted
            
            $
            0.02
            
            $
            (0.03
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARESBasic
            
            
            17,111,200
            
            
            12,795,549Diluted
            
            
            17,971,246
            
            
            12,795,549




The
      accompanying notes are an integral part of this
      statement.


5




SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY


AccumulatedPreferred
                  stock
              
              Common
                  stock
              
              
              
              
              
              Retained
                  earnings
              
              otherPaid-in
              
              Deferred
              
              Statutory
              
              
              
              comprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              Compensation
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2006
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              6,246,325
              
              $
              (705,877
              )
              $
              779,624
              
              $
              2,952,343
              
              $
              460,020
              
              $
              9,747,230Shares
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Beneficial
                  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
              )Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              36,521
              
              
              (36,521
              )
              
              
              
              
              --BALANCE,
                  March 31, 2007, (Unaudited)
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              10,964,602
              
              $
              (344,978
              )
              $
              816,145
              
              $
              2,545,104
              
              $
              563,179
              
              $
              14,558,847Shares
                  issued for services
              
              
              
              
              
              
              
              
              78,750
              
              
              79
              
              
              115,684
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              115,763Inducement
                  cost for debentures converted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450Inducement
                  cost for warrants exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547Debentures
                  converted to common stock
              
              
              
              
              
              
              
              
              3,278,720
              
              
              3,279
              
              
              2,747,953
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,751,232Cashless
                  exercise of warrants
              
              
              
              
              
              
              
              
              958,181
              
              
              958
              
              
              (958
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              282,220
              
              
              
              
              
              
              
              
              
              
              
              282,220Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              879,423
              
              
              879,423Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,586,258
              )
              
              
              
              
              (1,586,258
              )Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              836,575
              
              
              (836,575
              )
              
              
              
              
              -BALANCE,
                  December 31, 2007
              
              
              2,000,000
              
              $
              2,000
              
              
              17,111,200
              
              $
              17,111
              
              $
              14,741,278
              
              $
              (62,758
              )
              $
              1,652,720
              
              $
              122,271
              
              $
              1,442,602
              
              $
              17,915,224Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,758
              
              
              
              
              
              
              
              
              
              
              
              62,758Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              770,013
              
              
              770,013Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              616,351
              
              
              
              
              
              616,351Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              89,683
              
              
              (89,683
              )
              
              
              
              
              -BALANCE,
                  March 31, 2008, (Unaudited)
              
              
              2,000,000
              
              $
              2,000
              
              
              17,111,200
              
              $
              17,111
              
              $
              14,741,278
              
              $
              -
              
              $
              1,742,403
              
              $
              648,939
              
              $
              2,212,615
              
              $
              19,364,346




6


SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWSFOR
                  THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007(Unaudited)
  Three
                  months endedMarch
                  312008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income (loss)
              
              $
              616,351
              
              $
              (370,718
              )Adjustments
                  to reconcile net income (loss) to cashused
                  in operating activities:Depreciation
              
              
              106,882
              
              
              27,068Amortization
              
              
              36,747
              
              
              6,451Amortization
                  of deferred financing costs
              
              
              21,817
              
              
              40,876Amortization
                  of discount on debentures
              
              
              114,990
              
              
              91,918Amortization
                  of deferred compensation
              
              
              62,758
              
              
              360,899Change
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              (326,435
              )
              
              (137,891
              )Inventories
              
              
              (1,365,399
              )
              
              126,263Deposits
                  and prepaid expenses
              
              
              (778,513
              )
              
              (1,406
              )Other
                  receivables
              
              
              14,617
              
              
              (7,138
              )Accounts
                  payable
              
              
              132,951
              
              
              (6,419
              )Accrued
                  expenses
              
              
              32,650
              
              
              (265,482
              )Deposits
                  from customers
              
              
              7,443
              
              
              -Taxes
                  payables
              
              
              291,816
              
              
              (45,502
              )Other
                  payables
              
              
              (4,193
              )
              
              (78,187
              )Net
                  cash used in operating activities
              
              
              (1,035,518
              )
              
              (259,268
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  from loans receivable
              
              
              521,796
              
              
              -Purchase
                  of plant and equipment
              
              
              (47,829
              )
              
              (249,261
              )Net
                  cash provided by (used in) investing activities
              
              
              473,967
              
              
              (249,261
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Increase
                  in restricted cash
              
              
              (143
              )
              
              (125
              )Increase
                  in amount due to shareholders
              
              
              -
              
              
              36,700Advances
                  from shareholders and directors
              
              
              (357,829
              )
              
              -Proceeds
                  from shareholders and directors
              
              
              393,622
              
              
              -Repay
                  amounts due to related companies
              
              
              (42,841
              )
              
              -Proceeds
                  from third party loan
              
              
              167,724
              
              
              -Proceeds
                  from convertible debentures, net of debenture expenses
              
              
              -
              
              
              3,737,250Net
                  cash provided by financing activities
              
              
              160,533
              
              
              3,773,825EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              18,826
              
              
              33,136(DECREASE)
                  INCREASE IN CASH
              
              
              (382,192
              )
              
              3,298,432CASH,
                  beginning of period
              
              
              771,492
              
              
              192,016CASH,
                  end of period
              
              $
              389,300
              
              $
              3,490,448SUPPLEMENTAL
                  DISCLOSURE INFORMATIONInterest
                  paid
              
              $
              2,645
              
              $
              819Income
                  taxes paid
              
              $
              -
              
              $
              140,548Non-cash
                  investing and financing transactionsWarrants
                  issued for services
              
              $
              -
              
              $
              643,277




The
      accompanying notes are an integral part of this
      statement.


7


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        1- DESCRIPTION OF BUSINESS AND ORGANIZATION**
 
 Skystar
        Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
        Cyber Group Network Corporation, was incorporated in Nevada. The Company
        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”), a
        joint
        stock company in the People’s Republic of China (“China” or “PRC”), through the
        Company’s wholly owned subsidiary, Skystar
        Bio-Pharmaceutical (Cayman) Holdings Co., Limited (“Skystar Cayman”), a Cayman
        Islands company which the Company acquired on November 7, 2005. Skystar Cayman,
        through its variable interest entity (“VIE”), Xian Tianxing, engages in
        research, development, production, marketing and sales of bio-pharmaceutical
        and
        veterinary products. All current operations of the Company are in
        China.
 
 On
        August
        21, 2007, Xian Tianxing invested $66,700 (RMB 500,000) to establish Shanghai
        Siqiang Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang
        was established in Putuo District, City of Shanghai, China with a registered
        capital of $66,700 (RMB 500,000) and Xian Tianxing is the 100% shareholder.
        Shanghai Siqiang was established to become a research and development center
        for
        Xian Tianxing and engages in research, development, production and sales
        of
        veterinary products, feed additives, and veterinary disease diagnosis
        equipments.
 
 On
        October 16, 2007, the board of directors of the Company approved the acquisition
        of all of the issued and outstanding shares of Fortunate Time International
        Limited (“Fortunate Time”), a Hong Kong company owned 100% by the Company’s
        non-executive director Russell Scott Cramer, in the consideration of $129
        (HKD1,000).
 
 On
        July
        10, 2007, Fortunate Time has established Sida Biotechnology (Xian) Co., Ltd.
        (“Sida”) with register capital $5,000,000. Fortunate Time invested
        $2,000,000 into Sida on July 20, 2007. Accordingly to the Xian High Technology
        District approval notice, Fortunate Times will have to contribute the remaining
        balance of $3,000,000 in Sida by July 09, 2009, which is 2 years from the
        business licenses issuance date. Sida was established in High Technology
        District, Xian, China. Sida’s principle business is to perform
        bio-pharmaceutical research, production and selling activities. Sida also
        provides bio-pharmaceutical technology consultation service.
 
 On
        March
        10, 2008, the Company entered into a series of agreements (collectively the
        “Transfer Agreements”) transferring the contractual arrangements governing the
        relationship among Skystar Cayman, Xian Tianxing, and the majority shareholders
        of Xian Tianxing. Pursuant to the Transfer Agreements, from and after March
        10,
        2008, all of the rights and obligations of Skystar Cayman under the contractual
        arrangements were transferred to Sida. In effect, Skystar Cayman assigned
        the
        contractual rights it had with Xian Tianxing to an indirectly wholly-owned
        subsidiary, Sida.
 
 As
        a
        result of these contractual arrangements, which obligates Sida to absorb
        a
        majority of the risk of loss from Xian Tianxing’s activities and enable Sida to
        receive a majority of its expected residual returns, Sida 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, Sida consolidates Xian Tianxing’s results, assets and
        liabilities.
  8
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 **Note
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Basis
        of presentation and consolidation
 
 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 wholly-owned subsidiaries and its variable interest entities.
        All
        significant inter-company transactions and balances between the Company,
        its
        subsidiaries and VIEs are eliminated upon consolidation.
 
 In
        the
        opinion of management, the unaudited consolidated financial statements furnished
        herein include all adjustments, all of which are of a normal recurring nature,
        necessary for a fair statement of the results for the interim period presented.
        Operating results for the period ended March 31, 2008 are not necessarily
        indicative of the results that may be expected for the year ending December
        31,
        2008 .
 
 Consolidation
        of variable interest entity
 
 In
        accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
        Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
        that lack sufficient equity to finance their activities without additional
        financial support from other parties or whose equity holders lack adequate
        decision making ability. All VIEs with which the Company is involved must
        be
        evaluated to determine the primary beneficiary of the risks and rewards of
        the
        VIE. The primary beneficiary is required to consolidate the VIE for financial
        reporting purposes.
 
 The
        Company has concluded that Xian
        Tianxing is a VIE
        and that the Company’s wholly owned subsidiaries, Skystar Cayman (prior March
        10, 2008) and Sida (March 10, 2008 and thereafter), absorb
        a
        majority of the risk of loss from Xian Tianxing’s activities and enable the
        Company to receive a majority of its expected residual returns, the Company
        accounts for Xian Tianxing as a variable interest entity (“VIE”).
 
 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 plant and equipment. Because of the use of
        estimates inherent in the financial reporting process, actual results could
        differ from those estimates.
  9
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  Fair
        values of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
        Measurements, defines fair value, establishes a three-level valuation hierarchy
        for disclosures of fair value measurement and enhances disclosures requirements
        for fair value measures. The carrying amounts reported in the balance sheets
        for
        current receivables, payables and short term loans qualify as financial
        instruments and are a reasonable estimate of fair value because of the short
        period of time between the origination of such instruments and their expected
        realization and their current market rate of interest. The three levels are
        defined as follow:
 
 ·
              Level
                  1 inputs to the valuation methodology are quoted prices (unadjusted)
                  for
                  identical assets or liabilities in active
                  markets.
  ·
              Level
                  2 inputs to the valuation methodology include quoted prices for
                  similar
                  assets and liabilities in active markets, and inputs that are observable
                  for the assets or liability, either directly or indirectly, for
                  substantially the full term of the financial
                  instruments.
  ·
              Level
                  3 inputs to the valuation methodology are unobservable and significant
                  to
                  the fair value.
 
 The
        Company did not identify any assets and liabilities that are required to
        be
        presented on the balance sheet at fair value in accordance with SFAS No.
        157.
 
 The
        Company analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” During
        2007, the Company issued 8% convertible debentures in a face amount of $4.075
        million which are due February 28, 2009. During 2007, face amount of $3,302,300
        were converted into common stock. As
        fixed
        prices are set for the conversion prices of such convertible debentures and
        the
        attached warrants, the Company is in a position to be sure it had adequate
        authorized shares for the future conversion of convertible debentures and
        warrants. Therefore, the embedded derivatives and warrants were recorded
        as
        equity and are not required to be recorded at fair value and marked-to-market
        at
        each reporting period.
 
 As
        of
        March 31, 2008, the outstanding principal of the convertible notes was
        $ 482,298 and
        the
        discount resulted from the beneficial conversion feature and the warrants
        was
        $291,548. Since there is no quoted or observable market price for the fair
        value
        of identical notes, the Company then used the level 3 inputs for its valuation
        methodology, and used the Black Scholes Model to calculate the fair market
        value
        of the beneficial conversion feature and the warrants. In addition, due to
        the
        notes are expiring in 2009 and the Company does not anticipate any
        nonperformance risk and expects the note holders to convert the notes to
        the
        Company’s common stock within 2008, the Company determined that the fair value
        of the notes approximated the carrying value.
 
 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 collectability 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.
  10
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  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.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs which totaled
        $38,804 and $ 35,817 during
        the three months ended March 31, 2008 and
        2007, respectively.
 
 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
        $78,232 and $74,969 as of March
        31,
        2008 and December 31, 2007, 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, 2008 and December 31, 2007,
        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.
  Inventories
 
 Inventories
        are stated at the lower of cost, as determined on moving weighted average
        basis,
        or market. Costs of inventories include purchases and related costs incurred
        in
        bringing the products to their present location and condition.
  11
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  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
              
              
              20-40
                  yearsMachinery
                  and equipment
              
              
              10
                  yearsComputer,
                  office equipment and furniture
              
              
              5
                  yearsAutomobiles
              
              
              5-10
                  years
 
 Management
        assesses the carrying value of plant and equipment annually, or more often
        when
        factors indicating impairment are present, and reduces the carrying value
        of the
        fixed assets 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.
        Based on its review, management believes that, as of March 31, 2008, there
        was
        no impairment of its plant and equipment.
 
 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.
 
 Intangibles
 
 Land
        use
        rights - Land use rights represent 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 50 year term of the land use
        rights.
 
 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 intangibles - The Company evaluates the carrying value of intangibles
        annually, or more often when factors indicating impairment are present, 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 intangible assets. SFAS No. 144
        requires impairment losses to be recorded 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, 2008, there were no significant impairments of its
        intangible assets.
  12
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 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.
 
 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 records income tax pursuant to 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. 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. FIN 48 also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosures, and
        transition. The adoption had no affect on the Company’s financial statements.
        There are no deferred tax amounts at March 31, 2008 and December 31,
        2007.
  The
        Company’s operations are subject to income and transaction taxes in the United
        States and in the PRC jurisdictions. Significant estimates and judgments
        are
        required in determining the Company’s worldwide provision for income taxes. Some
        of these estimates are based on interpretations of existing tax laws or
        regulations. The ultimate amount of tax liability may be uncertain as a
        result.
 
 The
        Company does not anticipate any events which could cause change to these
        uncertainties.
 
 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.
  13
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  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.
 
 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 adopted Statement of Financial Accounting Standards No. 123R “Accounting
        for Stock-Based Compensation” (“SFAS 123R”), 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.
        S FAS
        123R
        allow the “simplified” method to determine the term when other information is
        not available. Because the Company does not have a history of employee stock
        options, the Company used the “simplified” method to estimates the life of the
        options.
 
 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 VIEs 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
        VIEs’ 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 VIEs’
financial statements are recorded as accumulated other comprehensive income.
  14
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (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, 2008
        and December 31, 2007 was US$1.00 to RMB7.00 and RMB7.29, respectively. .
        The
        weighted average translation rate of US$1.00 to RMB7.15 and RMB7.75 was applied
        to the income statement accounts in March 31, 2008 and 2007,
        respectively.
 
 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.
 
 Related
        parties
 
 Parties
        are considered to be related to the Company if the parties that, directly
        or
        indirectly, through one or more intermediaries, control, are controlled by,
        or
        are under common control with the Company. Related parties also include
        principal owners of the Company, its management, members of the immediate
        families of principal owners of the Company and its management and other
        parties
        with which the Company may deal if one party controls or can significantly
        influence the management or operating policies of the other to an extent
        that
        one of the transacting parties might be prevented from fully pursuing its
        own
        separate interests. A party which can significantly influence the management
        or
        operating policies of the transacting parties or if it has an ownership interest
        in one of the transacting parties and can significantly influence the other
        to
        an extent that one or more of the transacting parties might be prevented
        from
        fully pursuing its own separate interests is also a related party.
 
 Recently
        issued accounting pronouncements
  In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that  are
        not
        currently required to be measured at fair value. The objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities. The Company
        adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
        option to measure the fair value of eligible financial assets and
        liabilities.
  15
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. The Company
        adopted FSP EITF 07-3 and expensed the research and development as
        incurred.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
  **Note
        3 -CONCENTRATIONS AND CREDIT RISK**
 
 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.
  16
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 Certain
        financial instruments, which subject the Company to concentration of credit
        risk, consist of cash. The Company maintains balances at financial institutions
        which, from time to time, may exceed Federal Deposit Insurance Corporation
        insured limits for the banks located in the United States. Balances at financial
        institutions or state owned banks within the PRC are not covered by insurance. As
        of
        March 31, 2008 and December 31, 2007, the Company had deposits in excess
        of
        federally insured limits (including restricted cash) of $456,105 and $844,773,
        respectively. The Company has not experienced any losses in such accounts
        and
        believes it is not exposed to any significant risks on its cash in bank
        accounts.
 
 For
        the
        period ended March 31, 2008 and year ended December 31, 2007, all of the
        Company’s sales arose in the PRC. In addition, all accounts receivable as at
        March 31, 2008 and December 31, 2007 also arose in the PRC.
 
 No
        major
        customers accounted for more than 10% of the Company’s total revenues and total
        accounts receivable as of and for the three months ended March 31, 2008 and
        2007, respectively.
 
 The
        Company’s five largest vendors accounted for approximately 62.63% of the
        Company’s total purchases for the three months ended March 31, 2008, while the
        Company’s five largest vendors accounted for 47.78% of the Company’s total
        purchases for the three months ended March 31, 2007.
 
 The
        Company’s six major products accounted for approximately 41.4% of the Company’s
        total revenues for the three months ended March 31, 2008, while the Company’s
        six major products accounted for 52.8% of the Company’s total revenues for the
        three months ended March 31, 2007.
 
 **Note
        4 - RESTRICTED CASH**
 
 Restricted
        cash consists of the following:
 
 March
                  31, 2008
              
              December
                  31, 2007(Unaudited)Funds
                  received from PRC government
              
              $
              78,232
              
              $
              74,969(See
                  Note 10)
 
 **Note
        5 - INVENTORIES**
 
 Inventories
        consist of the following :
 March
                  31, 2008
              
              December
                  31, 2007(Unaudited)Raw
                  material
              
              $
              2,486,130
              
              $
              1,761,145Packing
                  materials
              
              
              197,525
              
              
              110,020Work
                  in process
              
              
              688
              
              
              2,639Finished
                  goods
              
              
              1,032,166
              
              
              355,041Low
                  value consumables
              
              
              14,338
              
              
              13,766Total
              
              $
              3,730,847
              
              $
              2,242,611
  17
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 **Note
        6 - LOANS RECEIVABLE**
 
 Loans
        receivable consists of the following:
 March
                  31, 2008
              
              December
                  31, 2007(Unaudited)Others,
                  non-interest bearing, unsecured
              
              $
              9,532
              
              $
              9,152Shanxi
                  Suoang Biotechnological Company, due October 30, 2007, extended
                  to March
                  31, 2008, annual interest at 7.0%, secured by unrelated company
                  Shanxi New
                  Resource Co.
              
              
              -
              
              
              27,420Xi’an
                  Tiantai Investment Company, due July 31, 2008 (or upon demand),
                  minimum
                  annual interest at 7.2%, unsecured
              
              
              314,160
              
              
              383,880Xi’an
                  SilverRiver Automatic Equipment Company, due on March 23, 2008
                  and
                  extended to April 2008, annual interest rate 8.4%, unsecured, balance
                  was
                  repaid in April 2008
              
              
              142,800
              
              
              411,300Shanxi
                  Hongye Housing Company, due on demand, non-interest
                  bearing.
              
              
              -
              
              
              137,100Total
                  loan receivable
              
              $
              466,492
              
              $
              968,852
 
 **Note
        7 - PLANT AND EQUIPMENT**
 
 Plant
        and
        equipment consists of the following :
 
 March
                  31, 2008
              
              December
                  31, 2007(Unaudited)Building
                  and improvements
              
              $
              3,741,879
              
              $
              3,592,519Plant
                  and machinery
              
              
              2,945,569
              
              
              2,827,591Office
                  equipment
              
              
              178,658
              
              
              167,617Vehicles
              
              
              315,261
              
              
              295,995Construction
                  in progress
              
              
              5,798,613
              
              
              5,531,236Total
              
              
              12,979,980
              
              
              12,414,958Less:
                  accumulated depreciation
              
              
              (756,008
              )
              
              (620,991
              )Plant
                  and equipment , net
              
              $
              12,223,972
              
              $
              11,793,967
 
 Construction
        in progress is the construction of a production base which will meet the
        Good
        Manufacturing Practices Standard (“GMP Standard”). No
        depreciation is provided for construction in progress until such time as
        the
        assets are completed and placed into service. Maintenance, repairs and minor
        renewals are charged directly to expenses as incurred. Major additions and
        betterment to property and equipment are capitalized.
  18
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 Construction
        on the plant for GMP standard bio-pharmaceutical facility and animal laboratory
        commenced in May 2005 and is expected to be completed at the end of 2008.
 
 The
        depreciation expense was $106,882 and $27,068 for the
        periods ended March 31, 2008 and 2007, respectively.
 
 **Note
        8 - INTANGIBLES**
 
 Intangibles
        consist of the following:
 
 2008
              
              2007(Unaudited)Land
                  use rights
              
              $
              368,781
              
              $
              354,061Technological
                  know-how
              
              
              856,800
              
              
              822,600Total
              
              
              1,225,581
              
              
              1,176,661Less:
                  accumulated amortization
              
              
              (209,846
              )
              
              (165,425
              )Intangible
                  assets, net
              
              $
              1,015,735
              
              $
              1,011,236
 
 The
        amortization expense for intangibles was $36,747 and $6,451 for
        the
        periods ended March 31, 2008 and 2007, respectively.
 
 **Note
        9 - INTEREST-BEARING SHORT-TERM LOAN**
 
 The
        short-term loan of $171,360 and $0 as of March 31, 2008 and December 31,
        2007,
        respectively, was for a term of one year from December 30, 2007 to December
        30,
        2008, is secured by a guarantee given by a third party, and bears annual
        interest at 7.47% .
 
 Interest
        expense for the periods ended March 31, 2008and 2007 amounted to $2,645 and
        $819, 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.
  19
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 
 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. 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. As
        of
        March 31, 2008, the Company has not reached a final agreement with the PRC
        government regarding the treatment of these two subsidies as either a loan
        or capital contribution, and the Company does not expect that the final
        agreement will be completed within the year of 2008; therefore, these amounts
        are carried as liabilities in the accompanying financial statements.
 
 **Note
        11 - CAPITAL TRANSACTIONS**
 
 On
        July
        10, 2007, the Company issued 40,000 shares of common stock as salary to a
        non-executive director. On the same date, the Company issued 38,750 shares
        of
        common stock to an independent consultant. The fair market value of the
        Company's common stock as of July 10, 2007 was $1.47 per share and expense
        of
        $115,763 related to these two stock issuances was charged to general and
        administrative expense.
 
 In
        the
        fourth quarter of 2007, the Company’s convertible note holders converted the
        debentures into 3,278,720 shares of common stock as more fully described
        in Note
        12.
 
 In
        the
        fourth quarter of 2007, the Company’s warrant holder exercised 3,100,000
        warrants into 958,181 shares of common stock, in a cashless
        exercise.
 
 **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.
 
 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 of the Transaction a warrant to purchase
        an
        aggregate of 570,500 shares of common stock 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  Debentures.
        For the three months ended March 31, 2008 and 2007, $21,817 and $40,876 was
        amortized to interest expense, respectively.
  20
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  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 Debentures were issued with a
        beneficial conversion feature. As a result, on February 27, 2007, 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 the Debentures and additional paid-in
        capital and will be amortized over the two year life of the Debentures using
        the
        effective interest method. For three months ended March 31, 2008 and 2007,
        $114,990 and $91,918 was amortized as interest expense respectively.
 
 On
        or
        about December 6, 2007, the Company entered into an Amendment, Exchange and
        Waiver Agreement (the “Amended Agreement”), dated as of November 9, 2007, with
        certain of the purchasers (the “Participating Purchasers”). Below are highlights
        of the Amended Agreement:
  ·
              The
                  Amended Agreement amends the terms of the Debentures held by the
                  Participating Purchasers by: (a) changing the conversion price
                  from $1.00
                  per share to $0.85 per share; (b) deleting the trading conditions
                  for
                  mandatory conversion; (c) granting the Company the right to mandatory
                  conversion at any time, and (d) allowing the Company to designate
                  the date
                  for the mandatory conversion.
 ·
              The
                  Amended Agreement amends the terms of the Warrants held by the
                  Participating Purchasers by: (a) changing the exercise price from
                  $1.20
                  per share to $0.95 per share; and (b) granting to the Participating
                  Purchasers the right to exercise their Warrants on a cashless
                  basis
 ·
              The
                  Amended Agreement is deemed to be: (a) the Company’s notice (the
                  “Conversion Notice”) to require conversion of the entire outstanding
                  principal of the Debentures held by the Participating Purchasers
                  and all
                  accrued but unpaid interest thereto; and (b) the Participating
                  Purchasers’
                  notice (the “Exercise Notice”) to the Company to exercise all of their
                  unexercised Warrants on a cashless
                  basis
 ·
              The
                  Amended Agreement amends the Registration Rights Agreement by waiving
                  all
                  outstanding registration damages due to the Purchasers in their
                  entirety.
                  Because the outstanding principal amounts of the Debentures held
                  by the
                  Participating Purchasers, as of the effective date of the Agreement,
                  total
                  more than seventy-five percent (75%) of the aggregate outstanding
                  principal amounts of the outstanding Debentures held by all the
                  Purchasers
                  on that date, the amendment to the Registration Rights Agreement
                  binds all
                  of the Purchasers.
 
 The
        Company has evaluated the cost of the amended terms of the Warrants and the
        Debentures. As the amendment has reduced the exercise price of the Warrants
        and
        the conversion price of the Debentures held by the Participating Purchasers,
        the
        difference between the value of the Warrants and the conversion option at
        the
        old prices and their value at the modified prices are costs for the Company
        and
        are charged to income.
  21
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 The
        inducement cost for the Debentures converted is $634,450 for the fiscal year
        ended December 31, 2007. The inducement cost for the Debentures converted
        was
        based on the market value of the additional 461,418 shares obtained by the
        participating purchases at $1.375 per shares on November 9, 2007. The inducement
        cost for the Warrants exercised is $279,547 for the fiscal year ended December
        31, 2007. The inducement cost for the Warrants exercised is calculated using
        the
        Binomial Model by determining the difference between the original exercise
        price
        of $1.20 shares and the reduced exercise price of $0.95.
 
 3,076,120
        shares of common stock were issued upon conversion of the Debentures with
        a
        carrying value of $2,548,632 at a reduced conversion price of $0.85. Another
        202,600 shares of common stock were issued upon conversion of the Debentures
        with a carry value of $202,600 at the original conversion price of $1.00.
 
 In
        accordance with paragraph 21 of EITF 00-27, all unamortized discount at the
        time
        of the conversion must be recognized as interest expense. The unamortized
        discount of the above converted Debentures is $2,403,480, which has been
        recorded as interest expenses in the accompanying consolidated statements
        of
        operations. The unamortized deferred financing costs of $540,167 at conversion
        of the Debentures into common stock was also been recorded as interest expenses
        in the accompanying consolidated statements of operations for the year ended
        December 31, 2007.
 
 As
        of March 31,
        2008, the carrying value of the remaining unconverted Debentures was $191,375,
        net of unamortized discount of $291,548. The following is the repayment schedule
        of the principal of the remaining debt as of March 31, 2008:
  Principal
                    repayment AmountNine
                    months ending December 31, 2008
                
                $
                414,990Year
                    ending December 31, 2009
                
                
                67,933Thereafter
                
                
                -$
                482,923
 
 In
        connection to the issuance of the Debentures, 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 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.
        The Company filed the registration statement on June 1, 2007, however the
        registration statement did not become effective until September 25, 2007.
        Because the Amended Agreement waived all outstanding r egistration
        damages, t he
        Company reversed the previously accrued liquidated damages totaling $345,017
        at
        December 31, 2007.
  22
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2008
 (UNAUDITED)
  Following
        is a summary of the status of warrants outstanding at March 31, 2008:
 
 Outstanding
                  Warrants
              
              Exercisable
                  WarrantsExercise
                  Price
              
              Number
              
              Average
                Remaining
                Contractual
                Life
              
              Average
                Exercise
                Price
              
              Number$1.20
              
              975,000
              
              1.92
                  years
              
              $1.20
              
              975,000$1.00
              
              570,500
              
              3.92
                  years
              
              $1.00
              
              570,500Total
              
              1,545,500
              
              
              
              
              
              1,545,500
 
 
 Following
        is a summary of the Warrant activity:
 
 Outstanding
                  as of December 31, 2006
              
              -Granted
              
              
              4,645,500Forfeited
              
              
              -Exercised
              
              
              3,100,000Outstanding
                  as of December 31, 2007
              
              
              1,545,500Forfeited
              
              
              -Exercised
              
              
              -Outstanding
                  as of March 31, 2008
              
              
              1,545,500
 
 On
        or
        about March 31, 2008, the Company entered into an Amendment and Waiver Agreement
        (the “Amendment”) with two institutional and accredited investors who acquired
        two of the Debentures in a private transaction from the original holders
        of
        these Debentures. The Amendment amends certain terms and conditions of
        Debentures. The transaction contemplated by the Amendment closed on April
        21,
        2008, upon the issuance of shares of the Company’s restricted common stock to
        these two investors pursuant to the terms of the Amendment. The Amendment
        is
        similar to the above Amendment Agreement with significant differences summarized
        below :
 
 ·
              The
                  Amendment amends the terms of the Debentures held by these two
                  investors
                  by changing the conversion price from $1.00 per share to $0.80
                  per
                  share
 ·
              The Amendment
                  is deemed to be: (a) the Company’s notice (the “Conversion Notice”) to
                  require conversion of the entireoutstanding
                  principal of the Debentures held by these two investors and all
                  accrued
                  but unpaid interest thereto.
 ·
              Pursuant
                  to the Conversion Notice, the Company issued an aggregate of 1,227,503
                  shares of our common stock (the “Shares”) to these two investors in
                  reliance on the exemptions for sales of securities not involving
                  a public
                  offering to accredited investors, as set forth in Rule 506promulgated
                  under the Securities Act of 1933, as amended (the “Securities Act”), and
                  in Section 4(2) of the Securities
                  Act.
  23
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2008
 (UNAUDITED)
  **Note
        13 - STATUTORY RESERVES**
 
 Statutory
        reserves represent restricted retained earnings. Based on the legal formation
        of
        the entities, all PRC entities are 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.
 
 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
        unrestricted earnings to statutory reserves. During
        the period ended March 31, 2008 and 2007, the Company made total appropriations
        to these statutory reserves of $89,683, and $36,521, 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 - TAXES**
  The
        Company is registered in the State of Nevada whereas its subsidiary, Skystar
        is
        a tax exempt company incorporated in the Cayman Islands and conducts all
        of its
        business through its subsidiary, Sida, and its PRC VIEs, Xian Tianxing and
        Shanghai Siqiang
 
 Sida,
        Xian Tianxing, and Shanghai Siqiang are 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 25%. 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%.
 
 For
        the
        three month period ended March 31, 2008 and 2007, the provision for taxes
        on
        earnings consisted of:
 
 2008
              
              2007(Unaudited)
              
              (Unaudited)Current
                  PRC income tax expenseEnterprise
                  income tax
              
              $
              153,207
              
              $
              66,624
   24
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2008
 (UNAUDITED)
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate as of March 31:
  2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0China
                  income tax exemption
              
              
              (10.0
              )
              
              (18.0
              )Total
                  provision for income taxes
              
              
              15.0
              %
              
              15.0
              %
 
 The
        estimated tax savings due to the reduced tax rate for the periods ended March
        31, 2008 and 2007 amounted to  $105,004
        and $77,730 ,
        respectively. The
        net
        effect on earnings per share if the income tax had been applied would decrease
        basic earnings per share for the period ended March 31, 2008 and 2007 to
        $0.03
        and $(0.04), respectively, and would decrease diluted earnings per share
        to
        $0.02 and $(0.04), 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 $6,638,420
        which may be available to reduce future years’ taxable income. These carry
        forwards will expire, if not utilized, beginning in 2006 and continue through
        2027. 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, 2008. The valuation
        allowance at March 31, 2008 was $2,813,144. Management will review this
        valuation allowance periodically and will make adjustments as
        warranted.
 
 **Note
        15 - EARNINGS PER SHARE**
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, “Earnings per Share.” SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock. 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.
 
 The
        following demonstrates the calculation for earnings per share for the three
        months ended March 31:
  2008
                
                2007(Unaudited)
                
                (Unaudited)Net
                    income for basic earnings per share
                
                $
                616,351
                
                $
                (370,718
                )Add:
                    Interest expense for convertible note
                
                
                136,807Minus:
                    Discount on convertible debenture
                
                
                (398,171
                )Net
                    income for diluted earnings per share
                
                $
                354,987
                
                $
                (370,718
                )Weighted
                    average shares used in basic computation
                
                
                17,111,200
                
                
                12,795,549Diluted
                    effect of convertible debentures (as if)
                
                
                772,400Diluted
                    effect of warrants to placement agent
                
                
                87,646Weighted
                    average shares used in diluted computation
                
                
                17,971,246
                
                
                12,795,549Earnings
                    per shareBasic
                
                $
                0.04
                
                $
                (0.03
                )Diluted
                
                $
                0.02
                
                $
                (0.03
                )
   25
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  At
        March
        31, 2008 and 2007, the Company had outstanding warrants of 1,545,500. For
        the
        three months ended March 31, 2008, the
        average stock price was greater than the exercise prices of 570,500 warrants
        which resulted in additional weighted average common stock equivalents of
        87,646; 975,000 outstanding warrants were excluded from the diluted earnings
        per
        share calculation as they are anti-dilutive. For the three months ended March
        31, 2007, 1,545,500 outstanding warrants were excluded from the diluted earnings
        per share calculation as they are anti-dilutive.
 
 **Note
        16 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS**
 
 *Related
        party receivables and payables*
  Amounts
        receivable from and payable to related parties are summarized as
        follows:
 
 March
                  31, 2008
              
              December
                  31, 2007(Unaudited)Amounts
                  due from shareholder:Mr.
                  Weibing Lu (1)
              
              $
              23,726
              
              $
              59,462Amount
                  due to shareholder and director:Ms.
                  Aixia Wang (1)
              
              $
              1,428
              
              
              1,371Mr.
                  Scott Cremer(1)
              
              
              30,245
              
              
              30,245Total
              
              $
              31,673
              
              $
              31,616Amount
                  due to related companies:TianXing
                  Digital - owned by a director (2)
              
              $
              -
              
              $
              17,137Shanxi
                  Xingji Electronics Co. - owned by a director's wife (2)
              
              
              7,113
              
              
              32,817Total
              
              $
              7,113
              
              
              49,954
 
 (1)
              The
                  related individuals, Weibing Lu, Aixia Wang, and Scott Cremer are
                  all
                  shareholders of the Company. Mr. Lu and Mr. Cramer are also the
                  directors
                  of the Company, with Mr. Lu additionall being the chief executive
                  office.
                  The amounts due from and to these individuals were cash advances
                  to
                  facilitate Company operations or expenses paid by these individuals
                  on
                  behalf of the Company. These balances are non-interest bearing,
                  unsecured,
                  due on demand, and the ultimate manner of settlement is in cash
                  or in
                  exchange for office premises rental.
  26
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  (2)
              Shanxi
                  Xinji Electronics Company is owned by the wife of Mr. Lu and Tianxing
                  Digital Co. Ltd. is owned by Mr. Lu. The amount due to Shanxi Xinji
                  Electronics Co. Ltd. and Tianxing Digital Co., Ltd are short term
                  cash
                  transfers for business operations, non-interest bearing, unsecured,
                  and
                  payable upon demand. The ultimate manner of settlement is in cash.
 
 **Note
        17 - 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 December 31, 2014 with an annual rent of $12,020, which
        is
        subject to a 10% increase every four subsequent years.
 
 The
        Company leased additional office space from the Company’s CEO, Weibing Lu, for a
        period of five years from January 1, 2007 to December 31, 2011 with an annual
        rent of approximately $21,800 (or RMB 165,600).
 
 The
        Company entered into a tenancy agreement for the lease of Shanghai
        Siqiang office
        for a period of ten years from August 1, 2007 to August 1, 2017 with an annual
        rent of $20,563.
 
 The
        Company’s commitments for minimum rental payments under this lease for the next
        five years and thereafter are as follows:
 
 Nine
                  months ending December 31, 2008
              
              $
              42,676Year
                  ending December 31, 2009
              
              
              57,720Year
                  ending December 31, 2010
              
              
              57,720Year
                  ending December 31, 2011
              
              
              57,720Year
                  ending December 31, 2012
              
              
              34,410Thereafter
              
              
              120,253$
              370,499
 
 Rental
        expense for the three months ended March 31, 2008 and 2007 amounted to $7,869
        and $2,480, respectively.
 
 (b)  *Legal
        proceedings*
  In
        March
        2006, 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. On
        December 1, 2007, the lawsuit was dismissed following an Order to Show Cause
        regarding Dismissal. Prior to the dismissal, the Company was never served
        with a
        summons or complaint in the matter.
 
 27
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
  On
        or
        around May 2007, Andrew Chien (“Chien” or "Plaintiff") filed suit against the
        Company, R. Scott Cramer, Steve Lowe, David Wassung and Weibing Lu
        (“Defendants”) in United States District Court for the District of Connecticut,
        alleging causes of action for violation of Sections 10(b) and 20(a) of the
        Securities Exchange Act of 1934.  In or around November 2007, the
        Defendants filed motions to dismiss the complaint for failure to state a
        claim
        and for lack of personal jurisdiction.  The Plaintiff agreed to voluntarily
        amend the complaint after the motions were filed, and an amended complaint
        was
        subsequently filed on or around January 4, 2008.  The amended complaint
        dropped Weibing Lu (who is a resident of China and had never been served)
        as a
        defendant.  The remaining Defendants contend that the amended complaint has
        failed to correct the deficiencies of the original, and have filed a renewed
        motion to dismiss for failure to state a claim, also preserving their challenge
        to personal jurisdiction.  The Defendants deny all claims and have
        moved the Court to dismiss the complaint in its entirety in their motion
        to
        dismiss, which is still pending. The motion to dismiss also requests that
        the
        Court award sanctions against Chien under the Private Securities Litigation
        Reform Act and other authority in the event the Defendants' motion to dismiss
        the complaint is granted.
  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 has
        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 will need to be
        vacated
        due to 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
        18 - SUBSEQUENT EVENTS**
 
 On
        April
        21, 2008, the Company issued 90,000 shares of its restricted common stock
        to
        Russell Scott Cramer, a member of the Company’s board of directors. These
        restricted common shares were issued to Mr. Cramer
        pursuant to a unanimous written consent of the board of directors (excluding
        Mr.
        Cramer) for
        services unrelated to Mr. Cramer’s duties as a director.
 
 Additionally,
        on April 21, 2008, the Company issued 210,400 shares of its restricted common
        stock to its legal counsel. These restricted common shares were issued to
        the
        legal counsel pursuant to a unanimous written consent of the board of directors
        of the Company as partial payment for services rendered.
  28
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (UNAUDITED)
 On
        May 5,
        2008, Ms. Erna Gao resigned as the Chief Financial Officer of the
        Company. On the same date, the Company entered into a Loanout
        Agreement with Worldwide Officers, Inc., a California corporation, pursuant
        to
        which the Company has retained the services of Bennet P. Tchaikovsky to serve
        as
        Skystar’s Chief Financial Officer for a term of one year. Under the terms of the
        Loanout Agreement, Mr. Tchaikovsky will perform his duties from the United
        States and on a part-time basis (90 hours per month), and the Company agreed
        to
        pay an annual fee of $75,000 for Mr. Tchaikovsky’s services. Additionally, Mr.
        Tchaikovsky will have the right to receive 52,173 shares of our restricted
        common stock, to vest in four equal installments of 17,391 shares each every
        3
        calendar months, with the first installment to vest on August 5,
        2008.
  29


**ITEM
      2.** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**




*The
      following discussion and analysis of our financial condition and results of
      operations for the three months ended March 31, 2008* *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 bounds
      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-Q. 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 U.S. 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 U.S. 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, was incorporated in Nevada on September 24,
      1998. The Company 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”), a
      joint
      stock company in the People’s Republic of China (“China” or “PRC”), through the
      Company’s wholly owned subsidiary, Skystar
      Bio-Pharmaceutical (Cayman) Holdings Co., Limited (“Skystar Cayman”), a Cayman
      Islands company which the Company acquired on November 7, 2005. Skystar Cayman,
      through its variable interest entity (“VIE”), Xian Tianxing, engages in
      research, development, production, marketing and sales of bio-pharmaceutical
      and
      veterinary products in China.




Chinese
      law currently has limits on foreign ownership of certain companies. To comply
      with these foreign ownership restrictions, we operate our bio-pharmaceutical
      business in China through Xian Tianxing. Xian Tianxing holds the licenses and
      approvals necessary to operate our bio-pharmaceutical business in China. We
      have
      contractual arrangements with Xian Tianxing and its shareholders pursuant to
      which we provide technology consulting and other general business operation
      services to Xian Tianxing. Through these contractual arrangements, we also
      have
      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 enable us to control Xian Tianxing, we are considered the primary
      beneficiary of Xian Tianxing. Please
      see “Recent Development” below and Note 1 to our unaudited consolidated
      financial statements included in this report for the transfer of the contractual
      arrangements to Sida
      Biotechnology (Xian) Co., Ltd. (“Sida”), a PRC limited liability
      company, in March
      2008, and their impact on our consolidated financial statements.





Our
      business divisions currently include a veterinary bio-pharmaceutical products
      division, a veterinary drugs division, a fodder or feed additive division,
      and a
      micro-organism preparation division. Currently, we have four major product
      lines:





·
            Our
                bio-pharmaceutical veterinary vaccine line currently includes over
                10
                products;·
            Our
                veterinary medicine line for poultry and livestock currently includes
                over
                70 products;·
            Our
                feed additives line currently includes over 10 products;
                and·
            Our
                micro-organism products line currently includes over 10
                products.


Among
      our
      prominent products is a vaccine is designed to prevent the onset of avian
      coccidiosis disease, a parasitic and highly contagious gastrointestinal disease
      affecting chicken and other poultry. We refer to this vaccine as the “DLV
      chicken vaccine.” This disease has a significant economic impact to the poultry
      industry. The U.S. Department of Agriculture estimates that avian coccidiosis
      costs the worldwide poultry industry $3 billion in treatment expenses, bird
      losses and unmarketable birds
      due to low bird weight. Management believes that our DLV chicken vaccine is
      safe, effective and easy to administer, and may save costs by as much as 60%
      as
      compared to using conventional chemical medicines such as sulfaquinoxaline
      sodium and salinomycin sodium.




30




In
      August
      2007, Xian Tianxing established Shanghai Siqiang Biotechnological Company
      Limited (“Shanghai Siqiang”), with Xian Tianxing as the 100% shareholder. With
      technology support and consultation from Shanghai Poultry Verminosis
      Institution, which is a part of the Chinese Academy of Agricultural Sciences, Shanghai
      Siqiang engaged in the research, development, production and sales of feed
      additives and veterinary disease diagnosis equipments.





All
      of
      our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in China. We sell our products through a distribution channel covering
      29 provinces in China. As of May 13, 2008, we had over 600 distributors and
      200
      direct customers in 29 provinces in China.





**Recent
      Development**





On
      March
      10, 2008, we were made a party to a series of agreements (collectively the
      “Transfer Agreements”) transferring the contractual arrangements governing the
      relationship among Skystar Cayman, Xian Tianxing and the majority shareholders
      of Xian Tianxing. Pursuant to the Transfer Agreements, from and after March
      10,
      2008, all of the rights and obligations of Skystar Cayman under the contractual
      arrangements were transferred to Sida. The Company was made a party to the
      Transfer Agreements for the sole purpose of acknowledging the Transfer
      Agreements. Sida is the wholly owned subsidiary of Fortunate
      Time International Ltd. (“Fortunate Time”), a Hong Kong company and wholly owned
      subsidiary of Skystar Cayman. In
      effect, Skystar Cayman assigned the contractual rights it had with Xian Tianxing
      to an indirectly wholly-owned subsidiary, Sida.





Under
      our
      corporate structure with the contractual arrangements, the ability to transfer
      funds to and from Xian Tianxing expeditiously through a foreign currency bank
      account is necessary for the running of our business operations. Under current
      applicable Chinese law, only a company that is classified as either a wholly
      foreign owned enterprise (WFOE) or a Sino-foreign joint venture may maintain
      a
      foreign currency bank account. Because Sida is wholly owned by Fortunate Time,
      a
      Hong Kong company, Sida is deemed a WFOE and may therefore maintain a foreign
      currency account. The Transfer Agreements amend the contractual arrangements
      so
      that funds are required to be transferred to and from Xian Tianxing through
      Sida’s foreign currency account and, through Sida, allow us to continue to
      control Xian Tianxing and its business operations.





**2008
      Outlook**





*Acquisitions.* We
      intend
      to explore acquisitions of Good Manufacturing Practice (“GMP”) certified
      bio-pharmaceutical companies in provinces located close to our headquarters.
      One
      of our considerations for acquisitions is that the potential target must have
      production capacity for different dosage forms such as injection and powder.
      We
      may also consider acquiring bio-pharmaceutical companies with similar production
      capacity in other regions of China. Our goal is to be among the top producer
      and
      distributor of veterinary medicines in China, and we hope to be able to complete
      some acquisitions by the end of 2008.





*Brand
      Awareness* .
      Our
      goal is to associate the “Skystar” brand with reputable, high-quality products,
      including veterinary products. We recognize the importance of branding as well
      as packaging. All of our products bear a uniform brand but we also brand and
      package our products with specialized designs to differentiate the different
      categories of our products.





We
      conduct promotional marketing activities to publicize and enhance our image
      as
      well as to reinforce the recognition of our brand name, including:




·
              publishing
                  advertisements and articles in national as well as specialized
                  and
                  provincial newspapers, magazines, and in other media, including
                  the
                  Internet;
  ·
              participating
                  in national meetings, seminars, symposiums, exhibitions for
                  bio-pharmaceutical and other related
                  industries;
  ·
                organizing
                    cooperative promotional activities with distributors;
                    and
  ·
                  sending
                      direct mail to major farms.


*Manufacturing
      Facility.* We
      intend
      to complete a vaccine manufacturing facility by the third quarter of 2008 and
      obtain GMP certification by the end of 2008.





*Additional
      Products.* We
      plan
      to commercialize new products in each of the four divisions. We also expend
      significant amount of resources into our research and development in order
      to
      have additional products in the future. Management believes that such products
      will ultimately increase future revenue to our company.




31




**Critical
      Accounting Policies and Estimates**





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:





·
            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.·
            Convertible
                debentures and 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 our
                outstanding convertible debentures and warrants.·
            Liquidated
                damages: We have adopted FAS 5 and EITF 00-19-2 in connection with
                the
                liquidated damages we accrued pursuant to the terms of our Registration
                Rights Agreement with certain investors dated February 27,
                2007.





**Recent
      Accounting Pronouncements**




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 157, Fair Value
      Measurements” ** (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value under accounting principles generally accepted in the United States (GAAP)
      and expands disclosures about fair value measurements. Fair value is defined
      under SFAS 157 as the exchange price that would be received for an asset or
      paid
      to transfer a liability (an exit price) in the principal or most advantageous
      market for the asset or liability in an orderly transaction between market
      participants on the measurement date. SFAS 157 also establishes a fair value
      hierarchy which requires the Company to maximize the use of observable inputs
      and minimize the use of unobservable inputs when measuring fair value. On
      January 1, 2008, the Company adopted SFAS No. 157. The Company did not identify
      any assets and liabilities that are required to be presented on the balance
      sheet at fair value in accordance with SFAS No. 157.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that  are
      not
      currently required to be measured at fair value. The objective of FAS 159 is
      to
      provide opportunities to mitigate volatility in reported earnings caused
      by  measuring
      related assets and liabilities differently without having to apply hedge
      accounting provisions. FAS 159 also establishes presentation and
      disclosure  requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar types of assets and liabilities. The Company
      adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
      option to measure the fair value of eligible financial assets and
      liabilities.





In
      June
      2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received for use in Future
      Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
      nonrefundable advance payments for goods or services that used or rendered
      for
      research and development activities should be expensed when the advance payment
      is made or when the research and development activity has been performed. The
      Company adopted FSP EITF 07-3 and expensed the research and development as
      incurred.




32




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      has not determined the effect that the application of SFAS 160 will have on
      its
      consolidated financial statements.





In
      December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
      Combinations* ,
      was
      issued. SFAS No. 141R replaces SFAS No. 141, *Business
      Combinations.* SFAS
      141R
      retains the fundamental requirements in SFAS 141 that the acquisition method
      of
      accounting (which SFAS 141 called the *purchase
      method* )
      be used
      for all business combinations and for an acquirer to be identified for each
      business combination. SFAS 141R requires an acquirer to recognize the assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
      required the cost of an acquisition to be allocated to the individual assets
      acquired and liabilities assumed based on their estimated fair values. SFAS
      141R
      also requires the acquirer in a business combination achieved in stages
      (sometimes referred to as a step acquisition) to recognize the identifiable
      assets and liabilities, as well as the noncontrolling interest in the acquiree,
      at the full amounts of their fair values (or other amounts determined in
      accordance with SFAS 141R). SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. An entity
      may not apply it before that date. The Company is currently evaluating the
      impact that adopting SFAS No. 141R will have on its financial
      statements.





**Results
      of Operations**





The
      following table summarizes our results of operations. The table and the
      discussion below should be read in conjunction with the unaudited financial
      statements and the notes thereto appearing elsewhere in this
      report.




Three
                Months Ended March 31,2008
            
            2007(in
                U.S. Dollars, except for percentages)Sales
            
            $
            2,686,354
            
            
            100.00
            %
            $
            1,367,810
            
            
            100.00
            %Gross
                Profit
            
            $
            1,388,935
            
            
            51.70
            %
            $
            670,775
            
            
            49.04
            %Operating
                Expense
            
            $
            490,878
            
            
            18.27
            %
            $
            818,533
            
            
            59.84
            %Income
                From Operations
            
            $
            898,057
            
            
            33.43
            %
            $
            (147,758
            )
            
            (10.80
            )%Other
                Expenses
            
            $
            128,499
            
            
            4.78
            %
            $
            156,336
            
            
            11.43
            %Income
                tax expenses
            
            $
            153,207
            
            
            5.70
            %
            $
            66,624
            
            
            4.87
            %Net
                Income
            
            $
            616,351
            
            
            22.94
            %
            $
            (370,718
            )
            
            (27.10
            )%





*Revenue* .
      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, 2008, we had revenues of $2,686,354
      as
      compared to revenues of $1,367,810 during the three months ended March 31,
      2007,
      an increase of approximately 96.40%. We introduced several new products,
      including more than 60 new veterinary medicine products which accounted for
      $1,661,519 of our total revenue for the first quarter of fiscal 2008, an
      increase of approximately 343% as compared to the revenue from the same product
      segment for the three months ended March 31, 2007.





**Cost
      of Sales and Gross Profit Margin**





The
      following table sets forth the components of our cost of sales and gross profit
      both in absolute amount and as a percentage of total net sales for the periods
      indicated.




**Three
                Months Ended March 31,****2008**
            
            **2007**(in
                U.S. dollars, except for percentages)**Total
                Net Sales**
            
            **$**
            2,686,354
            
            
            100.00
            %
            **$**
            1,367,810
            
            
            100.00
            %Raw
                materials
            
            $
            1,163,090
            
            
            43.30
            %
            $
            610,487
            
            
            44.64
            %Labor
            
            $
            44,318
            
            
            1.65
            %
            $
            61,450
            
            
            4.49
            %Manufacturing
                Overhead
            
            $
            90,011
            
            
            3.35
            %
            $
            25,098
            
            
            1.83
            %**Total
                Cost of Goods Sold**
            
            **$**
            1,297,419
            
            
            48.30
            %
            **$**
            697,035
            
            
            50.96
            %**Gross
                Profit**
            
            **$**
            1,388,935
            
            
            51.70
            %
            **$**
            670,775
            
            
            49.04
            %




33




*Gross
      Profit.* Cost
      of
      goods sold, which consists of raw materials, direct labor, and manufacturing
      overhead, was $1,297,419 for the three months ended March 31, 2008 as compared
      to $697,035 for the three months ended March 31, 2007. Gross profit was
      $1,388,935 for the three months ended March 31, 2008 as compared to $670,775
      for
      the three months ended March 31, 2007, representing gross profit margins of
      approximately 51.70% and 49.04%, respectively. The increase in our gross profit
      margins is attributable to (a) the introduction of new high demand products
      that
      have higher gross profit margins, and (b) improvement in manufacturing
      techniques and the adaption of new technologies that cause equipment and
      machinery to operate more efficiently, which allowed us to use raw materials
      more efficiently and minimize waste. Additionally, our ability to produce
      microbial strains, which are key components in our micro-organism products,
      has
      translated into reduced costs to manufacture these products.





**Selling,
      General and Administrative Expenses**





**For
                the Three Months Ended March 31,****2008**
            
            **2007****$%
                of Total**
              **Net
                Sales**
            
            
            
            **$%
                of Total**
              **Net
                Sales**(in
                U.S. Dollars, except for percentages)Gross
                Profit
            
            $
            1,388,935
            
            
            51.70
            %
            $
            670,775
            
            
            49.04
            %Operating
                Expenses:Selling
                Expenses
            
            
            189,844
            
            
            7.07
            %
            
            109,428
            
            
            8.00
            %General
                and Administrative Expenses
            
            
            190,977
            
            
            7.11
            %
            
            316,551
            
            
            23.14
            %Research
                and Development Costs
            
            
            47,299
            
            
            1.76
            %
            
            31,655
            
            
            2.31
            %Amortization
                of Deferred
              Compensation
            
            
            62,758
            
            
            2.34
            %
            
            360,899
            
            
            26.39
            %Total
            
            
            490,878
            
            
            18.27
            %
            
            818,533
            
            
            59.84
            %Income
                (Loss) from Operations
            
            
            898,057
            
            
            33.43
            %
            
            (147,758
            )
            
            (10.80
            %)





*Selling
      Expenses* .
      Selling
      expenses, which consist of commissions, advertising and promotion expenses,
      freight charges, and salaries totaled $189,844 for the three months ended March
      31, 2008 as compared to $109,428 for the three months ended March 31, 2007,
      an
      increase of approximately 73.49%. This increase is primarily attributable to
      our
      expanding sales team and activities, which is, in turn, reflected in our
      increased sales. We believe that our selling expenses will continue to increase
      as our sales continue to grow.





*General
      and Administrative Expenses* .
      General
      and administrative expenses totaled $190,977 for the three months ended March
      31, 2008, as compared to $316,551 for the three months ended March 31, 2007,
      a
      decrease of approximately 39.67%. General and administrative expenses are
      primarily legal accounting and other professional fees that we incur in order
      to
      stay compliant as a U.S. public company. Such professional expenses were
      considerably higher for the first quarter of 2007 as a result of our private
      financing transaction that closed during that period. However, we anticipate
      that our general and administrative expenses will increase due to the increasing
      costs of being a U.S. public company.





*Research
      and Development Costs* .
      Research and development costs, which consist of salaries, professional fees,
      and technical support fees, totaled $47,299 for the three months ended March
      31,
      2008, as compared to $31,655 for the three months ended March 31, 2007, an
      increase of approximately 49.42%. This significant increase is primarily
      attributable to increased research activities with certain outside experts
      and
      institutions with whom we cooperate on research and development of both existing
      and new products. We believe that our research and development costs will
      continue to increase as we will continue to increase our research activities.





*Income
      from Operations.* We
      recorded income of $898,057 from operations for the three months ended March
      31,
      2008 as compared to loss of $147,758 for the same period in 2007, representing
      an increase of approximately 707.79%. The increase is mainly due to an increase
      in sales of our products, including our products with higher gross profit
      margins.




34




*Net
      Income.* We
      had
      net income of $616,351 for the three months ended March 31, 2008 as compared
      to
      net loss of $370,718 for the three months ended March 31, 2007, an increase
      of
      approximately 266.26%. The increase in net income is largely attributable to
      an
      increase in sales.





**Liquidity** ****





For
      the
      three months ended March 31, 2008, cash used in operating activities was
      $1,035,518 as compared to $259,268 cash used in operating activities for the
      three months ended March 31, 2007. The decrease in cash generated from operating
      activities is primarily attributable to (a) bulk purchases of certain raw
      materials for anticipated production of both existing and new products in the
      second and third quarter of fiscal 2008, and (b) increased prepayments to
      certain suppliers to ensure low purchase price of certain raw materials.





We
      generated $473,967 from investing activities for the three months ended March
      31, 2008, as compared to expending $249,261 in investing activities for the
      three months ended March 31, 2007. The expenditure in investing activities
      for
      2008 consisted of payment of $47,829 for the purchase of equipment. The income
      from investing activities for 2008 consisted of proceeds of $521,796 from loans
      receivable.





From
      financing activities, we generated $160,533 for the three months ended March
      31,
      2008 as compared to $3,773,825 generated from the three months ended March
      31,
      2007. The decrease in cash generated from financing activities is
      mainly attributable to the proceeds from a third party loan further
      discussed in detail in Note 9 of the accompanying footnotes to the consolidated
      financial statements.





As
      of
      March 31, 2008, we had cash of $389,300. Our total current assets were
      $8,110,386, and our total current liabilities were $2,074,290, which resulted
      in
      a net working capital of $6,036,096. Management
      believes that we have the ability to meet cash requirements for our operations
      in order to continue as a going concern, including sufficient cash flows to
      meet
      our obligations on a timely basis in the foreseeable future, provided that
      we
      can continue to maintain profitable operations and our net working capital
      remains liquid.





**Capital
      Resources** ****





During
      the three months ended March 31, 2008, the Company received loan receivable
      approximately of $521,000, of which approximately $48,000 were used to purchase
      plant and equipment. If we were to acquire another business or further expand
      our operations, we will require additional capital.





**Exchange
      Rate**





Xian
      Tianxing maintains its books and records in Renminbi (“RMB”), the lawful
      currency of China. In general, for consolidation purposes, we translate 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$1.00.
      On
      July 21, 2005, the Chinese government reformed the exchange rate system into
      a
      managed floating exchange rate system based on market supply and demand with
      reference to a basket of currencies. In addition, the exchange rate of RMB
      to
      US$ 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:




35




**March
                31, 2008**
            
            **December
                31, 2007**
            
            **March
                31, 2007**Assets
                and liabilities
            
            
            USD0.14280:RMB1
            
            
            USD0.1371:RMB1
            
            
            USD0.12950:RMB1Statements
                of operations and cash flows for the period/year ended
            
            
            USD0.13977:RMB1
            
            
            USD0.13167:RMB1
            
            
            USD0.12901:RMB1





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





**Off-Balance
      Sheet Arrangements**




As
      of the
      date of this quarterly 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 stockholder’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.




**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Not
      Applicable





**ITEM
      4.**  **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      March 31, 2008, we carried out an evaluation, under the supervision and with
      the
      participation of our management, including our chief executive officer and
      our
      chief financial officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures. Based on the foregoing, our chief executive
      officer and chief financial officer concluded that our disclosure controls
      and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934) were not effective.





**Remediation
      of Material Weaknesses in Internal Control over Financial
      Reporting**





In
      our
      annual report on Form 10-K for the year ended December 31, 2007, we reported
      certain material weaknesses involving control activities, specifically (1)
      accounting and finance personnel weaknesses, (2) lack of internal audit function
      and (3) lack of internal audit system. In light of the foregoing, our management
      began to undertake steps to address these issues, some of which were outlined
      in
      our annual report. Specifically, we have recently retained Mr. Bennet P.
      Tchaikovsky as our chief financial officer, whom our management believes has
      the
      requisite financial reporting experience, skills and knowledge to complement
      our
      existing personnel. Additionally, we are in the process of interviewing
      prospective new members for our board of directors, including a member who
      is
      appropriately credentialed as a financial expert with a goal to establish both
      our audit and compensation committees, as well as sufficient number of
      independent directors.





Management,
      including our chief executive officer and our chief financial officer, does
      not
      expect that our disclosure controls and internal controls will prevent all
      error
      or all fraud, even as the same are improved to address any deficiencies and/or
      weaknesses. A control system, no matter how well conceived and operated, can
      provide only reasonable, not absolute, assurance that the objectives of the
      control system are met. Over time, controls may become inadequate because of
      changes in conditions or deterioration in the degree of compliance with policies
      or procedures. Further, the design of a control system must reflect the fact
      that there are resource constraints, and the benefits of controls must be
      considered relative to their costs. Because of the inherent limitations in
      all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues and instances of fraud, if any, within the Company have
      been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      override of the control.




36




Our
      financial reporting process includes extensive procedures we undertake in order
      to obtain assurance regarding the reliability of our published financial
      statements, notwithstanding the material weaknesses in internal control. We
      expanded our review of accounting for business combinations to help compensate
      for our material weaknesses in order to provide assurance that the financial
      statements are free of material inaccuracies or omissions of material fact.
      As a
      result, management, to the best of its knowledge, believes that (i) this
      Quarterly Report on Form 10-Q does not contain any untrue statements of a
      material fact or omits any material fact and (ii) the financial statements
      and
      other financial information included in this report have been prepared in
      conformity with GAAP and fairly present in all material aspects our financial
      condition, results of operations, and cash flows.





**Changes
      in Internal Control over Financial Reporting**





Except
      for the remedial actions taken as described above, there were no changes in
      our
      internal control over financial reporting (as defined in Rule 13a-15(f) of
      the
      Securities Exchange Act of 1934) during the quarter ended March 31, 2008 that
      have materially affected, or are reasonably likely to materially affect, our
      internal control over financial reporting.








37


**PART
      II.** **OTHER
      INFORMATION**





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





The
      following discussion discusses all known or anticipated material legal
      proceedings commenced by or against us. Occasionally we may be named as a party
      in claims and legal proceedings arising out of the normal course of our
      business. These claims and legal proceedings may relate to contractual rights
      and obligations, employment matters, or to other matters relating to our
      business and operations.





Other
      than the matter discussed below, we are not aware of any material pending legal
      proceedings involving us.





Gregory
      Evans v. The Cyber Group Network Corp, et al. (District Court, Clark County, State of Nevada, Case No. A513378). In March
      2006, Gregory Evans filed suit against us, (under our former name, The Cyber
      Group Network Corp), R. Scott Cramer, Steve Lowe and David Wassung in State
      of
      Nevada District Court in Clark County, Nevada, alleging causes of action for
      “Refusing to Call Vote of Stockholders” and “Conversion” on or about November
      18, 2005. On
      December 1, 2007, the lawsuit was dismissed following an Order to Show Cause
      regarding Dismissal. Prior to the dismissal, the Company was never served with
      a
      summons or complaint in the matter.





Andrew
      Chien v. Skystar Bio-Pharmaceutical Company, et. al. (US.
      District Court, District of Connecticut, Case No. 3:2007cv00781). Andrew Chien
      filed suit against the Company, R. Scott Cramer, Steve Lowe, David Wassung
      and
      Weibing Lu in United States District Court for the District of Connecticut,
      alleging causes of action for violation of Sections 10(b) and 20(a) of the
      Exchange Act. In
      or
      around November 2007, the defendants filed motions to dismiss the complaint
      for
      failure to state a claim and for lack of personal jurisdiction. Mr. Chien
      agreed to voluntarily amend the complaint after the motions were filed, and
      an
      amended complaint was subsequently filed on or around January 4, 2008. The
      amended complaint dropped Weibing Lu (who is a resident of China and had never
      been served) as a defendant. The remaining defendants contend that the
      amended complaint has failed to correct the deficiencies of the original
      complaint, and have filed a renewed motion to dismiss for failure to state
      a
      claim, also preserving their challenge to personal jurisdiction. The
      defendants deny all claims and have moved the Court to dismiss the amended
      complaint in its entirety in their motion to dismiss, which is still pending.
      The motion to dismiss also requests that the Court award sanctions against
      Mr.
      Chien under the Private Securities Litigation Reform Act and other authority
      in
      the event the defendants' motion to dismiss the amended complaint is
      granted.





**ITEM
      1A.** **RISK
      FACTORS**





*You
      should carefully consider the risks described below together with all of the
      other information included in this report before making an investment decision
      with regard to our securities. The statements contained in or incorporated
      into
      this offering that are not historic facts are forward-looking statements that
      are subject to risks and uncertainties that could cause actual results to differ
      materially from those set forth in or implied by forward-looking statements.
      If
      any of the following risks actually occurs, our business, financial condition
      or
      results of operations could be harmed. In that case, the trading price of our
      common stock could decline, and you may lose all or part of your
      investment.*





**Risks
      Relating to Our Business**





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




We
      have a
      relatively limited operating history. Xian Tianxing, the variable interest
      entity through which we operate our business, commenced operations in 1997
      and
      first achieved profitability in the quarter ended September 30, 1999.
      Accordingly, you should consider our future prospects in light of the risks
      and
      uncertainties typically experienced by companies such as ours in evolving
      industries such as the bio-pharmaceutical industry in China. Some of these
      risks
      and uncertainties relate to our ability to:




·
            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;




38




·
            raise
                sufficient capital to sustain and expand our business;·
            maintain
                effective control of our costs and expenses;·
            respond
                to changes in our regulatory environment;·
            respond
                to competitive market conditions;·
            manage
                risks associated with intellectual property rights;·
            attract,
                retain and motivate qualified personnel;·
            upgrade
                our technology to support additional research and development of
                new
                products; and·
            maintain
                or improve our position as one of the market leaders in China.




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





***If
      we fail to obtain additional financing we will be unable 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 build 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
      needs arise, we intend to seek additional funds through public or private equity
      or debt financing, strategic transactions and/or from other sources.




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
      business will be materially and adversely affected if our collaborative
      partners, licensees and other third parties over whom we are very dependent
      fail
      to perform as expected.***





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 substantial milestone
      payments and royalties 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. We could enter into collaborative arrangements for the development
      of
      particular products that may lead to our relinquishing some or all rights to
      the
      related technology or products. 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.




39




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




***Our
      products will be adversely affected if we are unable to protect proprietary
      rights or 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.




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.




40




***Difficulties
      in manufacturing our products could have a material adverse effect on our
      profitability.***




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 China’s Good Manufacturing Practice (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.





***Failure
      or delays in obtaining an adequate amount of raw material or other supplies
      would materially and adversely affect our revenue***





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.




***Our
      ability to generate more revenue would be adversely affected if we 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.




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 the price of our common stock to
      decrease.




***If
      we are unable to obtain the regulatory approvals or clearances that are
      necessary to commercialize our products, we will have less revenue than
      expected.***




China
      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.




41




Any
      marketed product and its manufacturer, including us, 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.





***Our
      revenue will be materially and adversely affected if our products are unable
      to
      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 and thus reduce our earnings or increase
      our losses.***




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 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. If we 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, whether or not we are
      successful.




42




***We
      have no business liability or disruption insurance coverage and therefore we
      are
      susceptible to catastrophic or other events that may disrupt our
      business.***





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.





***We
      will be unsuccessful if we fail to attract and retain 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.





**Risks
      Related to Our Corporate Structure**




***Chinese
      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 Chinese laws and
      regulations may materially and adversely affect our
      business.***




There
      are
      substantial uncertainties regarding the interpretation and application of
      Chinese 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 stockholders. We are considered a foreign person or foreign invested
      enterprise under Chinese law. As a result, we are subject to Chinese 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
      Chinese 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 Chinese 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 Chinese 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 Chinese
      regulation of bio-pharmaceutical business and companies, including limitations
      on our ability to own key assets.***




The
      Chinese 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
      Chinese 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.




43




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




The
      Chinese 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 bio-pharmaceutical business in China. We have
      contractual arrangements with Xian Tianxing and its stockholders 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 Chinese regulations, we cannot assure you
      that
      the Chinese government would agree that these operating arrangements comply
      with
      Chinese licensing, registration or other regulatory requirements, with existing
      policies or with requirements or policies that may be adopted in the future.
      If
      the Chinese 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.




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




Since
      Chinese 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
      Chinese law, which may not be effective. In addition, we cannot assure you
      that
      either of Xian Tianxing’s stockholders will 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 Chinese 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 Chinese 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 Chinese government has implemented various
      measures to encourage economic development and guide the allocation of
      resources. Some of these measures benefit the overall Chinese 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 Chinese 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.




44





***If
      Chinese 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
      Chinese 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 Chinese Income Tax Laws, it is entitled to a preferential
      tax rate of 15%. If the Chinese 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 25%, 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.




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




We
      are a
      holding company incorporated in Nevada and do not have any assets or conduct
      any
      business operations other than our indirect 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
      Chinese government also imposes controls on the conversion of the Chinese
      currency, Renminbi (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 Chinese 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 Chinese 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 Chinese legal system is based on written statutes. Prior court
      decisions may be cited for reference but have limited precedential
      value.




Since
      1979, Chinese 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 Chinese 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
      Chinese counsel has advised us that China does not have treaties with the United
      States or many other countries providing for the reciprocal recognition and
      enforcement of judgment of courts.




45




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




The
      Chinese 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 Chinese
      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 Chinese 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 China 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 Chinese 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 stockholders.




***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 the 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.




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




Our
      business could be adversely affected by the effects of an epidemic outbreak,
      such as the SARS epidemic in April 2004. Any prolonged recurrence of such
      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**





***The
      full exercise of certain outstanding warrants could result in the substantial
      dilution of the company in terms of a particular percentage ownership in the
      company as well as the book value of the common shares. The sale of a large
      amount of common shares received upon exercise of the warrants on the public
      market to finance the exercise price or to pay associated income taxes, or
      the
      perception that such sales could occur, could substantially depress the
      prevailing market prices for our shares.***




The
      exercise price of certain of our outstanding warrants may be less than the
      current market price for our common shares. In the event of exercise of these
      securities, a stockholder could suffer substantial dilution of his, her or
      its
      investment in terms of the percentage ownership in us as well as the book value
      of the common shares held. Full exercise of the warrants would increase the
      outstanding common shares as of May 7, 2008 by approximately 8% to approximately
      20,184,603 shares.





***To
      date, we have not paid any cash dividends and no cash dividends are expected
      to
      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 our
      operations.




46




***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 desire to liquidate your
      shares.***





We
      cannot
      predict the extent to which an active public market for its common stock will
      develop or be sustained. We intend to apply for listing on the American Stock
      Exchange, but cannot assure you that this listing or listing on any other
      exchange will ever occur.




Our
      common shares have historically been sporadically or “thinly-traded” on the “OTC
      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.





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 stockholders 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
      fluctuating level 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-averse 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
      registration statement. 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.




47




Stockholders
      should be aware that 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 stockholders
      and
      affiliated entities.***




As
      of May
      7, 2008, our principal stockholders and their affiliated entities own
      approximately 30.5% of our outstanding common shares, representing approximately
      30.5% of our voting power. These stockholders, 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 stockholders and their affiliated entities, elections of our board
      of
      directors will generally be within the control of these stockholders and their
      affiliated entities. While all of our stockholders are entitled to vote on
      matters submitted to our stockholders for approval, the concentration of shares
      and voting control presently lies with these principal stockholders and their
      affiliated entities. As such, it would be difficult for stockholders 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 stockholders will be viewed favorably by all stockholders of the
      company.





***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
      stockholders, 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
      stockholders against our directors and officers even though such actions, if
      successful, might otherwise benefit our company and stockholders.




***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 similar rule changes 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.




48




***Past
      company activities prior to the reverse merger may lead to future liability
      for
      the company.***





Prior
      to
      our entry into the contractual arrangements with Xian Tianxing on October 28,
      2005, we engaged in businesses unrelated to its current operations. Although
      the
      prior business owners provided 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
      Skystar.




***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;·
            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
      stockholders.***




We
      believe that our current cash and cash equivalents, anticipated cash flow from
      operations and the net proceeds from our recent financing will be sufficient
      to
      meet our anticipated cash needs for the foreseeable 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 stockholders. 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.***




49




We
      are
      subject to reporting obligations under the U.S. securities laws. 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 our 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 our 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.





**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 SEC on April 23,
      2008.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**





None.





**ITEM
      5. OTHER INFORMATION**





None.





50


**ITEM
      6. EXHIBITS**





The
      following exhibits are filed herewith:





**Exhibit
                No.******
            
            **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 (5)3.3
            
            Company
                Bylaws (6)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)10.8
            
            Form
                of the Amendment, Exchange and Waiver Agreement between the Company
                and
                certain accredited investors dated November 9, 2007 (8)10.9
            
            Lease
                Agreement between Xian Tianxing Bio-Pharmaceutical Co., Ltd. and
                Weibing
                Lu dated June 1, 2007 (9)31.1
            
            Certifications
                pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                Act
                of 1934, as amended, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002 (11)31.2
            
            Certifications
                pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                Act
                of 1934, as amended, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002 (11)32.1
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (11)32.2
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (11)99.1
            
            Consulting
                Services Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings,
                Co., Ltd., Xian Tianxing Bio-Pharmaceutical Co., Ltd. dated October
                28,
                2005 (4)99.2
            
            Equity
                Pledge Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings,
                Co., Ltd. and Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”)
                and Xian Tianxing’s Majority Shareholders dated October 28, 2005
                (4)




51




99.3
            
            Operating
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.,
                and Xian Tianxing Bio-Pharmaceutical Co. (“Xian Tianxing”), Xian
                Tianxing’s Majority Shareholders, Ltd. and Weibing Lu dated October 28,
                2005 (4)99.4
            
            Proxy
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.
                and Xian Tianxing Bio-Pharmaceutical Co. (“Xian Tianxing”), Xian
                Tianxing’s Majority Shareholders and Weibing Lu dated October 28, 2005
                (4)99.5
            
            Option
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.
                and Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”), Xian
                Tianxing Majority Shareholders and Weibing Lu dated October 28, 2005
                (4)99.6
            
            Amendment
                to Consulting Agreement by and among Skystar Bio-Pharmaceutical (Cayman)
                Holdings Co., Ltd. (“Skystar Cayman”), Sida Biotechnology (Xian) Co., Ltd.
                (“Sida”), Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”) and
                Skystar Bio-Pharmaceutical Co. (“Skystar”) dated March 10, 2008
                (10)99.7
            
            Amendment
                to Equity Pledge Agreement among Skystar Cayman, Sida, Xian Tianxing,
                Xian
                Tianxing’s majority shareholders and Skystar dated March 10, 2008
                (1099.8
            
            Agreement
                to Transfer of Operating Agreement among Skystar Cayman, Sida, Xian
                Tianxing, Xian Tianxing’s majority shareholders and Skystar dated March
                10, 2008 (10)99.9
            
            Designation
                Agreement among Skystar Cayman, Sida, Xian Tianxing, Xian Tianxing’s
                majority shareholders and Skystar dated March 10, 2008
                (10)99.10
            
            Agreement
                to Transfer of Option Agreement among Skystar Cayman, Sida, Xian
                Tianxing,
                Xian Tianxing’s majority shareholders and Skystar dated March 10, 2008
                (10)





(1)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K 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 Annual Report on Form 10-KSB filed on
                April 17, 2006.(6)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K on December
                21, 2005.


(7)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                March 5, 2007.(8)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                December 11, 2007.(9)
            Incorporated
                by reference from the Registrant’s Annual Report on Form 10-K filed on
                April 2, 2008.(10)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K on March 11,
                2008.(11)
            Filed
                herewith.




52


**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.











May
                15, 2008
            SKYSTAR
                BIO-PHARMACEUTICAL COMPANYBy:
            /s/
                Weibing LuWeibing
                Lu
              Chief
                Executive Officer
              (Principal
                Executive Officer)By:
            /s/
                Bennet P. TchaikovskyBennet
                P. Tchaikovsky
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




53