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,
      2009





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




For the
transition period from _____________ to ______________.





Commission
File Number 000-28153











Skystar
Bio-Pharmaceutical Company





(Exact
name of registrant as specified in its charter)





Nevada
              (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 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  x    No  o




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




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




As of May
18, 2009, the Registrant had 1,869,297 shares of common stock
outstanding.













SKYSTAR
BIO-PHARMACEUTICAL COMPANY




FORM 10-Q




INDEX




Page NumberSPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
            
            3PART
      I.  FINANCIAL INFORMATION
            
            4Item
      1.
            Financial
      Statements (unaudited)
            
            4Consolidated
      Balance Sheet as of March 31, 2009 and December 31, 2008
            
            4Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      Three Months Ended March 31, 2009 and 2008
            
            5Consolidated
      Statements of Shareholders’ Equity
            
            6Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009 and
      2008
            
            7Notes
      to the Consolidated Financial Statements as of March 31,
    2009
            
            8Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            29Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            
            36Item
      4T.
            Controls
      and Procedures
            
            36PART
      II.  OTHER INFORMATION
            
            37Item
      1.
            Legal
      Proceedings
            
            37Item
      1A.
            Risk
      Factors
            
            38Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            51Item
      3.
            Defaults
      Upon Senior Securities
            
            51Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            51Item
      5.
            Other
      Information
            
            51Item
      6.
            Exhibits
            
            51SIGNATURES
            
            54




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 Quarterly 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


SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL
STATEMENTS.


March
      31, 2009
              
              
              December
      31, 2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
              
              $
              203,675
              
              
              $
              576,409Restricted
      cash
              
              
              80,975
              
              
              
              80,885Short-term
      investment
              
              
              351,600
              
              
              
              352,080Accounts
      receivable, net of allowance for doubtful accounts of
    $349,151and
      $327,857 as of March 31, 2009 and December 31, 2008,
      respectively.
              
              
              3,393,006
              
              
              
              2,424,102Inventories
              
              
              5,970,398
              
              
              
              3,086,060Deposits
      and prepaid expenses
              
              
              2,321,062
              
              
              
              4,878,851Loan
      and other receivables, net
              
              
              755,741
              
              
              
              380,186Total
      current assets
              
              
              13,076,457
              
              
              
              11,778,573PLANT
      AND EQUIPMENT, NET
              
              
              7,363,908
              
              
              
              7,413,689CONSTRUCTION-IN-PROGRESS
              
              
              7,060,083
              
              
              
              6,516,630OTHER
      ASSETS:Long-term
      prepayments
              
              
              4,922,400
              
              
              
              5,207,117Intangible
      assets, net
              
              
              859,786
              
              
              
              899,529Total
      other assets
              
              
              5,782,186
              
              
              
              6,106,646Total
      assets
              
              $
              33,282,634
              
              
              $
              31,815,538LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short-term
      loan
              
              $
              966,899
              
              
              $
              748,170Accounts
      payable
              
              
              380,610
              
              
              
              547,430Accrued
      expenses
              
              
              1,187,570
              
              
              
              1,488,575Short-term
      loan from shareholders
              
              
              131,850
              
              
              
              308,070Deposits
      from customers
              
              
              292,249
              
              
              
              424,266Taxes
      payable
              
              
              1,112,737
              
              
              
              212,661Other
      payables
              
              
              108,218
              
              
              
              68,398Shares
      to be issued to related party
              
              
              95,204
              
              
              
              95,204Amounts
      due to related parties
              
              
              325,338
              
              
              
              242,225Total
      current liabilities
              
              
              4,600,675
              
              
              
              4,134,999OTHER
      LIABILITIES:Deferred
      government grant
              
              
              1,098,750
              
              
              
              1,100,250Fair
      value of warrants
              
              
              839,303
              
              
              
              -Total
      other liabilities
              
              
              1,938,053
              
              
              
              1,100,250Total
      liabilities
              
              
              6,538,728
              
              
              
              5,235,249COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 2,000,000 series
      "A" shares issuedand
      outstanding as of March 31, 2009 and December 31, 2008,
      respectively; Nil series "B"shares
      issued and outstanding as of March 31, 2009 and December 31, 2008,
      respectively.
              
              
              2,000
              
              
              
              2,000Common
      stock, $0.001 par value, 20,000,000 shares authorized as of March 31, 2009
      andDecember
      31, 2008; 1,867,823 and 1,866,519 shares issued and outstanding as
      ofMarch
      31, 2009 and December 31, 2008, respectively.
              
              
              1,868
              
              
              
              1,867Paid-in-capital
              
              
              15,254,184
              
              
              
              16,347,641Statutory
      reserves
              
              
              2,952,710
              
              
              
              2,952,710Retained
      earnings
              
              
              5,713,985
              
              
              
              4,418,464Accumulated
      other comprehensive income
              
              
              2,819,159
              
              
              
              2,857,607Total
      shareholders' equity
              
              
              26,743,906
              
              
              
              26,580,289Total
      liabilities and shareholders' equity
              
              $
              33,282,634
              
              
              $
              31,815,538








4
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE MONTHS ENDED MARCH 31, 2009 and 2008
 (Unaudited)


Three
      months ended March 31,2009
              
              
              2008REVENUE,
      NET
              
              $
              3,823,566
              
              
              $
              2,686,354COST
      OF REVENUE
              
              
              1,946,358
              
              
              
              1,297,419GROSS
      PROFIT
              
              
              1,877,208
              
              
              
              1,388,935OPERATING
      EXPENSES:Research
      and development
              
              
              117,352
              
              
              
              47,299Selling
      expenses
              
              
              207,395
              
              
              
              189,844General
      and administrative
              
              
              314,695
              
              
              
              253,735Total
      operating expenses
              
              
              639,442
              
              
              
              490,878INCOME
      FROM OPERATIONS
              
              
              1,237,766
              
              
              
              898,057OTHER
      INCOME (EXPENSE):Other
      expense
              
              
              (232
              )
              
              
              (363
              )Interest
      income (expense), net
              
              
              302
              
              
              
              (128,136
              )Change
      in fair value of warrants
              
              
              38,328
              
              
              
              -Total
      other income (expense), net
              
              
              38,398
              
              
              
              (128,499
              )INCOME
      BEFORE PROVISION FOR INCOME TAXES
              
              
              1,276,164
              
              
              
              769,558PROVISION
      FOR INCOME TAXES
              
              
              211,520
              
              
              
              153,207NET
      INCOME
              
              
              1,064,644
              
              
              
              616,351OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
              
              
              (38,448
              )
              
              
              770,013COMPREHENSIVE
      INCOME
              
              $
              1,026,196
              
              
              $
              1,386,364EARNINGS
      PER SHARE:Basic
              
              $
              0.57
              
              
              $
              0.36Diluted
              
              $
              0.57
              
              
              $
              0.20WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES:Basic
              
              
              1,867,301
              
              
              
              1,711,120Diluted
              
              
              1,867,301
              
              
              
              1,797,125





5
 
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


AccumulatedRetained
      earnings
                
                
                otherPreferred
      stock
                
                
                Common
      stock
                
                
                Paid-in
                
                
                Deferred
                
                
                Statutory
                
                
                
                
                
                comprehensiveShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capital
                
                
                Compensation
                
                
                reserves
                
                
                Unrestricted
                
                
                income
                
                
                TotalBALANCE,
      December 31, 2007
                
                
                2,000,000
                
                
                $
                2,000
                
                
                
                1,711,120
                
                
                $
                1,711
                
                
                $
                14,756,678
                
                
                $
                (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
                
                
                
                1,711,120
                
                
                
                1,711
                
                
                
                14,756,678
                
                
                
                -
                
                
                
                1,742,403
                
                
                
                648,939
                
                
                
                2,212,615
                
                
                
                19,364,346Shares
      issued for services
                
                
                
                
                
                
                
                
                
                
                11,609
                
                
                
                12
                
                
                
                130,409
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                130,421Shares
      issued for debt settlement
                
                
                
                
                
                
                
                
                
                
                21,040
                
                
                
                21
                
                
                
                220,899
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                220,920Debentures
      converted to common stock
                
                
                
                
                
                
                
                
                
                
                122,750
                
                
                
                123
                
                
                
                1,239,655
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,239,778Foreign
      currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                644,992
                
                
                
                644,992Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,979,832
                
                
                
                
                
                
                
                4,979,832Appropriation
      to statutory reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,210,307
                
                
                
                (1,210,307
                )
                
                
                
                
                
                
                -BALANCE,
      December 31, 2008, as previously reported
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,866,519
                
                
                
                1,867
                
                
                
                16,347,641
                
                
                
                -
                
                
                
                2,952,710
                
                
                
                4,418,464
                
                
                
                2,857,607
                
                
                
                26,580,289Cumulative
      effect of reclassification of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,108,508
                )
                
                
                
                
                
                
                
                
                
                
                230,877
                
                
                
                
                
                
                
                (877,631
                )BALANCE,
      January 1, 2009, as adjusted, (Unaudited)
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,866,519
                
                
                
                1,867
                
                
                
                15,239,133
                
                
                
                -
                
                
                
                2,952,710
                
                
                
                4,649,341
                
                
                
                2,857,607
                
                
                
                25,702,658Shares
      issued for services
                
                
                
                
                
                
                
                
                
                
                1,304
                
                
                
                1
                
                
                
                15,051
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,052Foreign
      currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (38,448
                )
                
                
                (38,448
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,064,644
                
                
                
                
                
                
                
                1,064,644BALANCE,
      March 31, 2009, (Unaudited)
                
                
                2,000,000
                
                
                $
                2,000
                
                
                
                1,867,823
                
                
                $
                1,868
                
                
                $
                15,254,184
                
                
                $
                -
                
                
                $
                2,952,710
                
                
                $
                5,713,985
                
                
                $
                2,819,159
                
                
                $
                26,743,906
  
 6
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Unaudited)
 Three
      months ended March 31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                1,064,644
                
                
                $
                616,351Adjustments
      to reconcile net income to cash provided
      by (used in) operating activities:Depreciation
                
                
                112,930
                
                
                
                106,882Amortization
                
                
                38,519
                
                
                
                36,747Amortization
      of deferred financing costs
                
                
                -
                
                
                
                21,817Amortization
      of discount on debentures
                
                
                -
                
                
                
                114,990Amortization
      of deferred compensation
                
                
                -
                
                
                
                62,758Common
      stock issued for services
                
                
                15,052
                
                
                
                -Bad
      debt expense
                
                
                21,743
                
                
                
                -Change
      of fair value of warrants
                
                
                (38,328
                )
                
                
                -Change
      in operating assets and liabilitiesAccounts
      receivable
                
                
                (994,017
                )
                
                
                (326,435
                )Inventories
                
                
                (2,888,742
                )
                
                
                (1,365,399
                )Deposits
      and prepaid expenses
                
                
                2,551,310
                
                
                
                (778,513
                )Other
      receivables
                
                
                (9,823
                )
                
                
                14,617Accounts
      payable
                
                
                (166,085
                )
                
                
                132,951Accrued
      expenses
                
                
                (382,703
                )
                
                
                32,650Deposits
      from customers
                
                
                (131,448
                )
                
                
                7,443Taxes
      payable
                
                
                900,427
                
                
                
                291,816Other
      payables
                
                
                39,916
                
                
                
                (4,193
                )Net
      cash provided by (used in) operating activities
                
                
                133,395
                
                
                
                (1,035,518
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Payments
      for long-term prepayments
                
                
                (32,233
                )
                
                
                -Loans
      to third parties
                
                
                (366,275
                )
                
                
                521,796Purchase
      of plant and equipment
                
                
                (73,255
                )
                
                
                (47,829
                )Addition
      of construction-in-progress
                
                
                (242,507
                )
                
                
                -Net
      cash used in investing activities
                
                
                (714,270
                )
                
                
                473,967CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      in restricted cash
                
                
                (200
                )
                
                
                (143
                )Advances
      to shareholders and directors
                
                
                (175,812
                )
                
                
                (357,829
                )Proceeds
      from shareholders and directors
                
                
                83,124
                
                
                
                393,622Repay
      amounts due to related companies
                
                
                -
                
                
                
                (42,841
                )Proceeds
      from short-term loan
                
                
                219,765
                
                
                
                167,724Net
      cash provided by financing activities
                
                
                126,877
                
                
                
                160,533EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                
                
                81,264
                
                
                
                18,826(DECREASE)
      INCREASE IN CASH
                
                
                (372,734
                )
                
                
                (382,192
                )CASH,
      beginning
                
                
                576,409
                
                
                
                771,492CASH,
      ending
                
                $
                203,675
                
                
                $
                389,300SUPPLEMENTAL
      DISCLOSURE INFORMATION:Interest
      paid
                
                $
                19,079
                
                
                $
                2,645Income
      taxes paid
                
                $
                -
                
                
                $
                -Non-cash
      investing and financing activities -Long-term
      prepayment transferred to construction-in-progress
                
                $
                309,869
                
                
                $
                -
 The accompanying
notes are an integral part of these consolidation statements.
 7
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Note
1- ORGANIZATION
 
 Organizationand description of
business
 
 Skystar
Bio-Pharmaceutical Company (“Skystar” or the “Company”), was incorporated in
Nevada on September 24, 1998. Since its acquisition on November 7, 2005 of
Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), a
Cayman Islands company, the Company has been engaged in research,
development, production, marketing and sales of veterinary healthcare and
medical care products.  All current operations of the Company are in the
People’s
Republic of China (“China” or the “PRC”)
 
 All of
the Company’s operations are carried out by Xian Tianxing Bio-Pharmaceutical
Co., Limited (“Xian Tianxing”), a PRC joint stock company that the Company
controls through contractual arrangements originally between Skystar Cayman and
Xian Tianxing. On March 10, 2008, the Company entered into a series of
agreements transferring all of the rights and obligations of Skystar Cayman
under the contractual arrangements to Sida Biotechnology (Xian) Co., Ltd.
(“Sida”), a PRC company. Sida is the wholly-owned subsidiary of Fortunate
Time International Limited (“Fortunate Time”), a Hong Kong company and
wholly-owned subsidiary of Skystar Cayman. Xian Tianxing also has a wholly-owned
subsidiary, Shanghai Siqiang Biotechnological Co., Ltd. (“Shanghai
Siqiang”), a PRC company.
 
 As a
result of these contractual arrangements, which obligates Sida to absorb all of
the risk of loss from Xian Tianxing’s activities and enable Sida to receive all
of its expected residual returns, the Company accounts for Xian Tianxing as a
variable interest entity (“VIE”) under Financial Accounting Standards Board
(“FASB”) Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.” Accordingly, the Company
consolidates Xian Tianxing’s results, assets and liabilities.
 
 Sida was
established by Fortunate Time on July 10, 2007, with registered capital of
$5,000,000. Fortunate Time invested $2,000,000 into Sida on July 20, 2007, which
amount is payable to Skystar Cayman. Pursuant to the Xi’an High Technology
District approval notice, Fortunate Time is required to contribute the remaining
$3,000,000 of registered capital by July 9, 2009.
    Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis ofpresentation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
 
 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, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
 
 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
materially differ from those estimates upon which the carrying values were
based.
  8
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Principles of
consolidation
 
 The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries, Skystar Cayman, Fortunate Time, and
Sida, and its VIEs, Xian Tianxing and Shanghai Siqiang. All significant
inter-company transactions and balances between the Company, its subsidiaries
and VIEs are eliminated upon consolidation.
 
 Foreign currency
translation
 
 The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes and the Chinese Renminbi (“RMB”) as their function
currency.  The Company’s subsidiaries 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.
 
 The
Company translates the subsidiaries’ and VIEs’ assets and liabilities into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet
dates, and the statements of operations 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 consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the subsidiaries’ and VIEs’
financial statements are recorded as accumulated other comprehensive
income.
 
 The
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, 2009 and December 31, 2008 was US $1.00 to RMB 6.83 and
RMB 6.82, respectively. The weighted average translation rate of
US $1.00 to RMB 6.83 and RMB 7.15 was applied to the income
statement accounts in March 31, 2009 and 2008, respectively.
 
 Approval
of foreign currency payments by the People’s 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.
 
 Fair values of financial
instruments
 
 FAS 107,
“Disclosure About Fair Value of Financial Instruments” defines financial
instruments and requires fair value disclosure of applicable financial
instruments.  FAS 157, “Fair Value Measurements,” adopted January 1,
2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. Short term investments, receivables, payables, short term
loans, and warrant liabilities qualify as financial instruments. Management
concluded the carrying values 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, if applicable, their stated interest rate approximates
rates currently available.  The three levels are defined as
follows:
  •
                  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 measurement.
 
 9
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
  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 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.”
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6.  Paragraph 11(a) of FAS 133 specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the FAS
133 paragraph 11(a) scope exception.
 
 As a
result of adopting EITF 07-5, 154,550 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollars,
a currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.
 
 As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2007.  On
January 1, 2009, the Company reclassified from additional paid-in capital,
as a cumulative effect adjustment, $230,877 to beginning retained earnings and
$877,631 to warrant liabilities to recognize the fair value of such warrants.
The fair value of the warrants was $839,303 on March 31,
2009.  Therefore, the Company recognized a $38,328 (unaudited)
gain from the change in fair value for the three months ended
March 31, 2009.
 
 These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
Option Pricing Model using the following assumptions:
 
 March
      31, 2009
                  
                  
                  January
      1, 2009(Unaudited)Annual
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life (years)
                  
                  
                  0.90
                  
                  
                  
                  1.20Risk-free
      interest rate
                  
                  
                  1.01
                  %
                  
                  
                  1.01
                  %Expected
      volatility
                  
                  
                  135
                  %
                  
                  
                  135
                  %
 
 Expected
volatility is based on historical volatility.  Historical volatility
was computed using daily pricing observations for recent periods that correspond
to the term of the warrants. The Company believes this method produces an
estimate that is representative of our expectations of future volatility over
the expected term of these warrants. The Company has no reason to believe future
volatility over the expected remaining life of these warrants is likely to
differ materially from historical volatility. The expected life is based on the
remaining term of the warrants. The risk-free interest rate is based on U.S.
Treasury securities according to the remaining term of the
warrants.
  10
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 As
required by SFAS 157, financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement. Depending on the product and the terms of the transaction,
the fair value of the notes payable and derivative liabilities were modeled
using a series of techniques, including closed-form analytic formula, such as
the Black-Scholes Option Pricing Model, which does not entail material
subjectivity because the methodology employed does not necessitate significant
judgment, and the pricing inputs are observed from actively quoted
markets.
  The fair
value of the 154,550 warrants was determined using the Black-Scholes Model,
defined in SFAS 157 as level 2 inputs, and recorded the change in earnings. As a
result, the derivative liability is carried on the balance sheet at its fair
value.
 
 The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of March 31, 2009 (unaudited).
 
 Carrying
      Value at March 31, 2009
                  
                  
                  Fair
      Value Measurement at
                    March
      31, 2009Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Short-term
      investment
                  
                  $
                  351,600
                  
                  
                  $
                  351,600
                  
                  
                  $
                  -
                  
                  
                  $
                  -Derivative
      liability - warrants
                  
                  $
                  839,303
                  
                  
                  $
                  -
                  
                  
                  $
                  839,303
                  
                  
                  $
                  -
 
 Other
than the short-term investment and derivative liabilities - warrants carried at
fair value, the Company did not identify any other assets and liabilities that
are required to be presented on the balance sheet at fair value in accordance
with SFAS 157.
  Revenue
recognition
 
 Revenue
of the Company is primarily from the sales of veterinary healthcare and medical
care 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
allowance for sales returns is made on these consolidated financial statements
as product returns are insignificant based on historical
experience.
 
 There are
two types of sales upon which revenue is recognized:
 
 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
expenses, which totaled $91,007 (unaudited) and $38,804
(unaudited) during the three months ended March 31, 2009 and 2008,
respectively.
 
 The
Company’s revenue and cost of revenue by product line were as
follows:
 
 Three
      Months EndedMarch
      31, 2009
                  
                  March
      31, 2008(Unaudited)
                  
                  (Unaudited)Re    RevenueMicro-Organism
                  
                  $
                  893,293
                  
                  
                  $
                  789,655Veterinary
      Medications
                  
                  
                  2,602,496
                  
                  
                  
                  1,669,754F             Feed
      Additives
                  
                  
                  182,311
                  
                  
                  
                  93,554V            Vaccines
                  
                  
                  145,466
                  
                  
                  
                  133,391T      Total
      Revenue
                  
                  
                  3,823,566
                  
                  
                  
                  2,686,354Cost
      of RevenueM            Micro-Organism
                  
                  
                  260,537
                  
                  
                  
                  235,827V             Veterinary
      Medications
                  
                  
                  1,592,809
                  
                  
                  
                  999,484Fe            Feed
      Additives
                  
                  
                  77,439
                  
                  
                  
                  46,713Va           Vaccines
                  
                  
                  15,573
                  
                  
                  
                  15,395Tot   Total
      Cost of Revenue
                  
                  
                  1,946,358
                  
                  
                  
                  1,297,419Gr    Gross
      Profit
                  
                  $
                  1,877,208
                  
                  
                  $
                  1,388,935
 11
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
  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 $80,975 (unaudited) and $80,885 as
of March 31, 2009 and December 31, 2008, respectively. Restricted cash is
comprised of amounts received from the PRC government as subsidies and set aside
for specific uses (see Note 14).The restricted funds are
maintained as bank deposits and reflected as current assets based on the
expected period when such funds will be put into their specific
uses.
 
 Short-Terminvestment
 
 Short-term
investment is comprised of securities classified as available-for-sale, held by
a private investment trust company for investing
activities.  Available-for-sale securities are carried at fair value,
with unrealized gains or losses reported in other comprehensive income, net of
tax. Realized gains or losses are included in the results of operations. There
were no unrealized gains or losses relating to short term investment for the
three months ended March 31, 2009 and 2008, and as such, no such amounts were
included in other comprehensive income for such periods.
 
 Accounts and other
receivables
 
 Accounts
receivable 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 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. At each reporting period, the
allowance balance is adjusted to reflect the amount computed as a result of the
aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, a corresponding adjustment is made to
the allowance account as a change in estimate.  The ultimate
collection of the Company’s accounts receivable may take one year. Delinquent
account balances are reserved after management determines that the likelihood of
collection is not probable, and known bad debts are written-off against
allowance for doubtful accounts when identified.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market, as determined on a moving weighted
average basis. Costs of inventories include purchases and related costs incurred
in bringing the inventories to their present location and
condition. Management reviews inventories for obsolescence and cost in
excess of net realizable value at least annually and records a reserve against
the inventory and additional cost of goods sold when the carrying value exceeds
net realizable value.
  12
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (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
      yearsVehicles
                  5-10
      years
 
 Management
assesses the carrying value of plant and equipment annually, more often when
factors indicating impairment are present, and reduces the carrying value of
such 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 it 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,
2009, and December 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. All other
interest is expensed as incurred. Construction-in-progress is not
depreciated until such time the assets are completed and put into
service.
 
 Intangibles
 
 Land Use
Rights — Land use rights represent the amounts paid to acquire a long-term
interest to utilize the land underlying the Company’s facilities. This type of
arrangement is common for the use of land in the PRC. Land use rights are
amortized on a straight-line basis over its 50 year term.
  Technological
Know-How — Purchased technological know-how includes confidential
formulas, manufacturing processes, and technical and procedural manuals, and is
amortized using the straight-line method over the expected useful economic life
of five years, which reflects the period over which such confidential formulas,
manufacturing processes, and technical and procedural manuals are kept
confidential by the Company as agreed between the Company and the selling
parties.
  Impairment
of Intangible Assets —The Company evaluates
the carrying value of intangible assets annually, more often when factors
indicating impairment are present. The Company determines the existence of such
impairment by measuring the estimated future cash flows (undiscounted) and
comparing such amount to the net asset carrying value. If the undiscounted cash
flow estimated to be generated by any such intangible asset is less than its
carrying amount, a loss is recognized based on the amount by which the carrying
amount exceeds the intangible asset’s fair market value. Loss on intangible
assets to be disposed of is determined in a similar manner, except that fair
market values are reduced by the cost of disposal.  Based on its review,
the Company believes that, as of March 31, 2009, there were no significant
impairments of its intangible assets.
  Comprehensive
income
 
 SFAS 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. The accompanying consolidated financial statements include
the provisions of SFAS 130. Accumulated other comprehensive income is comprised
of the changes in foreign currency exchange rates.
  13
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Research and development
costs
 
 Research
and development costs are expensed to operations as incurred and include
salaries, professional fees and technical support fees. Research and development
costs for the three months ended March 31, 2009 and 2008, were $117,352
(unaudited) and $47,299 (unaudited), respectively.
 
 Advertisingcosts
 
 Cost
incurred in the advertisement of the Company and the Company’s products are
charged to operations currently. Advertising costs for the three months ended
March 31, 2009 and 2008 were $38,936 (unaudited) and $12,674
(unaudited), respectively.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the SFAS 109, “Accounting
for Income Taxes” and FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). SFAS 109 requires a company to use the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. There are no deferred tax amounts at March 31, 2009 and
December 31, 2008.
  In
accordance with FIN 48, 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 effect on the
Company’s consolidated financial statements.
 
 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 a change to these
uncertainties.
 
 Stock based
compensation
 
 The
Company records stock-based compensation in accordance with SFAS 123R,
“Share-Based Payment”. SFAS 123R requires companies to measure compensation cost
for stock-based employee compensation at fair value at the grant date and
recognize the expense over the employee’s requisite service period. Under SFAS
123R, the Company’s volatility is based on the historical volatility of the
Company’s stock or the expected volatility of similar companies. The expected
life assumption is primarily based on historical exercise patterns and employee
post-vesting termination behavior. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect of the
time of grant. SFAS 123R allows the “simplified” method to determine the term of
employee options when certain information is not available. Because the
Company does not have a history of employee stock options, the Company used the
“simplified” method to estimate the expected life of the
options.
  14
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Stock
compensation granted to non-employees is determined in accordance with EITF
96-18, “Accounting for Equity Instruments that are issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services, which
incorporates the fair value of the consideration received or the fair value of
equity instruments issued, whichever is more reliably measured.
 
 The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
 
 For the
period ended March 31, 2009, the Company did not grant any stock
options.
 
 Earnings per
share
 
 Earnings
per share is calculated in accordance with the SFAS 128, “Earnings Per
Share”.  Basic earnings per share is based upon the weighted average
number of common shares outstanding. Diluted earnings per share is based on the
assumption that all dilutive convertible shares, including convertible preferred
shares, and stock options were converted or exercised. Further, SFAS 128
requires that stock dividends or stock splits be accounted for retroactively if
the stock dividends or stock splits occur during the period, or retroactively if
the stock dividends or stock splits occur after the end of the period but before
the release of the financial statements, by considering it outstanding of the
entirety of each period presented.  Dilution is computed by applying
the treasury stock method. Under this method, options and warrants are assumed
to be exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.
 
 All share
and per share amounts used in the Company’s consolidated financial statements
and notes thereto have been retroactively restated to reflect the
10-for-1 stock split effected on May 12, 2009.
 
 Related
parties
 
 Parties
are considered to be related to the Company if the parties, 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 such principal owners and 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.
 
 Recently issued accounting
pronouncements
  In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities – An Amendment of SFAS No. 133.” SFAS 161 seeks to
improve financial reporting for derivative instruments and hedging activities by
requiring enhanced disclosures regarding the impact on financial position,
financial performance, and cash flows. To achieve this increased transparency,
SFAS 161 requires (1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format; (2) the disclosure of
derivative features that are credit risk-related; and (3) cross-referencing
within the footnotes. SFAS 161 is effective on January 1, 2009 and the
adoption of SFAS 161 did not impact the Company’s consolidated financial
statements.
  15
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles." SFAS 162 is intended to improve financial reporting by identifying
a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with
GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." Management is currently evaluating SFAS 162 and
does not believe that it will have a significant impact on the determination or
reporting of the financial results.
 
 In
June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” The FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and therefore
need to be included in the earnings allocation in calculating earnings per share
under the two-class method described in SFAS 128, “Earnings per Share.” The FSP
requires companies to treat unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents as a separate class
of securities in calculating earnings per share. The FSP is effective for fiscal
years beginning after December 15, 2008; earlier application is not
permitted. The adoption of EITF 03-6-1 did not have a material impact on the
Company’s financial position or results.
 
 In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP
FAS 157-3 clarifies the application of SFAS 157 in an inactive market,
without changing its existing principles. The FSP was effective immediately upon
issuance. The adoption of FSP FAS 157-3 did not have an effect on the
Company’s financial condition, results of operations or cash flows.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”
FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves
this by amending the impairment model in EITF 99-20 to remove its exclusive
reliance on “market participant” estimates of future cash flows used in
determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on the Company’s consolidated financial
statements.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. Management is currently evaluating this new FSP but does not believe
that it will have a significant impact on the determination or reporting of the
financial results.
  16
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP.  Management is
currently evaluating this new FSP but does not believe that it will have a
significant impact on the determination or reporting of the financial
results.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption.
Management is currently evaluating the disclosure requirements of this new
FSP.
 
 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 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.
 
 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, 2009 and December 31, 2008, the Company had deposits in excess of
federally insured limits (including restricted cash) of $284,650 and $448,082
respectively. The Company has not experienced any losses in such
accounts.
  17
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 For the
three months ended March 31, 2009 and 2008, all of the Company’s sales arose in
the PRC. No major customers accounted for more than 10% of the Company’s total
revenues. In addition, all accounts receivable at March 31, 2009 and
December 31, 2008 also arose in the PRC.
 
 The
Company’s two largest vendors accounted for approximately 25.91% of
the Company’s total purchases for the three months ended March 31, 2009, while
the Company’s five largest vendors accounted for 62.63% of the Company’s total
purchases for the three months ended March 31, 2008.
 
 The
Company had no products that accounted for more than 10% of the Company’s total
revenues for the three months ended March 31, 2009, while one of the
Company’s products accounted for 10.7% of the Company’s total revenues for the
three months ended March 31, 2008.
 
 Note
4 — SHORT TERM INVESTMENT
 
 In 2007,
the Company entered into an investment agreement with an unrelated party to
invest certain funds in the Chinese stock market. The nature of the investment
is available-for-sale with certain guaranteed returns such as 7.2% interest
through August 1, 2008 and 5.0% interest after August 1, 2008 for one
year.  There are no restrictions or penalties for early withdrawals
prior to maturity. The investment matures on July 31, 2009. The Company had
$351,600 and $352,080 in short-term investment as of March 31, 2009 and December
31, 2008, respectively.
 
 For the
three months ended March 31, 2009 and 2008, the Company recognized interest
income amounting to $4,308 (unaudited) and $5,654 (unaudited),
respectively, from the short term investment.
 
 Note
5 — ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 The
following table presents the movement of allowance for doubtful accounts as of
March 31, 2009 and December 31, 2008:
 
 Allowance
      for bad debt, December 31, 2007
                  
                  $
                  199,639Addition
                  
                  
                  114,239Recovery
                  
                  
                  -Translation
      adjustment
                  
                  
                  13,979Allowance
      for bad debt, December 31, 2008
                  
                  
                  327,857Addition
                  
                  
                  21,741Recovery
                  
                  
                  -Translation
      adjustment
                  
                  
                  (447
                  )Allowance
      for bad debt, March 31, 2009 (unaudited)
                  
                  $
                  349,151
 
 Note
6 - INVENTORIES
 
 Inventories
consist of the following:
 March
      31,
                    2009
                  
                  
                  December
      31, 2008(Unaudited)Raw
      material
                  
                  $
                  4,580,587
                  
                  
                  $
                  2,087,428Packing
      materials
                  
                  
                  332,883
                  
                  
                  
                  165,077Work
      in process
                  
                  
                  2,554
                  
                  
                  
                  2,446Finished
      goods
                  
                  
                  1,034,830
                  
                  
                  
                  811,538Low
      value consumables
                  
                  
                  19,544
                  
                  
                  
                  19,571Total
                  
                  $
                  5,970,398
                  
                  
                  $
                  3,086,060
  18
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 The
Company periodically reviews its reserves for slow moving and obsolete
inventories. As of March 31, 2009 and December 31, 2008, the Company
believes that no such reserves were necessary.
 
 Note
7 — DEPOSITS AND PREPAID EXPENSES
 
 Deposits
and prepaid expenses are comprised of the following:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008(Unaudited)Prepayment
      for raw materials purchasing
                  
                  $
                  1,988,617
                  
                  
                  $
                  4,210,618Prepayment
      for packaging materials purchasing
                  
                  
                  179,643
                  
                  
                  
                  499,755Prepayment
      for advertisement fee
                  
                  
                  51,036
                  
                  
                  
                  89,436Prepayment
      for due diligence fee
                  
                  
                  73,250
                  
                  
                  
                  73,350Other
                  
                  
                  28,516
                  
                  
                  
                  5,692Total
                  
                  $
                  2,321,062
                  
                  
                  $
                  4,878,851
 
 Note
8 – LOAN AND OTHER RECEIVABLES
 
 Loans and
other receivables consist of the following:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008(Unaudited)Shaanxi
      Xinbangdike Technology Developing Company
                  
                  
                  660,935
                  
                  
                  
                  295,087Other
      receivables
                  
                  
                  94,806
                  
                  
                  
                  85,099Total
      loans and other receivables
                  
                  $
                  755,741
                  
                  
                  $
                  380,186
 
 Loan to
Shaanxi Xinbangdike Technology Development Company is non-interest bearing,
unsecured and due on demand.
 
 Note
9 – PROPERTY, PLANT AND EQUIPMENT, NET
 
 Plant and
equipment consists of the following:
 
 March
      31,
                    2009
                  
                  
                  December
      31, 2008(Unaudited)Building
      and improvements
                  
                  $
                  4,970,868
                  
                  
                  $
                  4,977,654Machinery
      and equipment
                  
                  
                  3,102,853
                  
                  
                  
                  3,035,376Office
      equipment and furniture
                  
                  
                  188,266
                  
                  
                  
                  186,702Vehicles
                  
                  
                  328,697
                  
                  
                  
                  329,331Total
                  
                  
                  8,590,684
                  
                  
                  
                  8,529,063Less:
      accumulated depreciation
                  
                  
                  (1,226,776
                  )
                  
                  
                  (1,115,374
                  )Plant
      and equipment , net
                  
                  $
                  7,363,908
                  
                  
                  $
                  7,413,689
 
 The
depreciation expense was $112,922 (unaudited) and $106,882 (unaudited)
for the periods ended March 31, 2009 and
2008, respectively.
  19
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Note
10 — CONSTURCTION IN PROGRESS
 
 Construction
in progress is related to a plant being built in accordance with the PRC’s
Good Manufacturing Practices (“GMP”) Standard. Construction on this plant
commenced in 2005, the veterinary medicine facility and the building that houses
quality control, research and development and administration were completed
during 2007, and the remaining plant facilities are expected to be completed by
the end of 2009, depending upon the Company’s ability to raise additional
capital. The Company estimates that as of March 31, 2009, additional funds will
be needed to complete the construction project. No depreciation is provided for
construction in progress until such time the assets are completed and placed
into service.
 
 As of
March 31, 2009 and December 31, 2008, the Company had construction in progress
amounting to $7,060,083 (unaudited) and $6,516,630, respectively.
$19,078 (unaudited) and $0 (unaudited) in interest expense had been
capitalized for construction in progress for the three months ended March 31,
2009 and 2008, respectively.
 
 Note
11— LONG TERM PREPAYMENT
 
 Long term
prepayment consists of the following as of March 31, 2009 and December 31,
2008:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008(Unaudited)Construction
      deposit
                  
                  $
                  2,212,150
                  
                  
                  $
                  2,493,167Deposit
      for the potential acquisitions
                  
                  
                  2,710,250
                  
                  
                  
                  2,713,950Total
                  
                  $
                  4,922,400
                  
                  
                  $
                  5,207,117
 
 As of
March 31, 2009 and December 31, 2008, the Company has determined that these
prepayments are noncurrent because: (1) these amounts relate to noncurrent
assets, and (2) the Company’s ability to complete the projects underlying the
construction deposit and any potential acquisitions is contingent upon the
Company obtaining financing, the successful outcome of which cannot be
determined.
 
 Deposits
for potential acquisitions represent deposits made to four separate
potential acquisition targets: one that produces veterinary medicines, one that
produces micro-organisms and feed additives, one that produces veterinary
medicines for domestic pets, and one with buildings for the Company’s own future
expansion.
 
 Note
12 - INTANGIBLES
 
 March
      31,
                    2009
                  
                  
                  December
      31,
                    2008(Unaudited)Land
      use rights
                  
                  $
                  378,337
                  
                  
                  $
                  378,853Technological
      know-how
                  
                  
                  879,000
                  
                  
                  
                  880,200Total
                  
                  
                  1,257,337
                  
                  
                  
                  1,259,053Less:
      accumulated amortization
                  
                  
                  (397,551
                  )
                  
                  
                  (359,524
                  )Intangible
      assets, net
                  
                  $
                  859,786
                  
                  
                  $
                  899,529
 
 During
2007, the Company paid $658,350 for the exclusive rights to the use of a strain
of micro-bio organisms for a five-year term from November 1, 2007 through
October 31, 2012. The Company began using the strain in its veterinary medicines
in 2008. The amortization expense for intangibles was $38,519 (unaudited)
and $36,747 (unaudited) for the periods ended March 31, 2009 and 2008,
respectively.
  20
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Amortization
expenses for the future five years and thereafter are as follows:
 
 Years ending December 31,
                  
                  Amount2009
                  
                  $
                  115,5572010
                  
                  
                  154,0762011
                  
                  
                  154,0762012
                  
                  
                  123,9742013
                  
                  
                  1,8912014
      and thereafter
                  
                  
                  290,677Total
                  
                  $
                  840,251
 
 Note
13 – SHORT-TERM LOAN
 
 On
September 3, 2008, the Company signed a one year short-term loan agreement
with the Bank of East Asia to borrow up to $1.9 million (RMB 13 million)
for operating purposes secured by the Company’s land use right and buildings. On
September 17, 2008, the Company received proceeds of $733,500 (RMB 5
million) from the bank. This amount will become due on September 16, 2009. The
balance of $1.1 million (RMB 8 million) can be borrowed once the Company
has a deposit balance in the amount of $4 million with the bank and uses the
bank as the Company’s primary transaction bank. As of March 31, 2009, the net
value of the land use right and properties pledged for the loan was $334,828 and
$3,287,019, respectively.
 
 The
applicable interest rate of the loan is the Bank of China’s standard short-term
rate, 6.93% at inception of the loan, which is subject to change with the
government policy, plus an additional 20% interest rate float. Pursuant to these
terms, the interest rate was approximately 8.32% as of March 31, 2009. Interest
payments to the Bank of East Asia are due every three months. Interest expense
incurred and associated with the short term loan amounted to $12,262 for
the three months ended March 31, 2009, which has been capitalized as part
of construction-in-progress, and no principal amount has been paid.
 
 Pursuant
to the short term loan agreement, the Company is required to comply with certain
covenants, such as maintaining sufficient environmental controls with respect to
the Company’s manufacturing processes, providing written notification to the
Bank of East Asia for any changes in the organizational structure or executive
officers, among others.  As of March 31, 2009, the management of the
Company determined that the Company was in compliance with these
covenants.
 
 On
January 14, 2009, the Company signed a one year short-term loan contract with
Shaanxi Agricultural Yanta Credit Union for $219,750 (RMB 1.5 million) at annual
interest rate of 8.6585% for operating purposes secured by the personal property
of Weibing Lu, the Company’s Chief Executive Officer. This amount will become
due on January 13, 2010. Interest expense incurred and associated with the
short-term loan amounted to $4,035 for the three months ended March 31, 2009,
which has been capitalized as part of construction-in-progress, and no principal
amount has been paid.
 
 Interest
expense for the periods ended March 31, 2009 and 2008, amounted to
$19,078 (unaudited) and $2,645 (unaudited), respectively.
 
 Note
14 - DEFERRED GOVERNMENT GRANT
 
 Deferred
government grant represents subsidies for GMP projects granted by the PRC
government. A subsidy in the amount of $641,000 was approved by the PRC
government for the Company to construct a new factory in 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. In 2006, the
Company expended $186,644 for the construction of its new factory.
 
 Also in
2003, the Company received a second subsidy in the amount of $256,400 to finance
the Company’s research and development activities. In 2005, the Company received
a third subsidy of $64,100 for the Company’s research and development
activities, which was expended during that year.
  21
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 According
to PRC government regulations, the funds granted may be treated as capital
contributed by a company appointed by the PRC government or as a loan from such
company, which the Company will be required to repay. As of March 31, 2009, the
Company has not reached a final agreement with the PRC government regarding the
treatment of these three 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 2009. Therefore, these amounts are reflected as liabilities
in the accompanying consolidated financial statements.
 
 As of
March 31, 2009 and December 31, 2008, deferred government grant amounted to
$1,098,750 (unaudited) and $1,100,250, respectively, and the Company had $80,975
(unaudited) and $80,885, respectively, of fund balance and recorded as
restricted cash.
 
 Note
15 - CAPITAL TRANSACTIONS
 
 On
February 12, 2008, the Company issued 9,000 shares of common stock as salary to
a non-executive director. The trading value of the Company's common stock on
February 12, 2008, was $11.10 per share and a corresponding amount of $99,900
was charged to general and administrative expenses.  The Company also
had a $95,204 balance under shares to be issued as of December 31, 2008, which
represented 11,000 common shares to be issued to the non-executive director for
his service provided for the period of May 2008 to December 2008. The Company
recorded it as part of general and administrative expenses based on the weighted
average trading price of the Company’s common stock for the said
period.
 
 On
February 29, 2008, the Company issued 21,040 shares of common stock to its legal
counsel as partial payment for services rendered. The trading value of the
Company's common stock on February 29, 2008, was $10.50 per share and additional
inducement cost of $42,081 between the fair value of the shares at $220,920 and
the partial payment of $178,839 was charged to general and administrative
expenses.
 
 On April
21, 2008, two of the Company’s convertible debenture holders converted
$982,003 of debentures into 122,750 shares of common stock.
 
 On May 5,
2008, the Company agreed to issue 5,217 shares of common stock to its chief
financial officer during the term of his agreement. The shares vest in four
equal installments of 1,304 shares each quarter. The trading value of the
common stock on May 5, 2008, was $11.70 per share for a total value of $61,042.
This compensation expense is recognized on a straight-line basis over the
vesting period. Compensation expense of $15,052 (unaudited) and $0 (unaudited)
was charged to general and administrative expenses for the three months ended
March 31, 2009 and 2008, respectively.
 
 Following
is a summary of the status of warrants outstanding at March 31,
2009:
  Number
      of Warrants
                    
                    Average
      Remaining
                      Contractual
      Life
                    
                    Average
      Exercise Price
                    
                    
                    Intrinsic
      Value97,500
                    
                    0.91
      years
                    
                    $
                    12.00
                    
                    
                    $
                    -57,050
                    
                    2.91
      years
                    
                    $
                    10.00
                    
                    
                    
                    -154,550
                    
                    
                    
                    $
                    11.30
                    
                    
                    $
                    -
 
 Following
is an activity summary of the Company’s outstanding warrants:
  Outstanding
      as of December 31, 2007
                  
                  
                  154,500Gra      Granted
                  
                  
                  -Forf     Forfeited
                  
                  
                  -Exe      Exercised
                  
                  
                  -Out  Outstanding
      as of March 31, 2008 (unaudited)
                  
                  
                  154,550Gra       Granted
                  
                  
                  -Forf      Forfeited
                  
                  
                  -Exe       Exercised
                  
                  
                  -Out  Outstanding
      as of December 31, 2008
                  
                  
                  154,550Gra       Granted
                  
                  
                  -Forf      Forfeited
                  
                  
                  -Exe       Exercised
                  
                  
                  -Out  Outstanding
      as of March 31, 2009 (unaudited)
                  
                  
                  154,550
  22
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Note
16 - CONVERTIBLE DEBENTURES
 
 In
February 2007, the Company sold an aggregate of $4.075 million of its 8%
convertible debentures (the “Debnetures”) and issued warrants to purchase
407,500 shares of common stock to several institutional and accredited
investors. On April 21, 2008, the Company entered into an Amendment and Waiver
Agreement (the “Amendment”) with two institutional and accredited investors who
acquired two remaining unconverted Debentures in a private transaction from the
original holders of these Debentures.  Below are highlights of the
Amendment:
  •
                  The
      Amendment amends the terms of these Debentures by: (a) changing the
      conversion price from $10.00 per share to $8.00 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
      Amendment is deemed to be: (a) the Company’s notice to require conversion
      of the entire outstanding principal of these Debentures and all accrued
      but unpaid interest thereon.
 
 The
difference between the value of the conversion option at the previous prices and
their value at the modified prices are deemed costs for the Company and are
charged to operations. The inducement cost for the two Debentures converted was
$257,775 for the year ended December 31, 2008. The inducement cost for the
converted Debentures was based on the market value of the additional 24,550
shares obtained by these two investors at $10.50 per share on April 21,
2008.
 
 122,750
shares of common stock were issued upon conversion of the two Debentures with a
carrying value of $982,003 (including $490,713 of default premium) at a reduced
conversion price of $8.00.
 
 In
accordance with EITF 00-27, all unamortized discount amounting to $291,548 at
the time of the conversion was recognized as interest expense for the year ended
December 31, 2008. The unamortized deferred financing costs of $79,998 on
conversion of the Debentures were also recorded as interest expense for the year
ended December 31, 2008.
  Note
17 - 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. As of March 31, 2009, Xian
Tianxing has met the statutory surplus reserve requirement, and approximately
$370,000 still needs to be transferred to the statutory surplus reserve from
Shanghai Siqiang and Sida.
  23
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 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. There are no legal
requirements in the PRC to fund these statutory reserves by the transfer of cash
to any restricted accounts, and as such, the Company has not transferred any
cash to these accounts. These reserves are not distributable as cash
dividends.
  Note
18 - TAXES
  The
Company is registered in the State of Nevada whereas its subsidiary, Skystar
Cayman, is a tax exempt company incorporated in the Cayman Islands and conducts
all of its business through its subsidiaries, Fortunate Time and Sida, and
Sida’s 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 Tax is generally imposed
at a statutory rate of 25% beginning on January 1, 2008. Xian
Tianxing has been approved as a new technology enterprise, and under PRC
Income Tax Laws is entitled to a preferential tax rate of 15%.
 
 For the
three months period ended March 31, 2009 and 2008, the provision for taxes on
earnings consisted of:
 
 2009
                  
                  2008(Unaudited)
                  
                  (Unaudited)Current
      PRC income tax expenseEnterprise
      income tax
                  
                  $
                  211,520
                  
                  
                  $
                  153,207
  The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate as of March 31:
  2009
                    
                    
                    2008(Unaudited)U.S.
      Statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in USA
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income tax rate
                    
                    
                    25.0
                    
                    
                    
                    25.0China
      income tax exemption
                    
                    
                    (10.0
                    )
                    
                    
                    (10.0
                    )Other
      item (1)
                    
                    
                    1.6
                    
                    
                    
                    5.0Total
      provision for income taxes
                    
                    
                    16.6
                    %
                    
                    
                    20.0
                    %
  (1) The
other item is operating expenses incurred by Skystar that are not deductible in
the PRC which resulted in an increase in effective tax rate of 1.6% and 5.0% for
the three months ended March 31, 2009 and 2008, respectively.
 
 The
estimated tax savings due to the reduced tax rate for the periods ended March
31, 2009 and 2008 amounted to $144,244 and $105,004,
respectively. The net effect on earnings per share if the
statutory income tax had been applied would decrease basic earnings per
share for the period ended March 31, 2009 and 2008 to $0.08 and $0.03,
respectively, and would decrease diluted earnings per share to $0.08 and $0.02,
respectively.
  24
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 The
Company was incorporated in the United States and has incurred net operating
loss for income tax purpose for 2009. The estimated net operating loss carry
forwards for United States income tax purposes amounted to $7,873,055 which may
be available to reduce future years’ taxable income. These carry forwards will
expire, if not utilized, beginning in 2026 and continue through 2029. 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, 2009. The valuation allowance at March 31,
2009 was $3,232,920. The Company’s management reviews this valuation
allowance periodically and will make adjustments as warranted.
 
 Note
19 - EARNINGS PER SHARE
 
 The
following demonstrates the calculation for earnings per share:
 
 For
      the three months ended March 312009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)Net
      income for basic earnings per share
                  
                  $
                  1,064,644
                  
                  
                  $
                  616,351Add:
      Interest expense for convertible note
                  
                  
                  
                  
                  
                  
                  136,807Minus:
      Discount on convertible debenture
                  
                  
                  
                  
                  
                  
                  (398,171
                  )Net
      income for diluted earnings per share
                  
                  $
                  1,064,644
                  
                  
                  $
                  354,987Weighted
      average shares used in basic computation
                  
                  
                  1,867,301
                  
                  
                  
                  1,711,120Diluted
      effect of convertible debentures (as if)
                  
                  
                  -
                  
                  
                  
                  77,240Diluted
      effect of warrants to placement agent
                  
                  
                  -
                  
                  
                  
                  8,765Weighted
      average shares used in diluted computation
                  
                  
                  1,867,301
                  
                  
                  
                  1,797,125Earnings
      per shareBasic
                  
                  $
                  0.57
                  
                  
                  $
                  0.36Diluted
                  
                  $
                  0.57
                  
                  
                  $
                  0.20
  At March
31, 2009 and 2008, the Company had 154,550 warrants outstanding. For the three
months ended March 31, 2009, these outstanding warrants were excluded from the
diluted earnings per share calculation as they are anti-dilutive as the average
stock price was less than the exercise prices of the warrants. For the
three months ended March 31, 2008, the average stock price was greater than the
exercise prices of 57,050 warrants which resulted in additional weighted average
common stock equivalents of 8,765;97,500outstanding warrants were excluded from the diluted earnings per share
calculation as they are anti-dilutive.
 
 Note
20 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
 Amounts
receivable from and payable to related parties are summarized as
follows:
 
 March
      31,
                    2009
                  
                  
                  December
      31,
                    2008(Unaudited)Short term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1)
      (2)
                  
                  $
                  43,950
                  
                  
                  $
                  220,050Mr.
      Wei Wen – officer and shareholder (2)
                  
                  
                  43,950
                  
                  
                  
                  44,010Ms.
      Aixia Wang – shareholder (2)
                  
                  
                  43,950
                  
                  
                  
                  44,010Total
                  
                  $
                  131,850
                  
                  
                  $
                  308,070Shares to be issued to
      related partyScott
      Cramer – non-executive director (3)
                  
                  $
                  95,204
                  
                  
                  $
                  95,204Amounts due to related
      partiesBennet
      P. Tchaikovsky – CFO (4)
                  
                  
                  13,168
                  
                  
                  
                  13,168Scott
      Cramer – non-executive director and shareholder (4)
                  
                  
                  224,684
                  
                  
                  
                  224,684Shaanxi
      Xingji Electronics Co. - owned by a director's wife (4)
                  
                  
                  45,388
                  
                  
                  
                  4,373Mr.
      Weibing Lu – officer and shareholder (4)
                  
                  
                  42,098
                  
                  
                  
                  -Total
                  
                  $
                  325,338
                  
                  
                  $
                  242,225
  (1) In
2008, Weibing Lu obtained an unsecured personal loan from Huaxia Bank’s Xi’an
Branch with annual interest rate of 7.47% and advanced $176,040 in cash to Xian
Tianxing to facilitate operations. Xian Tianxing guaranteed the loan. The loan
principal and related interest was due on December 30, 2008. On January 4, 2009,
Xian Tianxing paid the full principal amount to the bank, with related interest
of $15,741.
  25
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 (2) On May
29, 2008, Weibing Lu, Wei Wen and Aixia Wang obtained personal loans from Yanta
Credit Union’s East Xiaozai Road Branch and advanced cash to Xian Tianxing in
the total amount of $132,030 to facilitate operations. The loans are due on May
29, 2009 with 8.436% interest per annum and are guaranteed by Xian Tianxing. As
of March 31, 2009, Xian Tianxing had paid interest of $2,882 for the loans
of the three shareholders.
 
 (3) As
of March 31, 2009 and December 31, 2008, the Company had a $95,204 balance
(representing 11,000 common shares) under agreement to issue shares
to Scott Cramer, as compensation for being a representative of the Company
in the United States for the period from May 2008 to December
2008.
 
 (4)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of March 31, 2009, and December 31,
2008 were short-term cash transfers for business operations, non-interest
bearing, unsecured, and payable upon demand. As of March 31, 2009, the Company
also had $42,098 payable to Mr. Lu for advance from Mr. Lu for short
term financing purpose. As of March 31, 2009 and December 31, 2008, the
Company also had payable to Scott Cramer and Bennet P. Tchaikovsky for the
expenses paid by them on behalf of the Company.
 
 Note
21 - 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 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 annual rent of $13,563 (or
RMB 94,600), which is subject to a 10% increase every four subsequent
years.
 
 The
Company leases office space from Weibing Lu, the Company’s chief executive
officer, for a period of five years from January 1, 2007 to December 31, 2011,
with annual rent of approximately $24,000 (or RMB 165,600). The Company also
entered into a tenancy agreement with Weibing Lu for the lease of Shanghai
Siqiang’s office for a period of ten years from August 1, 2007 to August 1,
2017, with annual rent of approximately $21,000 (or RMB 144,000).
 
 Minimum
future lease payments under these leases for the next five years and thereafter
are as follows:
 
 Period
                  
                  AmountNine
      months ending December 31, 2009
                  
                  $
                  44,415Year
      ending December 31, 2010
                  
                  
                  59,219Year
      ending December 31, 2011
                  
                  
                  59,219Year
      ending December 31, 2012
                  
                  
                  35,304Year
      ending December 31, 2013
                  
                  
                  36,343Year
      ending December 31, 2014 and thereafter
                  
                  
                  87,034$
                  321,534
  26
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Rental
expense for the three months ended March 31, 2009 and 2008 amounted to $14,804
(unaudited) and $7,869 (unaudited), respectively.
 
 (b) Legal
proceedings
  From time
to time, the Companyis involved in legal
matters arising in the ordinary course of business.  Management
currentlyis not
aware of any legal matters or pending litigation, which would have a significant
effect on the Company’s consolidated financial statements as of March 31,
2009.
 
 In May
2007, Andrew Chien filed suit against the Company, 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 was never served) as a defendant. The remaining defendants contended
that the amended complaint failed to correct the deficiencies of the original
complaint, and filed a renewed motion to dismiss for failure to state a claim,
also preserving their challenge to personal jurisdiction. The defendants denied
all claims and moved the Court to dismiss the amended complaint in its entirety
in their motion to dismiss. The motion to dismiss also requested that the Court
award sanctions against Mr. Chien under Federal Rule of Civil Procedure Rule 11
("Rule 11") and the Private Securities Litigation Reform Act ("PSLRA"). On July
17, 2008, in a decision that is now published, the Court granted defendants'
motion and subsequently dismissed the lawsuit, entering judgment on behalf of
the defendants.  Mr. Chien filed a Notice of Appeal of the Court's
dismissal of his lawsuit, opposed by the defendants, which remains
pending.  Defendants were invited by Judge Kravitz to bring a
post-judgment motion for sanctions pursuant to Rule 11 and the PSLRA, which they
did.  On February 5, 2009, Judge Kravitz issued a ruling on
defendants' Motion for Sanctions.  He found the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Rule 11, and imposed significant monetary sanctions on both Mr.
Chien and his former attorney.  As part of the basis for imposing
sanctions on Mr. Chien personally, the Court specifically found that Mr. Chien
had knowledge of facts directly contradicting the allegations of his complaint,
as evident in internet postings he made on online message boards.  Mr.
Chien subsequently filed motions seeking to "re-open" this case, and to recuse
Judge Kravitz, but both motions were denied.
 
 Subsequently,
Mr. Chien, proceeding pro se, filed another lawsuit against the Company, Scott
Cramer, Steve Lowe, David Wassung and Weibing Lu in Connecticut Superior Court,
alleging causes of action similar to those alleged in his federal complaint
described above as well as state law causes of action. The Company contends that
the new complaint is just as frivolous as Mr. Chien's earlier federal action,
which the new complaint substantially duplicates.  The earlier federal
action, described above, was found to be totally frivolous and dismissed in its
entirety, with substantial monetary sanctions awarded by the judge against both
Mr. Chien and his former attorney. A Notice of Removal to the U.S. District
Court, District of Connecticut was filed in the state case on January 27, 2009,
and the case has been assigned to Judge Kravitz, the same federal judge in the
related federal case already dismissed, which is described below.  The
Company has filed a motion to dismiss this new action which remains
pending.  In the motion to dismiss, Defendants indicate their
intention to again seek sanctions against Mr. Chien under Rule 11and the PSLRA
in the event the motion is granted.
  27
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 Other
than the above described legal proceedings, the Company is not aware of any
other legal matters 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 the Company or has a material adverse interest to the Company. No
provision has been made in the consolidated financial statements for the above
contingencies.
  (c)Ownership of leasehold
property
 
 In 2005,
a shareholder contributed a leasehold office building as additional capital of
Xian Tianxing. However, the title of the leasehold property has not passed to
the Company. The Company does not believe there are any 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
property, there is a risk that the building will need to be vacated due to
unofficial ownership. Management believes that this possibility is remote, and
as such, no provision has been made in the consolidated financial statements for
this potential occurrence.
 
 (d) R&D Project
 
 During
the first quarter of 2008, Xian Tianxing contracted with
Northwestern Agricultural Technology University to jointly work
on an R&D project concerning the application of nano-technology in the
prevention of major milk cow disease. The total projected budget for this
project is approximately $574,000 (RMB 4 million) which is to be paid
according to the completed stages of the project. The Company expects this
project to be completed in one year. As of March 31, 2009, the Company incurred
$117,352 (RMB 800,986) of expenses relating to this project. The
project reached trial stage in March 2009 and the Company expects
to obtain veterinary permit for the new product from government on
2010.
 
 Note
22 - SUBSEQUENT EVENTS
 
 In April
2009, all deposits made by the Company for potential acquisitions in the amount
of $2,710,250 (RMB 18,500,000) were returned to the Company.
 
 On May
12, 2009, the Company effectuated a 10-for-1 stock split of its issued and
outstanding shares of common stock and a proportional reduction of its
authorized shares of common stock.
 28
  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, 2009 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 is a holding company that, through its variable interest
entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”),
researches, develops, manufactures and distributes veterinary health care and
medical care products in the People’s Republic of China (“PRC”).
 
 All of
the Company’s operations are carried out by Xian Tianxing, a PRC company, which
the Company controls through contractual arrangements originally between Xian
Tianxing and Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar
Cayman”), a Cayman Island company that became the Company’s wholly-owned
subsidiary subsequent to a share exchange transaction on November 7,
2005.  On March 10, 2008, all of the rights and obligations of Skystar
Cayman under the contractual arrangements were transferred to Sida Biotechnology
(Xian) Co., Ltd. (“Sida”), a PRC company and wholly-owned subsidiary of
Fortunate Time International Limited, a Hong Kong company and wholly-owned
subsidiary of Skystar Cayman. Xian Tianxing also has a wholly-owned subsidiary,
Shanghai Siqiang Biotechnological Co., Ltd., a PRC company.
 
 Such
contractual arrangements are necessary to comply with Chinese law limiting
foreign ownership of certain companies. Through these contractual arrangements,
we 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.
  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
      140 products;·
            Our
      feed additives line currently includes over 10 products;
    and·
            Our
      micro-organism products line currently includes over 10
      products.




All of
our revenue is derived from the sale of veterinary health care and medical
care products in China. We sell our products through a distribution channel
covering 29 provinces in China. As of March 31, 2009, we had over 1,128
distributors and 403 direct customers in 29 provinces in China.





Reverse
Stock Split





On May
12, 2009, we effected a 10-for-1 stock split of our issued and outstanding
shares of common stock as well as a corresponding reduction in the number of
shares of our authorized common stock on an identical 10-for-1 basis. The
reverse stock split was approved by our board of directors on April 27, 2009,
and effected by filing a Certificate of Change with the Nevada Secretary of
State pursuant to Nevada Revised Statutes Section 78.207.




29





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 may, by
definition, 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 collectability is reasonably assured. Sales are recorded 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
      delivery: 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
      No.133, “Accounting for Derivatives and Hedging Activities,” EITF 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios,” and EITF 00-27,
      “Application of Issue No. 98-5 to Certain Convertible Instruments,” for
      valuation and accounting treatment of our outstanding convertible
      debentures and warrants.




·
            Liquidated
      damages: We have adopted SFAS No. 5, “Accounting for Contingencies” and
      EITF 00-19-2, “Accounting for Derivative Financial Instruments Indexed to,
      and Potentially Settled in, a Company’s own Stock,” in connection with the
      liquidated damages we accrued pursuant to the terms of our Registration
      Rights Agreement with certain investors dated February 27,
      2007.





·
            Reclassification
      of Warrants to a Liability: We have adopted EITF 07-5, "Determining
      Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
      Stock”, in connection with the warrants that were issued to investors and
      our placement agent in February
2007.





Recent
Accounting Pronouncements





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" (“SFAS 161”). SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008, with early adoption
encouraged and its adoption did not have a material impact on the Company’s
consolidated results of operations or consolidated financial
position.





In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3 “Determination of the
useful life of Intangible Assets,” which amends the factors a company should
consider when developing renewal assumptions used to determine the useful life
of an intangible asset under SFAS 142. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. SFAS 142 requires companies to
consider whether renewal can be completed without substantial cost or material
modification of the existing terms and conditions associated with the asset. FSP
142-3 replaces the previous useful life criteria with a new requirement—that an
entity consider its own historical experience in renewing similar arrangements.
If historical experience does not exist, then the Company would consider market
participant assumptions regarding renewal including 1) highest and best use of
the asset by a market participant, and 2) adjustments for other entity-specific
factors included in SFAS 142, and its adoption did not have a material impact on
the Company’s consolidated results of operations or consolidated financial
position.




30





On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)."  FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP
APB14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years, and its
adoption did not have a material impact on the Company’s consolidated results of
operations or consolidated financial position.





On June
16, 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards
that contain rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal years beginning
after December 15, 2008 and its adoption did not have a material impact on the
Company’s consolidated results of operations or consolidated financial
position.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.”  EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted. Paragraph 11(a)
of SFAS No. 133,  “Accounting for Derivatives and Hedging
Activities,”  specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own stock
and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all options and warrants exercisable at strike
prices denominated in any currency other than the functional currency of the
operating entity in the PRC. The Company adopted EITF 07-5 during the three
months ended March 31, 2009 which resulted in an initial cumulative charge to
Additional Paid In Capital of $1,108,508 and a gain of $38,328 recognized during
the three months ended March 31, 2009 as a change in the fair value of
warrants.





In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5,  “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,”  that result from EITF 00-27 “ Application of
Issue No. 98-5 to Certain Convertible Instruments,”  and SFAS 150,
“Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.”  EITF 08-4 is effective for financial
statements issued for fiscal years ending after December 15, 2008, and its
adoption did not have a material impact on the Company’s consolidated results of
operations or consolidated financial position.





In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable
Interest Entities.” The changes proposed include a removal of the scope
exemption from FIN 46R for QSPEs, a revision of the current risks and
rewards-based FIN 46R consolidation model to a qualitative model based on
control and a requirement that consolidation of VIEs be re-evaluated on an
ongoing basis. Although the revised standards have not yet been finalized, these
changes may have a significant impact on the Company’s consolidated financial
statements as the Company may be required to deconsolidate certain assets and
liabilities due to the ongoing evaluation of its primary beneficiary status. In
addition, the Company may also be required to consolidate other VIEs that are
not currently consolidated based an analysis under the current FIN 46R
consolidation model. The proposed revisions would be effective for fiscal years
that begin after November 15, 2009.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s consolidated results of operations or
consolidated financial position.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the
Company’s consolidated financial statements.




31





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS
124-2). Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (FSP FAS 107-1 and APB 28-1) or FSP FAS 115-2 and FAS 124-2, it
must also elect to early adopt this FSP. Management is currently evaluating this
new FSP but do not believe that it will have a significant impact on the
determination or reporting of the financial results.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP.  Management is
currently evaluating this new FSP but do not believe that it will have a
significant impact on the determination or reporting of the financial
results.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption.
Management is currently evaluating the disclosure requirements of this new
FSP.





Results
of Operations





The
following table summarizes our results of operations for the three months
ended March 31, 2009 and 2008.





Three
      Months Ended March 31,2009
            
            
            2008Amount
            
            
            Percentage
      of
              total
      revenue
            
            
            Amount
            
            
            Percentage
      of
              total
      revenueRevenues
            
            $
            3,823,566
            
            
            
            100.00
            %
            
            $
            2,686,354
            
            
            
            100.00
            %Gross
      Profit
            
            $
            1,877,208
            
            
            
            49.10
            %
            
            $
            1,388,935
            
            
            
            51.70
            %Operating
      Expenses
            
            $
            639,442
            
            
            
            16.72
            %
            
            $
            490,878
            
            
            
            18.27
            %Income
      from Operations
            
            $
            1,237,766
            
            
            
            32.37
            %
            
            $
            898,057
            
            
            
            33.43
            %Other
      Expenses (Income)
            
            $
            (38,398)
            
            
            
            (1.00
            )%
            
            $
            128,499
            
            
            
            4.78
            %Income
      Tax Expenses
            
            $
            211,520
            
            
            
            5.53
            %
            
            $
            153,207
            
            
            
            5.70
            %Net
      Income (Loss)
            
            $
            1,064,644
            
            
            
            27.84
            %
            
            $
            616,351
            
            
            
            22.94
            %





32




Revenues.  All of
our revenues are derived from the sale of veterinary healthcare and medical care
products in the PRC. For the three months ended March 31, 2009, we had revenues
of $3,823,566 as compared to revenues of $2,686,354 for the three months ended
March 31, 2008, an increase of approximately 42.33%.





Revenues — Veterinary
Medications.  Revenues from sales of our veterinary medications
product line increased from $1,669,754 for the three months ended March 31, 2008
to $2,602,496 for the three months ended March 31, 2009 for an increase of
$932,742 or 55.86%.  The increase in veterinary medication sales was
primarily attributable to the expanded production capacity of our veterinary
medicine plant that was completed in 2007, additional product offerings, and
increased use by our customers of products for the treatment of livestock and
poultry diseases during the three months ended March 31, 2009.





Revenues — Micro-Organism.  Revenues
from sales of our micro-organism product line increased from $789,655 for
the three months ended March 31, 2008 to $893,293 during the three months
ended March 31, 2009 for an increase of $103,638 or 13.12%. The increase
of $103,638 was a result of increased customer demand for our probiotics
micro-organism products and enhanced sales efforts during the three months ended
March 31, 2009.





Revenues — Feed
Additives.  Revenues from sales of our feed additives product
line increased from $93,554 for the three months ended March 31, 2008 to
$182,311 for the three months ended March 31, 2009 for an increase of
$88,757 or 94.87%. The increase of $88,757 was a result of increased
customer demand for our multi-enzyme feed additive products during the three
months ended March 31, 2009.





Revenues — Vaccines.  Revenues
from sales of our vaccines product line increased from $133,391 for the
three months ended March 31, 2008 to $ 145,466 for the three months ended
March 31, 2009 or an increase of $12,075 or 9.05%. This increase was a result of
an increase in customer demand of our vaccine products during the three months
ended March 31, 2009. We are presently operating at full production capacity for
our vaccine product line and therefore cannot significantly increase sales until
we expand our production capabilities.





Cost
of Revenue





Cost of
revenue.  For the three months ended March 31, 2009, we had
cost of revenues, which consists of raw materials, direct labor, and
manufacturing overhead, of $1,946,358 as compared to cost of sales of $1,297,419
the three months ended March 31, 2008, an increase of approximately 50.02% as a
result of our overall sales increase of 42.33%. Our cost of sales consists of
four product lines: veterinary medications, micro-organism, feed additives, and
vaccines.





Cost of
Revenue — Veterinary Medications.  Cost of sales of
our veterinary medications product line increased from $999,484 for the three
months ended March 31, 2008 to $1,592,809 for the three months ended March
31, 2009, for an increase of $593,325 or approximately 59.36%. This increase was
mainly due to the corresponding increase in veterinary medications
sales.





Cost of
Revenue — Micro-Organism.  Cost of sales of our
micro-organism product line increased from $235,827 for the three months
ended March 31, 2008 to $260,537 for the three months ended March 31, 2009
for an increase of $24,710 or approximately 10.48%. This increase was
mainly due to the corresponding increase in micro-organism
sales.





Cost of Revenue — Feed
Additives.  Cost of sales of our feed additives product
line increased from $46,713 for the three months ended March 31, 2008 to
$77,439 for the three months ended March 31, 2009 for an increase of $30,726 or
65.78%. The increase was primarily due to an increase in feed additive sales
during the three months ended March 31, 2009.





Cost of
Revenue — Vaccines.  Cost of sales of our vaccines
product line increased from $15,395 for the three months ended March 31,
2008 to $15,573 for the three months ended March 31, 2009, for an increase
of $178 or 1.16%. This increase was a result of an increase of vaccine
product sales during the three months ended March 31, 2009. Our vaccine facility
is presently running at full capacity.




33





Operating
Expenses





The
      three months ended March 31, 2009,2009
            
            
            2008Amount
            
            
            Percentage
      of
              total
      revenue
            
            
            Amount
            
            
            Percentage
      of
              total
      revenueGross
      Profit
            
            $
            1,877,208
            
            
            
            49.10
            %
            
            $
            1,388,935
            
            
            
            51.70
            %Operating
      Expenses
            
            $
            639,442
            
            
            
            16.72
            %
            
            $
            490,878
            
            
            
            18.27
            %Selling
      Expenses
            
            $
            207,395
            
            
            
            5.42
            %
            
            $
            189,844
            
            
            
            7.07
            %General
      and Administrative Expenses
            
            $
            314,695
            
            
            
            8.23
            %
            
            $
            253,735
            
            
            
            9.45
            %Research
      and Development Costs
            
            $
            117,352
            
            
            
            3.07
            %
            
            $
            47,299
            
            
            
            1.76
            %Income
      from Operations
            
            $
            1,237,766
            
            
            
            32.37
            %
            
            $
            898,057
            
            
            
            33.43
            %





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 $207,395 for
the three months ended March 31, 2009, an increase of approximately 9.24%. This
increase is a result of our increased sales during the three months ended March
31, 2009.





General and Administrative
Expenses.  General and administrative expenses totaled $314,695
for the three months ended March 31, 2009, as compared to $253,735 for the three
months ended March 31, 2008, an increase of approximately 24.03%. General and
administrative expenses are primarily legal, accounting and other professional
fees that we incurred as a U.S. public company. Our general and administrative
expenses were higher during the three months ended March 31, 2009 as a result of
the increased costs of being a U.S. publicly traded company. 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 $117,352 for
the three months ended March 31, 2009, as compared to $47,299 for the three
months ended March 31, 2008, an increase of approximately 148.11%. This increase
is primarily attributable to increased research and development activities from
developing veterinary medicines and vaccines. We anticipate that our research
and development costs will continue to increase as we continue improve existing
products and develop new products.





Liquidity





For the
three months ended March 31, 2009, the cash provided by operating activities was
$133,395 compared to cash used of $1,035,518 for the same period in 2008. This
increase is attributable to the increase in net income of $448,293 from $616,351
for the three months ended March 31, 2008 to $1,064,644 for the three months
ended March 31, 2009, as a result of increased sales of our veterinary medicines
and micro-organism products. For the three months ended March 31, 2009, net
cash provided by operating activities other than net income was mainly due to an
increase of $900,427 in taxes payable and a decrease of $2,551,310
in deposits and prepaid expenses. However, this increase was offset by
an increase of $2,888,742 in inventories, an increase of $994,017 in accounts
receivable, and a decrease in accrued expenses of $382,703, which collectively
decreased cash provided by operating activities by $813,725 for the three months
ended March 31, 2009 as compared to the prior year.  For the three
months ended March 31, 2008, the decrease in cash used in operating activities
was a result of (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 used
$714,270 in investing activities for the three months ended March 31, 2009, as
compared to generating $473,967 in investing activities for the three months
ended March 31, 2008. The net cash used in investing activities for the three
months ended March 31, 2009 was a result of $242,507 in payments made to
construction in progress, $366,275 of non-interest bearing loans made to third
parties, and property, plant and equipment purchase of $73,255, as compared to
$521,796 collected of a non-interest bearing loan to a third party offset with
$47,829 used in property, plant and equipment purchase during the three months
ended March 31, 2008.





Cash
provided by financing activities was $126,877 for the three months ended March
31, 2009 as compared to $160,533 generated for the three months ended March 31,
2008. For the three months ended March 31, 2009, we had proceeds from a short
term loan of $219,765 that was offset by repayments of short term loans from
shareholders of $175,812. For the three months ended March 31, 2008 we generated
$561,346 from shareholder loans and short term loans which was offset by the
repayment of advances from shareholders and directors of $357,829. These loans
are further discussed in detail in Note 13 and Note 20, respectively, of the
footnotes accompanying the consolidated financial statements.




34





As of
March 31, 2009, we had cash of $203,675. Our total current assets were
$13,076,457, and our total current liabilities were $4,600,675, which resulted
in a net working capital of $8,475,782. 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, 2009 we borrowed $219,765 on a short term basis
and repaid the bank $175,812. During April 2009, we collected $2,710,250 as a
result of the full return of deposits that we previously made for potential
acquisitions. However, if we are to acquire another business or further expand
our operations, we will need additional capital.





Plan of Operations





Over the
next 12 months, we plan to continue to market and sell our current products and
to develop new products.





In 2003,
we received approval from the State Council of China to expand our production
facilities and construct a new GMP standard plant. We have invested $10,501,000
(RMB 82,000,000) into this project, which is our Huxian plant, including
approximately $9,700,000 for the facilities and $800,000 for working capital.
The construction work commenced in 2005, and we completed the veterinary
medicine facility and the building that houses quality control, research and
development and administration during 2007, both of which are fully operational.
The remaining facilities of the Huxian plant are expected to be completed by the
latter part of 2009, depending upon the Company's ability to raise additional
capital. We anticipate that the new plant will generate sufficient cash
flows; thus, management has concluded that there is no impairment loss on the
construction in progress.





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





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations




Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      than
              1
      year
            
            
            1
      – 3 years
            
            3
      – 5 years
            
            
            More
      than
              5
      yearsR&D
      Project Obligation
            
            $
            253,017
            
            
            $
            253,017
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      Lease Obligations
            
            
            321,534
            
            
            
            44,415
            
            
            
            118,438
            
            
            
            71,647
            
            
            
            87,034Total
            
            $
            574,551
            
            
            $
            297,432
            
            
            $
            118,438
            
            
            $
            71,647
            
            
            $
            87,034





During
the first quarter of 2008, Xian Tianxing entered into an agreement with
Northwestern Agricultural Technology University to jointly work on a research
and development project regarding the application of nano-technology in the
prevention of a major milk cow disease. The total projected budget for this
project is approximately $574,000 (RMB 4 million), which we would pay in
installments as the stages of the project are completed. We expect this project
to be completed in one year. The research and development expense for this
project during 2008 was approximately $43,245 (RMB 0.3 million), and as of March
31, 2009, we also made $73,255 (RMB 500,000) of prepayment for purchase of
specific raw materials for the project. We anticipate that the remaining
$179,762 (RMB 1,226,961) will be spent during 2009.





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.




35





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 Quarterly Report were as follows:





March
      31, 2009
            
            December
      31, 2008
            
            March
      31, 2008Assets
      and liabilities
            
            
            USD0.1465:RMB1
            
            
            USD0.1467:RMB1
            
            
            USD0.1428:RMB1Statements
      of operations and cash flows for the period/year ended
            
            
            USD0.14651:RMB1
            
            
            USD0.14415:RMB1
            
            
            USD0.13977: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, 2009, 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, 2008, we reported
certain material weaknesses involving control activities,
specifically:





1.
            Accounting and Finance
      Personnel Weaknesses-
      The current accounting staffs are relatively inexperienced, and require
      substantial training so as to meet with the higher demands necessary to
      fulfill the requirements of U.S. GAAP-based reporting and SEC rules and
      regulations.





2.
            Lack of Internal Audit
      Function - The Company lacks qualified resources to perform the
      internal audit functions properly. The Company lacked an internal
      audit department, which rendered the Company ineffective in preventing and
      detecting control lapses and errors in the accounting of certain key areas
      like revenue recognition, purchase approvals, inter-company transactions,
      cash receipt and cash disbursement authorizations, inventory safeguard and
      proper accumulation for cost of products, in accordance with the
      appropriate costing method used by the
Company.




The
Company’s management has identified the steps necessary to address the material
weaknesses described above, as follows:





1.
            Hiring
      additional accounting and operations personnel and engaging outside
      contractors with technical accounting expertise, as needed, and
      reorganizing the accounting and finance department to ensure that
      accounting personnel with adequate experience, skills and knowledge
      relating to complex, non-routine transactions are directly involved in the
      review and accounting evaluation of our complex, non-routine
      transactions





2.
            Involving
      both internal accounting and operations personnel and outside contractors
      with technical accounting expertise, as needed, early in the evaluation of
      a complex, non-routine transaction to obtain additional guidance as to the
      application of generally accepted accounting principles to such a proposed
      transaction;




36




3.
            Documenting
      to standards established by senior accounting personnel and the principal
      accounting officer the review, analysis and related conclusions with
      respect to complex, non-routine
transactions;





4.
            Requiring
      senior accounting personnel and the principal accounting officer to review
      complex, non-routine transactions to evaluate and approve the accounting
      treatment for such transactions;
and




5.
            Evaluating
      the internal audit function in relation to the Company’s financial
      resources and requirements.





We expect
that we will satisfactorily address the control deficiencies and material
weaknesses relating to these matters by the end of our fiscal year ending
December 31, 2009, although there can be no assurance that compliance will be
achieved in this time frame.





Management,
including our chief executive officer and our chief financial officer, does not
expect that our disclosure controls and internal controls will prevent errors
and omissions, 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 errors and omissions, 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.





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 report
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 U.S. 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, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.





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.





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 was never served)
as a defendant. The remaining defendants contended that the amended complaint
failed to correct the deficiencies of the original complaint, and filed a
renewed motion to dismiss for failure to state a claim, also preserving their
challenge to personal jurisdiction. The defendants denied all claims and moved
the Court to dismiss the amended complaint in its entirety in their motion to
dismiss. The motion to dismiss also requested that the Court award sanctions
against Mr. Chien under Federal Rule of Civil Procedure Rule 11 ("Rule 11") and
the Private Securities Litigation Reform Act ("PSLRA"). On July 17, 2008, in a
decision that is now published, the Court granted defendants' motion and
subsequently dismissed the lawsuit, entering judgment on behalf of the
defendants.  Mr. Chien filed a Notice of Appeal of the Court's
dismissal of his lawsuit, opposed by the defendants, which remains
pending.  Defendants were invited by Judge Kravitz to bring a
post-judgment motion for sanctions pursuant to Rule 11 and the PSLRA, which they
did.  On February 5, 2009, Judge Kravitz issued a ruling on
defendants' Motion for Sanctions.  He found the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Rule 11, and imposed significant monetary sanctions on both Mr.
Chien and his former attorney.  As part of the basis for imposing
sanctions on Mr. Chien personally, the Court specifically found that Mr. Chien
had knowledge of facts directly contradicting the allegations of his complaint,
as evident in internet postings he made on online message boards.  Mr.
Chien subsequently filed motions seeking to "re-open" this case, and to recuse
Judge Kravitz, but both motions were denied.




37





Andrew Chien v. Skystar
Bio-Pharmaceutical Company, et. al. (formerly Superior Court, State of
Connecticut, Case No. NNH-CV-09-5025938-S, now U.S. District Court, District of
Connecticut, Case No. 3:09-CV-00149 (MRK)). Andrew Chien, proceeding pro se,
filed another lawsuit against the Company, Scott Cramer, Steve Lowe, David
Wassung and Weibing Lu in Connecticut Superior Court, alleging causes of action
similar to those alleged in his federal complaint described above as well as
state law causes of action. The Company contends that the new complaint is just
as frivolous as Mr. Chien's earlier federal action, which the new complaint
substantially duplicates.  The earlier federal action, described
above, was found to be totally frivolous and dismissed in its entirety, with
substantial monetary sanctions awarded by the judge against both Mr. Chien and
his former attorney. A Notice of Removal to the U.S. District Court, District of
Connecticut was filed in the state case on January 27, 2009, and the case has
been assigned to Judge Kravitz, the same federal judge in the related federal
case already dismissed, which is described below.  The Company has
filed a motion to dismiss this new action which remains pending.  In
the motion to dismiss, Defendants indicate their intention to again seek
sanctions against Mr. Chien under Rule 11and the PSLRA in the event the motion
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
relatively 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;·
            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;




38


·
            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.




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.




39




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.




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.




40




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.




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.




41




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.





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.





Downturn
in the global economy may slow domestic growth in China, which in turn may
affect our business.





Due to
the global downturn in the financial markets, China may not be able to maintain
its recent growth rates mainly due to the lack of demand of exports to countries
that are in recessions. Although we do not presently export any of our products,
our earnings may become unstable if China’s domestic growth slows significantly
and the demand for meats and poultry declines.




42





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.





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.
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.




43




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.





Because
we rely on the consulting services agreement with Xian Tianxing for our revenue,
the termination of this agreement will severely and detrimentally affect our
continuing business viability under our current corporate
structure.





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Sida and Xian Tianxing. As a
result, we currently rely entirely for our revenues on dividends payments from
Sida after it receives payments from Xian Tianxing pursuant to the consulting
services agreement which forms a part of the contractual arrangements between
Sida and Xian Tianxing. The consulting services agreement may be terminated by
written notice of Sida or Xian Tianxing in the event that: (a) one party causes
a material breach of the agreement, provided that if the breach does not relate
to a financial obligation of the breaching party, that party may attempt to
remedy the breach within 14 days following the receipt of the written notice;
(b) one party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or
becomes unable to pay its debts as they become due; (c) Sida terminates its
operations; (d) Xian Tianxing’s business license or any other license or
approval for its business operations is terminated, cancelled or revoked; or (e)
circumstances arise which would materially and adversely affect the performance
or the objectives of the agreement. Additionally, Sida may terminate the
consulting services agreement without cause.




Because
neither we nor our direct and indirect subsidiaries own equity interests of Xian
Tianxing, the termination of the consulting services agreement would sever our
ability to continue receiving payments from Xian Tianxing under our current
holding company structure. While we are currently not aware of any event or
reason that may cause the consulting services agreement to terminate, we cannot
assure you that such an event or reason will not occur in the future. In the
event that the consulting services agreement is terminated, this may have a
severe and detrimental effect on our continuing business viability under our
current corporate structure, which in turn may affect the value of your
investment.





Members
of Xian Tianxing’s management have potential conflicts of interest with us,
which may adversely affect our business and your ability for
recourse.





Weibing
Lu, our Chief Executive Officer, is also the Chief Financial Officer and
Chairman of the Board of Directors of Xian Tianxing. Mr. Wei Wen, who is Xian
Tianxing’s Vice-General Manager and Director, is a member of Skystar’s board of
directors. Conflicts of interests between their respective duties to our company
and Xian Tianxing may arise. As our directors and executive officer (in the case
of Mr. Lu), they have 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, every one of them will act completely in our interests or that
conflicts of interests will be resolved in our favor. For example, they may
determine that it is in Xian Tianxing’s interests to sever the contractual
arrangements with Sida, irrespective of the effect such action may have on us.
In addition, any one of them could violate his or her legal duties by diverting
business opportunities from us to others, thereby affecting the amount of
payment Xian Tianxing is obligated to remit to us under the consulting services
agreement.





Our board
of directors is comprised of a majority of independent directors (including two
based in the United States). These independent directors may be in a position to
deter and counteract the actions of our officers or non-independent directors
that are against our interests, as the independent directors do not have any
position with, or interests in, our affiliate entities, and should therefore not
have any conflicts of interests such as those potentially of our officers and
directors who are management members of Xian Tianxing. Additionally, the
independent directors have fiduciary duties to act in our best interests, and
failure on their part to do so may subject them to personal liabilities for
breach of such duties. We cannot, however, give any assurance as to how the
independent directors will act. Further, if we or the independent directors
cannot resolve any conflicts of interest between us and those of our officers
and directors who are management members of Xian Tianxing, we would have to rely
on legal proceedings, which could result in the disruption of our
business.




44





In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Xian
Tianxing or our officers or directors who are members of its management, the
majority of whom reside within China. Even if you are successful in bringing an
action, the laws of China may render you unable to enforce a judgment against
the assets of Xian Tianxing and its management, all of which are located in
China.





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.





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 Xi’an, Xian Tianxing 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 33%, and we would be unable to obtain business tax
refunds for our provision of technology consulting services. Loss of these
preferential tax treatments could have a material and adverse effect on our
financial condition and results of operations.




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.




45




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.





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.




46





Risks
Related to an Investment in Our Securities





The
exercise of warrants could result in 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 our warrants may be less than the current market price for our
common shares. In the event of the 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 conversion and exercise of the warrants would increase the outstanding
common shares as of May 18, 2009 by approximately 8.3% to approximately
2,023,847 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.




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.





If the
trading price of our common shares falls 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.




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.




47





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.





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 management members and
affiliated entities.




As of May
18, 2009, our management members and their affiliated entities own approximately
30.7% of our outstanding common shares, representing approximately 30.7% 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 our management members 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 our management members 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.




48




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.





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





Prior to
our acquisition of Skystar Cayman in November 2005, we were engaged in
businesses unrelated to our 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 we are not
completely indemnified may have a material adverse effect on us.




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.




49





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




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





Shares
eligible for future sale may adversely affect the market.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 18.7 million shares of our common stock outstanding as of March
25, 2009, approximately 10.4 million shares are, or will be, freely tradable
without restriction, as of March 25, 2009. Any substantial sale of our common
stock pursuant to Rule 144 may have a material adverse effect on the market
price of our common stock.





The
invalid issuance of our series “A” preferred stock may subject us to certain
claim by the holder of series “A” preferred shares as well as indemnification
obligations to the directors who authorized the issuance.





In 2001,
2,000,000 shares of our series “A” preferred stock were issued to a corporation
wholly-owned by our then chief executive officer and director, Gregory Evans,
for services purportedly rendered by him. The resolutions of the board of
directors approving such issuance stated that the series “A” preferred shares
carries a “super voting power of five”. Neither Mr. Evans nor any other member
of management at such time filed a certificate of designation with the Nevada
Secretary of State. Because no certificate of designation was filed with the
Nevada Secretary of State prior to the issuance of 2,000,000 shares of our
series “A” preferred stock, these shares do not have terms and are deemed
invalidly issued under Nevada corporate law. Moreover, such invalidity is not
correctable under applicable Nevada law by a subsequent filing of a certificate
of designation should we choose to do so now, which we do not have any intention
of doing. As such, we do not believe that the holder of these series “A”
preferred shares can successfully assert a right to obtain ownership interest in
our Company, substantial or otherwise.





Nevertheless,
the holder of these shares may potentially assert claims against us and the
directors who authorized the issuance. One such claim may be for breach of oral
or written contract. Since the Nevada statute of limitations is six years for
breach of a written contract and four years for breach of an oral contract,
however, any such claim may be time-barred. Even assuming that such claim is not
time-barred, we may have the affirmative defense of laches in that the delay of
prosecution of such claim unfairly and materially prejudices our interests,
especially considering the changes in control of our Company since the issuance
of the series “A” preferred shares. Additionally, as Mr. Evans was also a
principal of the Company at the time of issuance, a claim for breach of contract
may be defective for inadequate or lack of consideration. Another claim may be
for fraud based on an assertion that Mr. Evans was induced to provide services
on any purported representation of the then board of directors in exchange for
the series “A” preferred shares, which has a three-year statute of limitations
in Nevada. Thus, such claim may also be time-barred. Moreover, given Mr. Evan’s
roles with the Company at the time these shares were issued, the element of
reliance on his part may be difficult to justify. While we may have colorable
affirmative defenses against these claims, we cannot assure you that we would
ultimately prevail in any lawsuit. Should Mr. Evans prevail on any claim, we may
be subject to restitution or other forms of monetary damages, which amount is
difficult to determine but may take into consideration the then and current fair
market value of the series “A” preferred shares. Additionally, although the
directors who authorized the issuance of the series “A” preferred shares are no
longer members of our board of directors, we may nevertheless be obligated,
should such claim arises, to indemnify and defend these directors, provided we
have no such obligation if the actions of these directors, in authorizing the
issuance of the series “A” preferred shares, are determined to have arisen out
of their own gross negligence or willful misconduct.




50





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On May
11, 2009, we issued 2,609 shares (taking into account the 10-for-1 stock
split effected on May 12, 2009) of our restricted common stock to Bennet P.
Tchaikovsky as compensation, pursuant to the terms of the agreement under which
we engaged Mr. Tchaikovsky’s services as our chief financial
officer.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITYHOLDERS





None.





ITEM
5. OTHER INFORMATION





None.





ITEM
6. EXHIBITS





EXHIBIT INDEX




Exhibit
      Number
                
                Description2.1
                
                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
                
                Certificate
      of Amendment to Increase Number of Authorized Shares of Common Stock
      (13)3.4
                
                Certificate
      of Change (15)3.5
                
                Amended
      and Restated Bylaws of Skystar Bio-Pharmaceutical Company
    (14)4.1
                
                Certificate
      of Designation of Series B Convertible Preferred Stock
  (4)4.2
                
                Form
      of Class A Convertible Debenture (6)4.3
                
                Form
      of Class B Convertible Debenture (6)4.4
                
                Form
      of Class A Warrant (6)4.5
                
                Form
      of Class B Warrant (6)




51




10.1
            
            Form
      of Securities Purchase Agreement, dated as of February 26, 2007 by and
      among the Company and eight accredited investors (6)10.2
            
            Form
      of Registration Rights Agreement, dated as of February 26, 2007 by and
      among the Company and eight accredited investors (6)10.3
            
            Form
      of Company Principal Lockup Agreement in connection with the Securities
      Purchase Agreement dated as of February 26, 2007 (6)10.4
            
            Form
      of the Amendment, Exchange and Waiver Agreement between the Company and
      certain accredited investors dated November 9, 2007 (7)10.5
            
            Form
      of the Amendment and Waiver Agreement between Skystar Bio-Pharmaceutical
      Company and two institutional and accredited investors dated March 31,
      2008 (10)10.6
            
            Amendment
      to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
      Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
      (8)





10.7
                    
                    Agreement
      to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
      Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
      2008 (8)10.8
                    
                    Amendment
      to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
      (8)10.9
                    
                    Designation
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, Weibing Lu and Sida dated March 10, 2008
  (8)10.10
                    
                    Agreement
      to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10, 2008
      (8)10.11
                    
                    Employment
      Agreement with Weibing Lu dated May 5, 2008 (11)10.12
                    
                    Loanout
      Agreement with Worldwide Officers, Inc. with respect to the services of
      Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008
      (11)10.13
                    
                    Form
      of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
      (14)10.14
                    
                    Form
      of Director Offer Letter with Chengtun Qu and Shouguo Zhao
      (14)31.1
                    
                    Section
      302 Certification by the Corporation’s Chief Executive Officer
      (16)31.2
                    
                    Section
      302 Certification by the Corporation’s Chief Financial Officer
      (16)32.1
                    
                    Section
      906 Certification by the Corporation's Chief Executive Officer
      (16)32.2
                    
                    Section
      906 Certification by the Corporation's Chief Financial Officer
      (16)99.1
                    
                    Legal
      Opinion from Allbright Law Offices regarding the transfer of the
      contractual arrangements from Skystar Cayman to Sida, dated April 29, 2008
      (12)99.2
                    
                    Lease
      Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
      (9)99.3
                    
                    Lease
      Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
      Lu dated June 17, 2007 (12)99.4
                    
                    Summary
      of Research Arrangement between Shanghai Poultry Verminosis Institute and
      Xian Tianxing (12)99.5
                    
                    Cooperation
      Agreement between Shaanxi Microbial Institute and Xian Tianxing
      (12)





52


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





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





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





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





(5)
            Incorporated
      by reference from the Registrant’s 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 filed on
      March 5, 2007.





(7)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      December 11, 2007.




(8)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on March 11,
      2008.





(9)
            Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K on April 2,
      2008.





(10)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on April 23,
      2008.





(11)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on May 5,
      2008.





(12)
            Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 26, 2008.





(13)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on July 14,
      2008.





(14)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on July 15,
      2008.






(15)
                Incorporated by
      reference from the Registrant’s Current Report on Form 8-K on May 18,
      2009.(16)
                Filed
      herewith.




53




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
      19, 2009
              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)
  54