UNITED
STATES


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
      1934For
      the quarterly period ended June 30,
2010





orTransition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 ̈
            For
      the transition period from ______ to
  ______.




Commission
File Number 001-34394











SKYSTAR
BIO-PHARMACEUTICAL COMPANY


(Exact
name of small business issuer as specified in its charter)





Nevada
            33-0901534(State
      or other jurisdiction of
            (I.R.S.
      employerincorporation
      or organization)
            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)





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





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





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




Large
      Accelerated Filer   ̈
              Accelerated
      Filer   ̈Non-accelerated
      filer   ̈
              Smaller
      Reporting Company  þ





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





As of
August 11, 2010, the Registrant had 7,106,705 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
                    
                    4Consolidated
      Balance Sheets as of June 30, 2010 (unaudited) and December 31,
      2009
                    
                    4Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      Three Months and Six Months Ended June 30, 2010 and 2009
      (unaudited)
                    
                    5Consolidated
      Statements of Shareholders’ Equity(unaudited)
                    
                    6Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and
      2009(unaudited)
                    
                    7Notes
      to the Consolidated Financial Statements as of June 30,
      2010(unaudited)
                    
                    8Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    32Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    40Item
      4.
                    Controls
      and Procedures
                    
                    40PART
      II.  OTHER INFORMATION
                    
                    41Item
      1.
                    Legal
      Proceedings
                    
                    41Item
      1A.
                    Risk
      Factors
                    
                    42Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    42Item
      3.
                    Defaults
      Upon Senior Securities
                    
                    42Item
      4.
                    Reserved
                    
                    42Item
      5.
                    Other
      Information
                    
                    42Item
      6.
                    Exhibits
                    
                    42SIGNATURES
                    
                    45


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


PART
I.  FINANCIAL INFORMATION


SKYSTAR BIO-PHARMACEUTICAL COMPANY AND
SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
  June
      30,
                                                            
                                                            
                                                            December
      31,2010
                                                            
                                                            
                                                            2009UnauditedASSETSCURRENT
      ASSETS:Cash
                                                            
                                                            $
                                                            3,482,558
                                                            
                                                            
                                                            $
                                                            11,699,398Accounts
      receivable, net of allowance for doubtful accounts of $617,955 and
      $327,857 as of June 30, 2010 and December 31, 2009,
      respectively
                                                            
                                                            
                                                            7,711,719
                                                            
                                                            
                                                            
                                                            4,383,187Inventories,
      net of allowance of $263,539 and $199,460  as of June 30, 2010
      and December 31, 2009, respectively
                                                            
                                                            
                                                            13,318,742
                                                            
                                                            
                                                            
                                                            4,074,645Deposits
      and prepaid expenses
                                                            
                                                            
                                                            4,348,910
                                                            
                                                            
                                                            
                                                            11,900,314Other
      receivables
                                                            
                                                            
                                                            549,043
                                                            
                                                            
                                                            
                                                            490,712Total
      current assets
                                                            
                                                            
                                                            29,410,972
                                                            
                                                            
                                                            
                                                            32,548,256PLANT
      AND EQUIPMENT, NET
                                                            
                                                            
                                                            11,786,671
                                                            
                                                            
                                                            
                                                            8,829,058CONSTRUCTION-IN-PROGRESS
                                                            
                                                            
                                                            8,777,066
                                                            
                                                            
                                                            
                                                            9,389,120OTHER
      ASSETS:Long-term
      prepayments
                                                            
                                                            
                                                            1,341,031
                                                            
                                                            
                                                            
                                                            1,173,427Long-term
      prepayments for acquistions
                                                            
                                                            
                                                            12,376,146
                                                            
                                                            
                                                            
                                                            6,806,880Intangible
      assets, net
                                                            
                                                            
                                                            1,790,327
                                                            
                                                            
                                                            
                                                            1,860,172Total
      other assets
                                                            
                                                            
                                                            15,507,504
                                                            
                                                            
                                                            
                                                            9,840,479Total
      assets
                                                            
                                                            $
                                                            65,482,213
                                                            
                                                            
                                                            $
                                                            60,606,913LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                            
                                                            $
                                                            553,404
                                                            
                                                            
                                                            $
                                                            297,567Other
      payables and accrued expenses
                                                            
                                                            
                                                            832,816
                                                            
                                                            
                                                            
                                                            917,284Short-term
      loans
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            220,050Short-term
      loans from shareholders
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            110,025Deposits
      from customers
                                                            
                                                            
                                                            1,632,581
                                                            
                                                            
                                                            
                                                            1,275,958Taxes
      payable
                                                            
                                                            
                                                            1,481,748
                                                            
                                                            
                                                            
                                                            722,106Shares
      to be issued to related parties
                                                            
                                                            
                                                            372,739
                                                            
                                                            
                                                            
                                                            327,374Due
      to related parties
                                                            
                                                            
                                                            137,503
                                                            
                                                            
                                                            
                                                            185,024Total
      current liabilities
                                                            
                                                            
                                                            5,010,791
                                                            
                                                            
                                                            
                                                            4,055,388OTHER
      LIABILITIES:Deferred
      government grant
                                                            
                                                            
                                                            1,104,750
                                                            
                                                            
                                                            
                                                            1,100,250Derivative liability
                                                            
                                                            
                                                            966,082
                                                            
                                                            
                                                            
                                                            1,538,686Total
      other liabilities
                                                            
                                                            
                                                            2,070,832
                                                            
                                                            
                                                            
                                                            2,638,936Total
      liabilities
                                                            
                                                            
                                                            7,081,623
                                                            
                                                            
                                                            
                                                            6,694,324COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized,  Nil
      Series "A" shares authorized as of June 30, 2010 and December 31, 2009
      48,000,000 Series "B" shares authorized, Nil Series "B" shares issued and
      outstanding  as of June 30, 2010 and December 31, 2009,
      respectively
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Common
      stock, $0.001 par value, 40,000,000 shares authorized, 7,106,705 and
      6,989,640 shares issued and outstanding as of June 30, 2010 and December
      31, 2009, respectively
                                                            
                                                            
                                                            7,106
                                                            
                                                            
                                                            
                                                            6,989Paid-in
      capital
                                                            
                                                            
                                                            35,353,156
                                                            
                                                            
                                                            
                                                            34,580,096Statutory
      reserves
                                                            
                                                            
                                                            3,879,077
                                                            
                                                            
                                                            
                                                            3,879,077Retained
      earnings
                                                            
                                                            
                                                            16,049,548
                                                            
                                                            
                                                            
                                                            12,574,906Accumulated
      other comprehensive income
                                                            
                                                            
                                                            3,111,703
                                                            
                                                            
                                                            
                                                            2,871,521Total
      shareholders' equity
                                                            
                                                            
                                                            58,400,590
                                                            
                                                            
                                                            
                                                            53,912,589Total
      liabilities and shareholders' equity
                                                            
                                                            $
                                                            65,482,213
                                                            
                                                            
                                                            $
                                                            60,606,913
  The
accompanying notes are an integral part of these consolidated financial
statements.
 4
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
  For Three Months Ended June 30,
                        
                        
                        For Six Months EndedJune 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009REVENUE,
      NET
                        
                        $
                        8,264,541
                        
                        
                        $
                        6,243,438
                        
                        
                        $
                        13,133,784
                        
                        
                        $
                        10,067,004COST
      OF REVENUE
                        
                        
                        3,905,063
                        
                        
                        
                        2,958,837
                        
                        
                        
                        6,196,282
                        
                        
                        
                        4,905,195GROSS
      PROFIT
                        
                        
                        4,359,478
                        
                        
                        
                        3,284,601
                        
                        
                        
                        6,937,502
                        
                        
                        
                        5,161,809OPERATING
      EXPENSES:Research
      and development
                        
                        
                        192,088
                        
                        
                        
                        366,695
                        
                        
                        
                        236,083
                        
                        
                        
                        484,047Selling
      expenses
                        
                        
                        431,810
                        
                        
                        
                        585,207
                        
                        
                        
                        602,944
                        
                        
                        
                        792,602General
      and administrative
                        
                        
                        998,034
                        
                        
                        
                        625,359
                        
                        
                        
                        1,617,584
                        
                        
                        
                        940,054Total
      operating expenses
                        
                        
                        1,621,932
                        
                        
                        
                        1,577,261
                        
                        
                        
                        2,456,611
                        
                        
                        
                        2,216,703INCOME
      FROM OPERATIONS
                        
                        
                        2,737,546
                        
                        
                        
                        1,707,340
                        
                        
                        
                        4,480,891
                        
                        
                        
                        2,945,106OTHER
      INCOME (EXPENSE):Other
      income (expense), net
                        
                        
                        36,257
                        
                        
                        
                        (310
                        )
                        
                        
                        36,674
                        
                        
                        
                        (542
                        )Interest
      income (expense), net
                        
                        
                        (12,976
                        )
                        
                        
                        (788
                        )
                        
                        
                        (17,792
                        )
                        
                        
                        (486
                        )Change
      in fair value of derivative liability
                        
                        
                        158,054
                        
                        
                        
                        (1,480,484
                        )
                        
                        
                        (159,326
                        )
                        
                        
                        (1,442,156
                        )Total
      other income (expense), net
                        
                        
                        181,335
                        
                        
                        
                        (1,481,582
                        )
                        
                        
                        (140,444
                        )
                        
                        
                        (1,443,184
                        )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                        
                        
                        2,918,881
                        
                        
                        
                        225,758
                        
                        
                        
                        4,340,447
                        
                        
                        
                        1,501,922PROVISION
      FOR INCOME TAXES
                        
                        
                        540,486
                        
                        
                        
                        342,555
                        
                        
                        
                        865,805
                        
                        
                        
                        554,075NET
      INCOME (LOSS)
                        
                        
                        2,378,395
                        
                        
                        
                        (116,797
                        )
                        
                        
                        3,474,642
                        
                        
                        
                        947,847OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                        
                        
                        280,998
                        
                        
                        
                        (16,233
                        )
                        
                        
                        240,182
                        
                        
                        
                        (54,681
                        )COMPREHENSIVE
      INCOME (LOSS)
                        
                        $
                        2,659,393
                        
                        
                        $
                        (133,030
                        )
                        
                        $
                        3,714,824
                        
                        
                        $
                        893,166EARNINGS
      PER SHARE:Basic
                        
                        $
                        0.33
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        0.49
                        
                        
                        $
                        0.25Diluted
                        
                        $
                        0.33
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        0.49
                        
                        
                        $
                        0.25WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES:Basic
                        
                        
                        7,104,606
                        
                        
                        
                        3,739,024
                        
                        
                        
                        7,083,149
                        
                        
                        
                        3,737,708Diluted
                        
                        
                        7,140,518
                        
                        
                        
                        3,739,024
                        
                        
                        
                        7,119,846
                        
                        
                        
                        3,824,432
  The
accompanying notes are an integral part of these consolidated financial
statements.
 5
  SKYSTAR BIO-PHARMACEUTICAL COMPANY AND
SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
  AccumulatedRetained
      earnings
                        
                        
                        otherPreferred
      stock
                        
                        
                        Common
      stock
                        
                        
                        Paid-in
                        
                        
                        Contribution
                        
                        
                        Statutory
                        
                        
                        
                        
                        
                        comprehensiveShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        Receivable
                        
                        
                        reserves
                        
                        
                        Unrestricted
                        
                        
                        income
                        
                        
                        TotalBALANCE,
      January 1, 2009, as adjusted
                        
                        
                        2,000,000
                        
                        
                        $
                        2,000
                        
                        
                        
                        3,733,038
                        
                        
                        $
                        3,733
                        
                        
                        $
                        15,237,267
                        
                        
                        
                        -
                        
                        
                        $
                        2,952,710
                        
                        
                        $
                        4,649,341
                        
                        
                        $
                        2,857,607
                        
                        
                        $
                        25,702,658Shares
      issued for services
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,218
                        
                        
                        
                        5
                        
                        
                        
                        30,516
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        30,521Fractional
      shares due to the ten-for-one reverse split
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,772
                        
                        
                        
                        2
                        
                        
                        
                        (2
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Shares
      issued for cash
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,220,000
                        
                        
                        
                        3,220
                        
                        
                        
                        19,164,103
                        
                        
                        
                        (19,167,323
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Foreign
      currency translation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (54,681
                        )
                        
                        
                        (54,681
                        )Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        947,847
                        
                        
                        
                        
                        
                        
                        
                        947,847Appropriation
      to statutory reserves
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        358,303
                        
                        
                        
                        (358,303
                        )
                        
                        
                        
                        
                        
                        
                        -BALANCE,
      June 30, 2009 (unaudited)
                        
                        
                        2,000,000
                        
                        
                        
                        2,000
                        
                        
                        
                        6,960,028
                        
                        
                        
                        6,960
                        
                        
                        
                        34,431,884
                        
                        
                        
                        (19,167,323
                        )
                        
                        
                        3,311,013
                        
                        
                        
                        5,238,885
                        
                        
                        
                        2,802,926
                        
                        
                        
                        26,626,345Shares
      issued for services
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,220
                        
                        
                        
                        7
                        
                        
                        
                        32,486
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        32,493Cancellation
      of preferred stock
                        
                        
                        (2,000,000
                        )
                        
                        
                        (2,000
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Cash
      receipts of shares issued
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (93,642
                        )
                        
                        
                        19,167,323
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        19,073,681Cashless
      exercise of warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        22,392
                        
                        
                        
                        22
                        
                        
                        
                        207,368
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        207,390Foreign
      currency translation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        68,595
                        
                        
                        
                        68,595Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,904,085
                        
                        
                        
                        
                        
                        
                        
                        7,904,085Appropriation
      to statutory reserves
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        568,064
                        
                        
                        
                        (568,064
                        )
                        
                        
                        
                        
                        
                        
                        -BALANCE,
      December 31, 2009
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,989,640
                        
                        
                        
                        6,989
                        
                        
                        
                        34,580,096
                        
                        
                        
                        -
                        
                        
                        
                        3,879,077
                        
                        
                        
                        12,574,906
                        
                        
                        
                        2,871,521
                        
                        
                        
                        53,912,589Shares
      issued for services
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        9,166
                        
                        
                        
                        9
                        
                        
                        
                        41,238
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        41,247Cashless
      exercise of warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        107,899
                        
                        
                        
                        108
                        
                        
                        
                        1,511,496
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,511,604Reclassification
      of purchase option to derivative liability
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (779,674
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (779,674
                        )Foreign
      currency translation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        240,182
                        
                        
                        
                        240,182Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,474,642
                        
                        
                        
                        
                        
                        
                        
                        3,474,642Appropriation
      to statutory reserves
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -BALANCE,
      June 30, 2010 (unaudited)
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        7,106,705
                        
                        
                        $
                        7,106
                        
                        
                        $
                        35,353,156
                        
                        
                        
                        -
                        
                        
                        $
                        3,879,077
                        
                        
                        $
                        16,049,548
                        
                        
                        $
                        3,111,703
                        
                        
                        $
                        58,400,590
  The
accompanying notes are an integral part of these consolidated financial
statements.
 6
  SKYSTAR BIO-PHARMACEUTICAL COMPANY AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 (UNAUDITED)
  Six
      months ended June 30,2010
                              
                              
                              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                              
                              $
                              3,474,642
                              
                              
                              $
                              947,847Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                              
                              
                              299,848
                              
                              
                              
                              225,953Amortization
                              
                              
                              77,133
                              
                              
                              
                              77,070Bad
      debt expense
                              
                              
                              287,561
                              
                              
                              
                              -Allowance
      for slow moving inventories
                              
                              
                              63,001
                              
                              
                              
                              -Common
      stock issued for services
                              
                              
                              16,245
                              
                              
                              
                              30,521Common
      stock to be issued to related parties for compensation
                              
                              
                              70,367
                              
                              
                              
                              78,024Change
      in fair value of derivative liability
                              
                              
                              159,326
                              
                              
                              
                              1,442,156Change
      in operating assets and liabilitiesAccounts
      receivable
                              
                              
                              (3,584,456
                              )
                              
                              
                              (1,412,505
                              )Inventories
                              
                              
                              (9,252,221
                              )
                              
                              
                              (5,164,998
                              )Deposits
      and prepaid expenses
                              
                              
                              7,729,174
                              
                              
                              
                              2,158,970Other
      receivables
                              
                              
                              (56,090
                              )
                              
                              
                              (43,532
                              )Accounts
      payable
                              
                              
                              253,565
                              
                              
                              
                              (197,071
                              )Other
      payables and accrued expenses
                              
                              
                              (88,372
                              )
                              
                              
                              (189,065
                              )Deposits
      from customers
                              
                              
                              349,949
                              
                              
                              
                              (164,796
                              )Taxes
      payable
                              
                              
                              753,555
                              
                              
                              
                              2,386,654Net
      cash provided by operating activities
                              
                              
                              553,227
                              
                              
                              
                              175,228CASH
      FLOWS FROM INVESTING ACTIVITIES:Refunds
      of prepayments for potentital acquistions
                              
                              
                              -
                              
                              
                              
                              2,711,545Proceeds
      from short-term investments
                              
                              
                              -
                              
                              
                              
                              43,971Prepayment
      for acquisitions
                              
                              
                              (5,518,478
                              )
                              
                              
                              -Loans
      to third parties
                              
                              
                              -
                              
                              
                              
                              (1,685,555
                              )Purchases
      of plant and equipment
                              
                              
                              (2,136,531
                              )
                              
                              
                              -Payments
      on construction-in-progress
                              
                              
                              (748,449
                              )
                              
                              
                              (1,792,941
                              )Net
      cash used in investing activities
                              
                              
                              (8,403,458
                              )
                              
                              
                              (722,980
                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
                              
                              
                              -
                              
                              
                              
                              80,662Proceeds
      from short-term loans
                              
                              
                              -
                              
                              
                              
                              205,198Repayment
      of short-term loans
                              
                              
                              (220,035
                              )
                              
                              
                              (307,798
                              )Repayment
      to shareholders and directors
                              
                              
                              (110,018
                              )
                              
                              
                              -Proceeds
      from shareholders and directors
                              
                              
                              -
                              
                              
                              
                              -Due
      (from) to related parties
                              
                              
                              (47,874
                              )
                              
                              
                              420,038Net
      cash  (used in) provided byfinancing activities
                              
                              
                              (377,927
                              )
                              
                              
                              398,100EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                              
                              
                              11,318
                              
                              
                              
                              (16,203
                              )DECREASE
      IN CASH
                              
                              
                              (8,216,840
                              )
                              
                              
                              (165,855
                              )CASH,
      beginning  of period
                              
                              
                              11,699,398
                              
                              
                              
                              576,409CASH,
      end of period
                              
                              $
                              3,482,558
                              
                              
                              $
                              410,554SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                              
                              $
                              7,435
                              
                              
                              $
                              40,448Cash
      paid for income taxes
                              
                              $
                              578,055
                              
                              
                              $
                              -Non-cash
      investing and financing activitiesLong-term
      prepayment transferred to construction-in-progress
                              
                              $
                              -
                              
                              
                              $
                              1,025,257Long-term
      prepayment transferred to plant and equipment
                              
                              $
                              439,897
                              
                              
                              $
                              -Construction-in-progress
      transferred to plant and equipment
                              
                              $
                              1,396,211
                              
                              
                              $
                              -Interest
      expense capitalized as construction-in-progress
                              
                              $
                              
                              
                              
                              $
                              40,050Cashless
      exercise of warrants
                              
                              $
                              1,511,604
                              
                              
                              $
                              -Issuance
      of common stock accrued in privous year
                              
                              $
                              25,002
                              
                              
                              $
                              -
  The
accompanying notes are an integral part of these consolidated financial
statements.
 7
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
1 – ORGANIZATION
  Organization and 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 which is wholly owned by 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’s
(“FASB”) interpretation on consolidation of variable interest
entities.  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. On July 9, 2009, Fortunate Time invested
the remaining $3,000,000 into Sida. Xi’an High Technology District approved
Sida’s application to increase its registered capital to $15,000,000 on July 13,
2009. On July 15, 2009, Sida received $10,000,000 additional registered
capital from Fortunate Time. Funds from Fortunate Time for $13,000,000 was from
the cash proceeds of the equity offering which is further discussed in Note
13.
 
 On
September 18, 2009, Skystar Bio-Pharmaceutical Inc. (“Skystar California”) was
incorporated in California and became a wholly-owned subsidiary of
Skystar.
 
 On May 7,
2010, Fortunate Time formed Skystar Biotechnology (Kunshan) Co., Limited
(“Skystar Kunshan”) in Kunshan, Jiangsu province, China, with registered capital
of $15,000,000, of which $2,000,000 was paid by Fortunate Time in cash on June
11, 2010, and the remaining $13,000,000 is required to be paid by May 7, 2012.
Skystar Kunshan was formed in connection with a potential acquisition of assets
(see Note 10).
 
 Hereinafter,
Skystar, Skystar California, Skystar Cayman, Fortunate Time, Sida, Xian
Tianxing, Shanghai Siqiang, and Skystar Kunshan are sometimes collectively
referred to as the “Company.”
  8
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of
consolidation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries, and its VIEs.  All significant
inter-company transactions and balances between the Company, its subsidiaries
and VIEs have been eliminated in consolidation.
 
 Certain
information and footnote disclosures normally present in annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K. The results for the three
and six months ended June 30, 2010, are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
 
 Foreign currency
translation
 
 The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes and the Chinese Renminbi (“RMB”) as its functional 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.
  9
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 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 rates of exchange quoted by the People’s Bank of China on June 30,
2010 and December 31, 2009 were RMB 6.79 and RMB 6.82 to US $1.00,
respectively.  The average translation rates of RMB 6.82 and RMB 6.82
to US $1.00 was applied to the income statement accounts for the six months
ended June 30, 2010 and 2009, respectively. For the three months ended June 30,
2010 and 2009, the average translation rates were RMB6.82 and RMB 6.83 to US
$1.00, 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
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires fair value
disclosures of those financial instruments.  This accounting standard
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.  Current assets and current liabilities qualify
as financial instruments and management believes their carrying amounts 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 current interest rates are  equivalent to interest
rates currently available.  The three levels of valuation hierarchy
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.
 
 Effective
January 1, 2009, the Company adopted the provisions of an accounting standard
regarding whether an instrument (or embedded feature) is indexed to an entity’s
own stock. This accounting standard 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.  It 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 scope exception within
the standards.
 
 As a
result of the foregoing adoption, 309,100 common stock purchase warrants
previously treated as equity instruments pursuant to the derivative liability
treatment exemption are no longer afforded equity treatment because the strike
price of the warrants is denominated in U.S. dollars, a currency other than the
Company’s functional currency, the RMB. 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 are recognized currently in earnings until
such time as the warrants are exercised or expired.
  10
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 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
liability to recognize the fair value of such warrants. On June 30, 2009, the
Company and Rodman & Renshaw, LLC, as representative of underwriters (the
"Underwriters") entered into an Underwriting Agreement in connection with a
public offering of the Company’s common stock. In connection with this offering,
the Company agreed to grant 140,000 common stock purchase options to five
designees of the Underwriters. All those options were provided for services
performed, and in accordance to the terms of the option agreement, the holders
are entitled to exercise the options starting on June 30, 2010. Therefore, as of
June 30, 2010, the purchase options were reclassified from equity to warrants
liabilities, and the Company reclassified $779,674 from additional paid in
capital to derivative liability.
 
 As
required by the FASB’s accounting standards, 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 values warrant liability were modeled using a
series of techniques, including closed-form analytic formula, such as the
Black-Scholes 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.
 
 These
warrants and options do not trade in an active securities market, and as
such, the Company estimates the fair value of these instruments using the
Black-Scholes Option Pricing Model (“Black-Scholes Model”) using the following
assumptions:
 
 Warrants
      (1)
                          
                          
                          Warrants
      (2)
                          
                          
                          PurchaseDecember
                          
                          
                          June
      30,
                          
                          
                          December
                          
                          
                          options(3)31,
      2009
                          
                          
                          2010
                          
                          
                          31,
      2009
                          
                          
                          June
      30, 2010(Unaudited)
                          
                          
                          
                          
                          
                          
                          (Unaudited)Stock
      price
                          
                          $
                          10.10
                          
                          
                          $
                          6.66
                          
                          
                          $
                          10.10
                          
                          
                          $
                          6.66Exercise
      price
                          
                          $
                          6.00
                          
                          
                          $
                          5.00
                          
                          
                          $
                          5.00
                          
                          
                          $
                          8.11Annual
      dividend yield
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Expected
      term (years)
                          
                          
                          0.17
                          
                          
                          
                          1.67
                          
                          
                          
                          2.17
                          
                          
                          
                          4.00Risk-free
      interest rate
                          
                          
                          0.04
                          %
                          
                          
                          0.51
                          %
                          
                          
                          1.14
                          %
                          
                          
                          1.40
                          %Expected
      volatility
                          
                          
                          34
                          %
                          
                          
                          193
                          %
                          
                          
                          178
                          %
                          
                          
                          143
                          %
 
 (1)
              As
      of December 31, 2009, 145,000 warrants with an exercise price of $6.00
      were outstanding. As of June 30, 2010, all of these warrants were
      exercised on a “cashless” basis.
 
 (2)
              As
      of December, 31, 2009, 107,254 warrants with an exercise price of $5.00
      were outstanding. As of June 30, 2010, 34,230 warrants were
      outstanding.
  (3)
              As
      of June 30, 2010, 140,000 options with an exercise of $8.11 were
      outstanding.
 
 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 and options. The Company believes this method produces an
estimate that is representative of future volatility over the expected term of
these warrants and options. The Company has no reason to believe future
volatility over the expected remaining life of these warrants and options is
likely to differ materially from historical volatility. The expected life is
based on the remaining term of the warrants and options. The risk-free interest
rate is based on U.S. Treasury securities according to the remaining term of the
warrants and options.
  11
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
  The fair
value of the 174,230 warrants and options outstanding as of June 30, 2010 was
determined using the Black-Scholes Model, defined in the FASB’s accounting
standard of fair value measurement as level 2 inputs, and recorded the change in
earnings. As a result, the warrant liability is carried on the consolidated
balance sheets at 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 June 30, 2010:
 
 Carrying
      Value at
                          June
      30, 2010
                        
                        
                        Fair
      Value Measurement at
                          June
      30, 2010Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Derivative liability
      (unaudited)
                        
                        $
                        966,082
                        
                        
                        $
                        —
                        
                        
                        $
                        966,082
                        
                        
                        $
                        —
  
 In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis.  Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges.  For the three and six months ended June 30, 2010, there were
no impairment charges.
 
 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
estimated allowance for sales returns is reflected on these consolidated
financial statements as sales returns are de minimis 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 goods sold are included in selling expenses, which
totaled $213,109 and $218,734 for the three months ended June 30, 2010 and 2009,
respectively, and $284,880 and $309,741 for the six months ended June 30, 2010
and 2009, respectively.
  12
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 The
Company’s revenue and cost of revenue by product line for the three and six
months ended June 30, 2010 and 2009 were as follows:
 
 Three
      months ended June 30,
                                
                                
                                Six
      months ended June 30,2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009(Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)RevenueMicro-organism
                                
                                $
                                1,985,095
                                
                                
                                $
                                1,735,534
                                
                                
                                $
                                3,191,673
                                
                                
                                $
                                2,628,827Veterinary
      Medications
                                
                                
                                5,533,020
                                
                                
                                
                                3,913,444
                                
                                
                                
                                8,729,279
                                
                                
                                
                                6,515,940Feed
      Additives
                                
                                
                                368,537
                                
                                
                                
                                281,461
                                
                                
                                
                                604,577
                                
                                
                                
                                463,772Vaccines
                                
                                
                                377,889
                                
                                
                                
                                312,999
                                
                                
                                
                                608,255
                                
                                
                                
                                458,465Total
      Revenue
                                
                                
                                8,264,541
                                
                                
                                
                                6,243,438
                                
                                
                                
                                13,133,784
                                
                                
                                
                                10,067,004Cost
      of RevenueMicro-organism
                                
                                
                                520,911
                                
                                
                                
                                513,310
                                
                                
                                
                                863,930
                                
                                
                                
                                773,847Veterinary
      Medications
                                
                                
                                3,197,770
                                
                                
                                
                                2,276,216
                                
                                
                                
                                5,020,027
                                
                                
                                
                                3,869,025Feed
      Additives
                                
                                
                                146,984
                                
                                
                                
                                121,367
                                
                                
                                
                                247,030
                                
                                
                                
                                198,806Vaccines
                                
                                
                                39,398
                                
                                
                                
                                47,944
                                
                                
                                
                                65,295
                                
                                
                                
                                63,517Total
      Cost of Revenue
                                
                                
                                3,905,063
                                
                                
                                
                                2,958,837
                                
                                
                                
                                6,196,282
                                
                                
                                
                                4,905,195Gross
      Profit
                                
                                $
                                4,359,478
                                
                                
                                $
                                3,284,601
                                
                                
                                $
                                6,937,502
                                
                                
                                $
                                5,161,809
 
 Cash
 
 Cash
includes cash on hand, demand deposits with banks and liquid investments with an
original maturity of three months or less.
 
 Restricted
cash
 
 Restricted
cash is comprised of amounts received from the PRC government as subsidies and
set aside for specific uses (see Note 13).Restricted cash is
maintained as bank deposits and reflected as current assets based on the
expected period when such funds will be put into their specific
uses.
  Accounts receivable 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.
  13
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Inventories
 
 Inventories
are stated at the lower of cost or market, as determined on a moving
weighted-average basis. 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.
 
 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. Expenditures for maintenance and repairs which do not improve or extend
the useful lives of the assets are charged to operations as incurred, while
renewals and betterments are capitalized. Gains and losses on disposals are
included in the results of operations. 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 June 30, 2010 and
December 31, 2009, there was no impairment for 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 significant, 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.
 
 Intangible
assets
 
 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, technical and procedural manuals, and is amortized
using the straight-line method over the weighted average useful life of nine
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.
  14
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Impairment
of Intangible Assets —The Company evaluates the carrying value of intangible assets annually,
or 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 June 30, 2010,
there was no impairment of its intangible assets.
 
 Comprehensive
income
 
 The
FASB’s accounting standard of 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 GAAP. Accumulated other comprehensive
income is comprised of the changes in foreign currency exchange
rates.
 
 Research and development
costs
 
 Research
and development costs are charged to operations as incurred and include
salaries, professional fees and technical support fees related to such
efforts.
  Advertising
costs
 
 Advertising
costs are charged to operations currently. Advertising costs for the three
months ended June 30, 2010 and 2009 were $4,818 and $36,921, respectively, and
for the six months ended June 30, 2010 and 2009 were $6,469 and $75,857,
respectively.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the FASB’s accounting
standard for income taxes.  Under the asset and liability method as
required by this accounting standard,  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. 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.
 
 Further,
in accordance with this accounting standard, a tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The standard 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.
  15
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 The
Company does not anticipate any events which could cause a change to these
uncertainties.
 
 Stock-based
compensation
 
 The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.
 
 Earnings per
share
 
 The
Company reports earnings per share and present both basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share is 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, warrants and stock options were converted or
exercised. Further, the method 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 1-for-10
reverse stock split effectuated on May 12, 2009 and the 2-for-1 forward stock
split effectuated on November 16, 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.
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no impact on previously reported net
income or cash flows.
  16
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Recently issued accounting
pronouncements
  In
December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company adopted this standard and the standard did
not have material effect on the Company’s consolidated financial
statements.
  In
January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard and the standard did not
have material effect on the Company’s consolidated financial
statements.
  In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary.  Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary.  Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value.  In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.  This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets.  This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009.  The
adoption of this ASU did not have impact the Company’s consolidated financial
statements.
  In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements.  Further, this update
clarifies existing disclosures on level of disaggregation and Disclosures about
inputs and valuation techniques.  A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.  The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
  17
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-09
primarily rescinds the requirement that, for listed companies, financial
statements clearly disclose the date through which subsequent events have been
evaluated. Subsequent events must still be evaluated through the date of
financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
  In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
  In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update
provides guidance on the recognition of revenue under the milestone method,
which allows a vendor to adopt an accounting policy to recognize all of the
arrangement consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is achieved.
The pronouncement is effective on a prospective basis for milestones
achieved in fiscal years and interim periods within those years, beginning on or
after June 15, 2010. The Company does not expect that the adoption of this
ASU will have a material impact on its consolidated financial
statements.
  Note
3 - CONCENTRATIONS AND CREDIT RISK
 
 The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in 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 federally 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 June 30, 2010 and December 31, 2009,
the Company had deposits in excess of federally insured limits (including
restricted cash) of $2,290,241 and $11,504,970 respectively. The Company has not
experienced any losses in such accounts.
  18
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 For the
three and six months ended June 30, 2010 and 2009, all of the Company’s sales
occurred in the PRC. No major customers accounted for more than 10% of the
Company’s total revenue. In addition, all accounts receivable at June 30, 2010
and December 31, 2009 also arose in the PRC.
 
 The
Company’s three largest vendors accounted for approximately 39% of total
purchase for the three months ended June 30, 2010, while the Company’s two
largest vendors accounted for approximately 45% of the Company’s total purchase
for the three months ended June 30, 2009. The Company’s four largest vendors
accounted for approximately 46% of total purchase for the six months ended June
30, 2010, while the Company’s two largest vendors accounted for approximately
34% of total purchase for the six months ended June 30, 2009. As of June 30,
2010 and 2009, there were no amounts due to those vendors.
 
 The
Company had one product that accounted for 23% and 21% of the Company’s total
revenue for the three and six months ended June 30, 2010, respectively, while
the same product accounted for 16% and 13% of the Company’s total revenue for
the three and six months ended June 30, 2009, respectively.
 
 Note
4 - ACCOUNTS RECEIVABLE, NET
 
 Accounts
receivable consisted of the following:
 
 June
      30, 2010
                              
                              December
      31,
                                  2009(Unaudited)Account
      receivable
                              
                              $
                              8,329,674
                              
                              
                              $
                              4,711,044Allowance
      for bad debts
                              
                              
                              (617,955)
                              
                              
                              
                              (327,857)Account
      receivable, net
                              
                              $
                              7,711,719
                              
                              
                              $
                              4,383,187
 
 The
following table presents the movement of allowance for doubtful
accounts:
 
 Allowance
      for bad debt, January 1, 2009
                        
                        $
                        327,857Addition
                        
                        
                        —Recovery
                        
                        
                        —Translation
      adjustment
                        
                        
                        —Allowance
      for bad debt, December 31, 2009
                        
                        
                        327,857Addition
                        
                        
                        288,757Recovery
                        
                        
                        —Translation
      adjustment
                        
                        
                        1,341Allowance
      for bad debt, June 30, 2010 (unaudited)
                        
                        $
                        617,955
 
  19
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
5 – INVENTORIES
 
 Inventories
consist of the following:
 June
      30, 2010
                  
                  
                  December
      31,2009(Unaudited)Raw
      materials
                  
                  $
                  9,936,932
                  
                  
                  $
                  2,997,481Packing
      materials
                  
                  
                  1,059,841
                  
                  
                  
                  159,620Work-in-process
                  
                  
                  7,377
                  
                  
                  
                  886Finished
      goods
                  
                  
                  2,558,480
                  
                  
                  
                  1,096,547Other
                  
                  
                  19,651
                  
                  
                  
                  19,571Total
                  
                  
                  13,582,281
                  
                  
                  
                  4,274,105Less:
      Allowance for slow moving raw materials
                  
                  
                  (263,539
                  )
                  
                  
                  (199,460
                  )Total
                  
                  $
                  13,318,742
                  
                  
                  $
                  4,074,645
 
 The
Company periodically reviews its reserves for slow-moving and obsolete
inventories. As of June 30, 2010 and December 31, 2009, the Company recorded
slow moving allowance for raw materials of $263,539 and $199,460,
respectively.
 
 Note
6 - DEPOSITS AND PREPAID EXPENSES
 
 Deposits
and prepaid expenses are comprised of the following:
 
 June
      30, 2010
                        
                        
                        December
      31, 2009(Unaudited)Prepayment
      for raw materials purchasing
                        
                        $
                        3,758,040
                        
                        
                        $
                        10,990,913Prepayment
      for packaging materials purchasing
                        
                        
                        280,610
                        
                        
                        
                        489,392Other
                        
                        
                        310,260
                        
                        
                        
                        420,009Total
                        
                        $
                        4,348,910
                        
                        
                        $
                        11,900,314
 
 Note
7 - PLANT AND EQUIPMENT, NET
 
 Plant and
equipment consist of the following:
 
 June
      30, 2010
                          
                          
                          December
      31, 2009(Unaudited)Building
      and improvements
                          
                          $
                          10,008,394
                          
                          
                          $
                          6,798,616Machinery
      and equipment
                          
                          
                          3,082,472
                          
                          
                          
                          3,035,814Office
      equipment and furniture
                          
                          
                          198,590
                          
                          
                          
                          191,424Vehicles
                          
                          
                          487,140
                          
                          
                          
                          485,156Total
                          
                          
                          13,776,596
                          
                          
                          
                          10,511,010Less:
      accumulated depreciation
                          
                          
                          (1,989,925
                          )
                          
                          
                          (1,681,952
                          )Plant
      and equipment, net
                          
                          $
                          11,786,671
                          
                          
                          $
                          8,829,058
 
 As of
December 31, 2009, the Company made deposit of $439,927 on a new office
building.  In January 2010, the purchase was completed, and the
total purchase cost of $1,600,346 was transferred to fixed asset in March 2010.
The Company transferred $1,396,211 from construction-in-progress to buildings
after the construction of its new micro-organism facility was completed in the
second quarter of 2010.
 
 Depreciation
expense was $176,364 and $113,031 for the three months ended June 30, 2010 and
2009, respectively. For the six months ended June 30, 2010 and 2009,
depreciation expense was $299,848 and $225,953, respectively.
  20
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
8 - CONSTRUCTION-IN-PROGRESS
 
 Construction-in-progress
(“CIP”) relates 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 during the six months ended June 30, 2010, the
micro-organism facility and some general facility improvements were completed
and placed in service which resulted in a transfer from CIP to property, plant
and equipment of $1,396,211. The remaining plant facilities are expected to be
completed by September 30, 2010, at an estimated cost of $650,000. No
depreciation is provided for construction-in-progress until such time the assets
are completed and placed into service.
 
 The
construction projects the Company is in the progress of completing
are:
 
 Total in CIPProject
                      
                      as of
                        6/30/2010
                      
                      
                      Estimate
      cost to
                        Complete
                      
                      
                      Estimated
                        Total Cost
                      
                      Estimated
                        Completion DateVaccine
      facility
                      
                      $
                      8,777,066
                      
                      
                      $
                      650,000
                      
                      
                      $
                      9,427,066
                      
                      September
      2010TOTAL
      CIP Balance
                      
                      $
                      8,777,066
                      
                      
                      $
                      650,000
                      
                      
                      $
                      9,427,066
 
 The
construction of the vaccine facility was completed in June 2010, and the Company
is in the process of installing, tooling, and testing equipment, and will
apply for GMP certification after equipment testing is completed. The Company
expects that the installation and testing of equipment will be completed by
September, 2010.
  As of
June 30, 2010 and December 31, 2009, the Company had CIP amounting to $8,777,066
and $9,389,120, respectively. No interest expense had been capitalized for CIP
for the three and six months ended June 30, 2010, respectively. For the three
and six months ended June 30, 2009, $20,972 and $40,050 was capitalized for CIP,
respectively.
 
 Note
9 - LONG-TERM PREPAYMENTS
 
 Long-term
prepayments consist of the following:
  June
      30, 2010
                          
                          
                          December
      31, 2009(Unaudited)R&D
      project
                          
                          $
                          132,570
                          
                          
                          $
                          293,400Construction
      deposit
                          
                          
                          441,900
                          
                          
                          $
                          440,100Deposit
      for building and equipment purchase
                          
                          
                          766,561
                          
                          
                          
                          439,927Total
                          
                          $
                          1,341,031
                          
                          
                          $
                          1,173,427
 
 In 2009,
the Company prepaid $293,400 (RMB 2 million) to a vendor for equipment and raw
materials related to a research and development project on nano-technology in
the prevention of a milk cow disease. As of June 30, 2010, $132,570 (RMB
900,000) of the prepayment remained unused.  As of June 30, 2010, the
project was in its trial stage (see Note 19).
  As of
December 31, 2009, deposits for office building purchase of $439,927 (RMB
2,998,820) represented deposit made for new office building.  The
purchase was completed and the deposit was transferred to fixed asset in March
2010.  The Company received property certificate in May 2010. As of
June 30, 2010, deposits for building and equipment purchase of $766,561
represented deposits made for equipments.
  21
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
10 - LONG-TERM PREPAYMENTS FOR ACQUISITIONS
 
 As of
June 30, 2010 and December 31, 2009, deposits for potential acquisitions of
$12,376,146 and $6,806,880, respectively, represented deposits made for
potential acquisition of assets or companies.
 
 As of
June 30, 2010, the Company paid $3,547,573 (RMB 24,084,000) to acquire the
assets of a Hubei-based veterinary manufacturer through its bankruptcy
proceedings, and $7,144,050 (RMB 48,500,000) in an attempt to acquire the assets
of a Jiangsu-based micro-organism manufacturer. The Hubei acquisition was
completed on August 11, 2010, and the Jiangsu acquisition is projected to be
completed in the third quarter of 2010.
 
 Deposits
made for potential acquisitions amounted to $1,684,523 and $6,806,880 at June
30, 2010 and December 31, 2009, respectively. Those deposits are held by an
unrelated third party engaged to identify potential acquisitions for the
Company. All potential acquisitions are contingent upon the Company successfully
negotiating with the selling parties, the ultimate date of which cannot be
readily determined.  Deposits are refundable if negotiations are not
successful.
 
 Note
11 – INTANGIBLE ASSETS
 
 Intangible
assets consisted of the following:
 June
      30, 2010
                        
                        
                        December
      31, 2009(Unaudited)Land
      use rights
                        
                        $
                        380,403
                        
                        
                        $
                        378,853Technological
      know-how
                        
                        
                        2,062,200
                        
                        
                        
                        2,053,800Total
                        
                        
                        2,442,603
                        
                        
                        
                        2,432,653Less:
      accumulated amortization
                        
                        
                        (652,276
                        )
                        
                        
                        (572,481
                        )Intangible
      assets, net
                        
                        $
                        1,790,327
                        
                        
                        $
                        1,860,172
 
 In 2009,
the Company paid $1,172,880 (RMB 8,000,000) for the transfer of a fish
disease vaccine technology for an eleven-year term from September 2009 through
September 2020, and this amount was included in technological know-how at June
30, 2010 and December 31, 2010. The technology was transferred to the
Company on June 17, 2010, and the Company began using such technology since, and
recorded the amortization expense based on the remaining term.
 
 For the
three months ended June 30, 2010 and 2009, the amortization expense for
intangible assets amounted to $38,577 and $38,551, respectively. For the six
months ended June 30, 2010 and 2009, the amortization expense for intangible
assets amounted to $77,133 and $77,070, respectively.
 
 Amortization
expense for the future five years and thereafter is as follows:
 
 Years
      ending December 31,
                          
                          Amount(Unaudited)2010
                          
                          $
                          134,9372011
                          
                          
                          269,8742012
                          
                          
                          245,3242013
                          
                          
                          122,5742014
                          
                          
                          122,574thereafter
                          
                          
                          895,044Total
                          
                          $
                          1,790,327
  22
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
12 – SHORT-TERM LOANS
  On
January 14, 2009, the Company signed a one year short-term loan contract with
Shaanxi Agricultural Yanta Credit Union for $220,050 (RMB 1.5 million) at an
annual interest rate of 8.66% for operating purposes secured by the personal
property of Weibing Lu, the Company’s Chief Executive Officer. This amount was
paid off on January 15, 2010.
 
 Interest
expense incurred and associated with the short-term loans amounted to $0 and
$1,365 for the three and six months ended June 30, 2010, none of which has been
capitalized as part of CIP in 2010. Interest expense incurred and associated
with the short term loan amounted to $20,972 and $40,050 for the three and six
months ended June 30, 2009, which has been capitalized as part of
CIP.
 
 Note
13 - DEFERRED GOVERNMENT GRANT
 
 Deferred
government grant represents subsidies for GMP projects granted by the PRC
government.  To date, the Company received government subsidies
totaling $1,104,750.
 
 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 June 30, 2010, the
Company has not reached a final agreement with the PRC government regarding the
treatment of these subsidies as either a loan or capital contribution, and the
Company does not expect that the final agreement will be completed within the
current year. Therefore, these amounts are reflected as non-current liabilities
in the accompanying consolidated financial statements.
 
 Note
14 - CAPITAL TRANSACTIONS
 
 On May
12, 2009, the Company effectuated a 1-for-10 reverse stock split of its issued
and outstanding shares of common stock and a proportional reduction of its
authorized shares of common stock. On November 16, 2009, the Company effectuated
a 2-for-1 forward split of its issued and outstanding common stock and a
proportional increase of its authorized shares of common stock. The
amounts of common stock, warrants, options disclosed in the Company’s
consolidated financial statements and the footnotes thereto have been
retroactively restated to reflect both the reverse stock split and
the forward stock split.
 
 Preferred
stock
 
 On June
25, 2009, the Company’s board of directors concluded that 2,000,000 shares of
series “A” preferred stock issued in 2001 were not valid because no certificate
of designation was filed prior to their issuance as required under Nevada
corporate law. On December 21, 2009, the Company instructed its transfer agent
to remove these preferred shares officially from its shareholder records. As of
June 30, 2010 and December 31, 2009, no share of series “A” preferred stock was
authorized or outstanding, respectively.
 
 Stock-based
compensation
 
 On March
30, 2010, the Company agreed to issue 2,500 shares of common stock to a
non-executive director in exchange for services unrelated to
directorship.  On April 16, 2010, the Company agreed to issue 10,000
shares of common stock to that director for his one-year service from April 1,
2010, the common stock compensation would vest in four equal installments of
2,500 each quarter. The trading value of the Company’s common stock on March 30,
2010 and April 16 was $11.74 and $10.61 per share, respectively and
corresponding amount of $27,025 and $53,550 was charged to general and
administrative expense for the three and six months ended June 30,
2010.    The Company accrued $355,922 and $302,372 under
shares to be issued as of June 30, 2010 and December 31, 2009, respectively,
which represented 52,334 and 47,334 common shares to be issued to that
non-executive director for his service provided for the period from May 2008 to
June 30, 2010, and for the period from May 2008 to December 2009,
respectively.  As of June 30, 2010, these shares have not been
issued.
  23
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 On May 5,
2008, the Company agreed to issue 10,434 shares of common stock to its former
chief financial officer (“CFO”) during the term of a one-year agreement, which
would vest in four equal installments of 2,608 shares each
quarter.  The trading value of the common stock on May 5, 2008 was
$5.85 per share for a total value of $61,042. These shares were fully
vested.  On May 26, 2009, the Company renewed the one-year service
agreement with the CFO and agreed to issue 14,440 shares of common stock, which
would vest in four equal installments of 3,610 shares every quarter starting
August 5, 2009. Compensation expense is recognized on a straight-line basis over
the vesting period.  Total compensation expense of $29,205 and $15,052
were charged to general and administrative expenses for the six months ended
June 30, 2010 and 2009.  In February 2010, 10,830 shares were
issued.  Effective April 16, 2010, the CFO resigned from his position
and the last installment of 3,610 shares was prorated to 2,880 shares, which
shares have not been issued.
 
 On May
26, 2009, the Company agreed to issue 5,556 shares of common stock to a director
at the beginning of each term of his directorship. The trading value of the
common stock on May 26, 2009 was $4.50 per share for the total value of $25,002,
and the amount was charged to general and administrative expenses for the three
and six months ended June 30, 2009. As of December 31, 2009, the balance was
included in shares to be issued. 5,556 shares were issued in February 2010. In
accordance to the agreement between the Company and this director, this director
shall continue to serve until his successor is duly elected and qualified. Since
the Company has not yet held its annual shareholder meeting and no successor has
been elected, this director has continued in his position and is
entitled to compensation for the next calendar term commencing May 26,
2010, prorated for any partial time periods. The trading value of the Company’s
common stock on May 26, 2010 was $8.33 per share. For the three and six months
ended June 30, 2010, $3,857 was charged to general and administrative
expense.
 
 Warrants and purchase
options
 
 On
February 28, 2007, the Company issued 195,000 warrants to four investors in
connection with a financing with an exercisable price of $6.00 per share for a
term of three years.  On the same date, the Company also issued
warrants to the placement agent, exercisable for 114,100 shares of the
Company’s common stock at a price of $5.00 per share for a five-year term. For
the three and six months ended June 30, 2010, 15,974 and 218,024 warrants were
exercised. The Company valued the exercise on the
respective dates and recorded a gain of $158,054 and a loss of $159,326
from changes in fair value of warrants in the three and six months ended June
30, 2010, respectively.
 
 In
connection with the 2009 equity offering discussed below, the Company agreed to
grant 140,000 common stock purchase options to five designees of the
Underwriters. The options are exercisable from June 30, 2010 to June 30, 2014,
and each option is exercisable for one share of the Company’s common stock, with
exercise price at $8.11 per share. All those options were provided for services
performed, and in accordance to the terms of the option agreement, the holders
are entitled to exercise the options starting on June 30, 2010. Therefore, as of
June 30, 2010, the purchase options were reclassified from equity to warrants
liabilities, and the Company reclassified $779,674 from additional paid in
capital to derivative liability.
 
 Following
is a summary of the status of warrants and purchase options outstanding at June
30, 2010:
  24
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Outstanding
                                
                                
                                Average
                                  Remainingwarrants/purchase
                                  options
                                
                                
                                Contractual
                                  Life
      (year)
                                
                                
                                Average
                                  Exercise
      Price34,230
                                
                                
                                
                                1.67
                                
                                
                                $
                                5.00140,000
                                
                                
                                
                                4.00
                                
                                
                                $
                                8.11
 
 Following
is an activity summary of the Company’s outstanding warrants and purchase
options:
 
 Outstanding
      as of December 31, 2008
                      
                      
                      309,100Granted
                      
                      
                      140,000Forfeited
                      
                      
                      —Exercised
                      
                      
                      —Outstanding
      as of June 30, 2009 (unaudited)
                      
                      
                      449,100Granted
                      
                      
                      —Forfeited
                      
                      
                      —Exercised
                      
                      
                      56,846Outstanding
      as of December 31, 2009
                      
                      
                      392,254Granted
                      
                      
                      —Forfeited
                      
                      
                      —Exercised
                      
                      
                      218,024Outstanding
      as of June 30, 2010 (unaudited)
                      
                      
                      174,230
 
 2009 Equity
offering
 
 On June
30, 2009, the Company and Rodman & Renshaw, LLC, as representative of
underwriters (the "Underwriters") entered into an Underwriting Agreement.
Pursuant to the Underwriting Agreement, the Company agreed to issue and sell an
aggregate of 3,220,000 shares (including 420,000 over-allotment shares) of its
common stock, at a price of $6.49 per share in a public offering. The closing
date of this offering was on the third business day following the effective date
of the registration statement registering the shares offered, or July 3,
2009.
 
 Incremental
costs incurred of this offering, including underwriting commission, legal fees,
and printing costs were $1,730,477, and were directly deducted from the
proceeds. The gross proceeds of this offering were $20,897,800. The Company
received cash proceeds of $18,411,496 on July 6, 2009.
 
 Equity Compensation
Plan
 
 On
December 8, 2009, the Company’s board of directors approved a stock incentive
plan for officers, directors, employees and consultants entitled the “Skystar
Bio-Pharmaceutical Company 2010 Stock Incentive Plan” (the “2010 Plan”). The
maximum number of shares that may be issued under the 2010 Plan is 700,000
shares of the Company’s common stock. The 2010 Plan was approved by the
Company’s stockholders on December 31, 2009, and awards may be granted
thereunder until December 7, 2019. As of June 30, 2010, there are 700,000 shares
of the Company’s common stock remaining available for future issuance under the
2010 Plan.
  25
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Note
15 - 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 entity’s registered capital, further appropriations are discretionary. The
statutory surplus reserve can be used to increase the entity’s registered
capital (upon approval by relevant government authorities) and eliminate its
future losses under PRC GAAP (upon a resolution by the board of directors). The
statutory surplus reserve is not distributable to shareholders except in the
event of liquidation. As of June 30, 2010, Xian Tianxing has met the statutory
surplus reserve requirement, and approximately $15,034,000 still needs to be
transferred to the statutory surplus reserve from other Chinese
subsidiaries.
 
 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
16 – TAXES
 
 Skystar
and Skystar California are subject to the United States federal income tax
provision. Skystar Cayman is a tax-exempt company incorporated in the Cayman
Islands and conducts all of its business through its subsidiaries, Fortunate
Time, 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%.
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the three and six months ended June 30, 2010 and 2009:
 
 For
      the three months ended
                              June
      30,
                            
                            
                            For
      the six months ended
                              June
      30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009(Unaudited)
                            
                            
                            (Unaudited)
                            
                            
                            (Unaudited)
                            
                            
                            (Unaudited)U.S.
      Statutory rate
                            
                            
                            34.0
                            %
                            
                            
                            34.0
                            %
                            
                            
                            34.0
                            %
                            
                            
                            34.0
                            %Foreign
      income not recognized in the U.S.
                            
                            
                            (34.0
                            )
                            
                            
                            (34.0
                            )
                            
                            
                            (34.0
                            )
                            
                            
                            (34.0
                            )China
      income tax rate
                            
                            
                            25.0
                            
                            
                            
                            25.0
                            
                            
                            
                            25.0
                            
                            
                            
                            25.0China
      income tax exemption
                            
                            
                            (10.0
                            )
                            
                            
                            (10.0
                            )
                            
                            
                            (10.0
                            )
                            
                            
                            (10.0
                            )Other
      item (1)
                            
                            
                            3.5
                            
                            
                            
                            136.7
                            
                            
                            
                            4.9
                            
                            
                            
                            21.9Total
      provision for income taxes
                            
                            
                            18.5
                            %
                            
                            
                            151.7
                            %
                            
                            
                            19.9
                            %
                            
                            
                            36.9
                            %
 
 (1)
              Other item is
      for operating expenses incurred by Skystar that are not deductible in
      the PRC, which resulted in an increase in effective tax rate of 3.5% and
      136.7% for the three months ended June 30, 2010 and 2009, respectively,
      and 4.9% and 21.9% for the six months ended June 30, 2010 and 2009,
      respectively.
  26
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Taxes
payable consisted of the following:
 June
      30, 2010
                              
                              
                              December
      31, 2009(Unaudited)Income
      taxes payable
                              
                              $
                              393,676
                              
                              
                              $
                              104,261Value
      added tax
                              
                              
                              986,446
                              
                              
                              
                              561,646Other
      taxes
                              
                              
                              101,626
                              
                              
                              
                              56,199Total
                              
                              $
                              1,481,748
                              
                              
                              $
                              722,106
 
 The
estimated tax savings due to the reduced tax rate for the three months ended
June 30, 2010 and 2009 amounted to $360,324 and $193,525, respectively. If the
statutory income tax had been applied, the Company would have decreased basic
earnings per share and diluted per share from $0.33 to $0.28, respectively, for
the three months ended June 30, 2010. For the three months ended June 30, 2009,
the basic and diluted losses per share would have increased from $0.03 to $0.08,
respectively, if the statutory income tax had been applied.
 
 The
estimated tax savings due to the reduced tax rate for the six months ended June
30, 2010 and 2009 amounted to $577,204 and $344,672, respectively. If the
statutory income tax had been applied, the Company would have decreased basic
and diluted earnings per share from $0.49 to $0.41, respectively, for the six
months ended June 30, 2010. For the six months ended June 30, 2009, the basic
and diluted earnings per share would have decreased from $0.25 to $0.16,
respectively, if the statutory income tax had been applied.
 
 Skystar
is incorporated in the U.S. and has incurred a net operating loss for income tax
purposes for the three and six months ended June 30, 2010. As of June 30, 2010,
the estimated net operating loss carryforwards for U.S. income tax purposes
amounted to $4,080,148 which may be available to reduce future years’ taxable
income. These carryforwards will expire, if not utilized, beginning in 2026 and
continue through 2030. Management believes that the realization of the benefits
arising from this loss appears to be uncertain due to the Company’s limited
operating history and continuing losses for U.S. income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance at June 30,
2010 and December 31, 2009. The valuation allowance at June 30, 2010 and
December 31, 2009 was $1,387,250 and $1,276,373, respectively. The Company’s
management reviews this valuation allowance periodically and makes adjustments
as necessary.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $30 million as of June 30, 2010, which were included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations.  Accordingly, no provision has been made
for U.S. deferred taxes related to future repatriation of these earnings, nor is
it practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 Note
17 - EARNINGS PER SHARE
 
 The
following is the calculation of earnings per share:
 For
      the three months ended
                                June
      30,
                              
                              
                              For
      the six months ended
                                June
      30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009Net
      income (loss)
                              
                              $
                              2,378,395
                              
                              
                              $
                              (116,797
                              )
                              
                              $
                              3,474,642
                              
                              
                              $
                              947,847Weighted
      average shares used in basic computation
                              
                              
                              7,104,606
                              
                              
                              
                              3,739,024
                              
                              
                              
                              7,083,149
                              
                              
                              
                              3,737,708Diluted
      effect of stock warrants
                              
                              
                              35,912
                              
                              
                              
                              —
                              
                              
                              
                              36,697
                              
                              
                              
                              86,724Weighted
      average shares used in diluted computation
                              
                              
                              7,140,518
                              
                              
                              
                              3,739,024
                              
                              
                              
                              7,119,846
                              
                              
                              
                              3,824,432Earnings
      (Loss) per share:Basic
                              
                              $
                              0.33
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.49
                              
                              
                              $
                              0.25Diluted
                              
                              $
                              0.33
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              0.49
                              
                              
                              $
                              0.25
  27
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 For the
three months ended June 30, 2010, the average stock price was greater than the
exercise prices of warrants which resulted in additional weighted-average common
stock equivalents of 35,912. For the three months ended March 31, 2009, the
outstanding warrants were excluded from the diluted earnings per share
calculation as they are anti-dilutive.
 
 For the
six months ended June 30, 2010 and 2009, the average stock price was greater
than the exercise prices of warrants which resulted in additional
weighted-average common stock equivalents of $36,697 and $86,724,
respectively.
 
 Note
18 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
 Amounts
receivable from and payable to related parties are summarized as
follows:
 
 June
      30, 2010
                        
                        
                        December
      31, 2009(Unaudited)Short-term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1)
                        
                        $
                        -
                        
                        
                        $
                        36,675Mr.
      Wei Wen – officer and shareholder (1)
                        
                        
                        -
                        
                        
                        
                        36,675Ms.
      Aixia Wang – shareholder (1)
                        
                        
                        -
                        
                        
                        
                        36,675Total
                        
                        $
                        -
                        
                        
                        $
                        110,025Shares to be issued to related
      partyScott
      Cramer – non-executive director (2)
                        
                        $
                        355,922
                        
                        
                        $
                        302,372Mark
      D. Chen – non-executive director(2)
                        
                        
                        3,857
                        
                        
                        
                        25,002Bennet
      Tchaikovsky(2)
                        
                        
                        12,960
                        
                        
                        
                        -Total
                        
                        $
                        372,739
                        
                        
                        $
                        327,374Amounts due (from) to related
      partiesScott
      Cramer – non-executive director and shareholder (3)
                        
                        
                        51,457
                        
                        
                        
                        143,556Shaanxi
      Xingji Electronics Co. - owned by a director's wife (3)
                        
                        
                        49,789
                        
                        
                        
                        -Officer
      and shareholder
                        
                        
                        36,257
                        
                        
                        
                        41,468Total
                        
                        $
                        137,503
                        
                        
                        $
                        185,024
 
 (1)
On June 2, 2009, Weibing Lu, Wei Wen and Aixia Wang obtained personal loans from
Yanta Credit Union and advanced cash to Xian Tianxing in the total amount of
$110,025. These loans were due on June 1, 2010, with 10.11% interest per annum
and are guaranteed by Xian Tianxing, were paid in full in June 2010. For the
three and six months ended June 30, 2010, Xian Tianxing paid interest of $2,225
and $6,070, respectively, for these loans directly to the bank. For the three
and six months ended June 30, 2009, Xian Tianxing paid interest of $2,748 and
$5,630, respectively, for these loans.
  28
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 (2)
As of June 30, 2010 and December 31, 2009, the Company had $355,922
(representing 52,334 common shares) and $302,372 (representing 47,334 common
shares), respectively, under agreement to issue shares to Scott Cramer, as
compensation for being a representative of the Company in the United States for
the periods from May 2008 to June 30, 2010, and December 31, 2009, respectively.
In addition, as of June 30, 2010 and December 31, 2009, the Company had $3,857
(representing 463 common shares) and $25,002 (representing 5,556 common shares)
under agreement to issue shares to Mark D. Chen as compensation at the beginning
of each term of his directorship. Effective April 16, 2010, the former CFO
Bennet Tchaikovsky resigned from his position and the last installment of 3,610
shares was prorated to 2,880 shares, which shares have not been issued as of
June 30, 2010, and the corresponding $12,960 was recorded as shares to be issued
and charged to general and administration expense.
 
 (3)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of June 30, 2010 and December 31,
2009 were short-term cash transfers for business operations, non-interest
bearing, unsecured, and payable upon demand. As of June 30, 2010 and December
31, 2009, the Company also had bonus shares due to Scott Cramer.
 
 Note
19 - 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 the FASB’s accounting standard of 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 Mr. 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).
 
 The
Company entered into a tenancy agreement for the lease of an office space in
California for a period of three years from July 1, 2009 to July 1, 2012 with
monthly rent of $1,100.
 
 The
Company entered into a one-year tenancy agreement for leasing Tianxing’s sales
office space in Tianjin from April 21, 2010 to April 20, 2011 with annual rent
of approximately $3,500 (or RMB 24,000).
 
 The
minimum future lease payments for the next five years and thereafter are as
follows:
 
 Period
                        
                        Amount(Unaudited)Six
      months ending December 31, 2010
                        
                        $
                        38,979Year
      ending December 31, 2011
                        
                        
                        73,622Year
      ending December 31, 2012
                        
                        
                        41,746Year
      ending December 31, 2013
                        
                        
                        35,146Year
      ending December 31, 2014
                        
                        
                        35,146Year
      ending December 31, 2015 and thereafter
                        
                        
                        54,795Total
                        
                        $
                        279,434
  29
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 Rental
expense for the three months ended June 30, 2010 and 2009 amounted to $29,643
and $14,811, respectively. Rental expense for the six months ended June 30, 2010
and 2009 amounted to $36,411 and $29,622, 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 June 30, 2010.
 
 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. On July 17, 2008, in a decision that is now published, the
Court granted defendants' motion to dismiss 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. Additionally, on February 5, 2009, the Court issued a
ruling on defendants' motion for sanctions, finding the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Federal Rule of Civil Procedure 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 the judge, but both motions were denied. A Notice of Appeal
concerning the ruling awarding sanctions against him was also filed by Mr.
Chien.  All appeals, including the one referenced below concerning Mr.
Chien's second lawsuit, were subsequently consolidated. On May 26, 2010, the
court of appeals for the Second Circuit upheld Judge Kravtiz’s ruling against
Mr. Chine.
  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 case was removed to
the U.S. District Court, District of Connecticut, and assigned to the same Judge
who dismissed Mr. Chien’s related federal action. On June 8, 2009, the Court
granted defendants’ motion to dismiss this action in its entirety, and denied
Mr. Chien’s motion to further amend his complaint. Mr. Chien filed a Notice of
Appeal concerning the ruling dismissing this lawsuit, which has been
consolidated with Mr. Chien’s appeal of his other lawsuit. On May 26, 2010, the
court of appeals for the Second Circuit upheld Judge Kravtiz’s ruling against
Mr. Chien.
 
 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.
  30
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2010
 (Unaudited)
 
 (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 a milk cow
disease. The total projected budget for this project is approximately $574,000
(RMB 4 million), of which, approximately $147,000 (RMB 1 million) was expensed
when incurred in previous years, and approximately $293,000 (RMB 2 million) was
prepaid in 2008. For the six months ended June 30, 2010, the Company incurred
$161,359 (RMB 1.1 million) of expenses relating to this project. The project is
still in the trial stage, and expects to obtain veterinary permit for the new
product from government in June 2011.
 
 During
the year ended December 31, 2009, Xian Tianxing contracted with the Fourth
Military Medical University to jointly work on a R&D project with a
contracted amount of approximated $880,200 (RMB 6,000,000). For the six months
ended June 30, 2010 and 2009, the Company incurred $74,724 (RMB 509,402) and $0
expenses relating to this project.
 
 (e)
Registered capital of subsidiaries
 
 Skystar
Kunshan’s remaining registered capital of $13,000,000 is required to be invested
by May 7, 2012.
  Note
20 - Subsequent Events
  On August
11, 2010, Sida became the parent company of Skystar Biotechnology (Jingzhou)
Co., Limited (“Skystar Jingzhou”), a company established in Jingzhou, Hubei
Province, China on February 5, 2010, with registered capital of approximately
$3.8 million (RMB 26 million). Approximately $3.5 million (RMB 23,480,000) of
Skystar Jingzhou’s registered capital has been paid, including approximately
$730,000 (RMB 5 million) in the form of cash and the balance (RMB 18,480,000) in
the form of buildings, equipment and drug manufacturing licenses (collectively
the “Assets”). The Assets were acquired from a Hubei-based veterinary
manufacturer through its bankruptcy proceedings, and Skystar Jingzhou was
established to hold and operate these Assets. Skystar Jingzhou will mainly focus
on manufacturing aquatic veterinary medicines and
antiseptics.
  The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of June 30,
2010.
  31


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 and six months ended June 30, 2010 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 of America. 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”).





As of
June 30, 2010, all of the Company’s operations were 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 Islands 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 (“Fortunate
Time), a Hong Kong company and wholly owned subsidiary of Skystar Cayman.
Fortunate Time has another subsidiary, Skystar Biotechnology (Kunshan) Co.,
Limited (“Skystar Kunshan”) that was set up in May 2010.  Skystar
Kunshan was formed in connection with the prepayments the Company has been
making in an attempt to acquire the assets of a micro-organism manufacturing
facility in Kunshan.  On August 11, 2010, Sida became the
parent company of Skystar Bio-Technology (Jingzhou) Co., Limited (“Skystar
Jingzhou), which was established to hold and operate the assets of a veterinary
manufacturer in Jingzhou, Hubei Province, that were acquired through its
bankruptcy proceedings. The assets acquired includebuildings, equipment
and drug manufacturing licenses. Xian Tianxing also has a wholly owned
subsidiary, Shanghai Siqiang Biotechnological Co., Ltd., a PRC
company.




The
contractual arrangements are necessary to comply with Chinese laws 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. Please see Note 1 to our consolidated
financial statements for the six months ended June 30, 2010, for the impact of
the contractual arrangements on our consolidated financial
statements.




Currently,
we have four major product lines:





·
            Our
      bio-pharmaceutical veterinary vaccine line currently includes over 10
      products;


32





·
            Our
      veterinary medicine line for poultry and livestock currently includes over
      212 products;





·
            Our
      feed additives line currently includes over 10 products;
    and





·
            Our
      micro-organism products line currently includes over 16
      products.





All of
our revenue is derived from the sale of veterinary healthcare and medical
care products in China, which are distributed throughout 29
provinces. As of June 30, 2010, we had over 1,708 distributors
and 591 direct customers.





Critical
Accounting Policies and Estimates





In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, we make estimates
and assumptions about the effect of matters that are inherently uncertain and
may change in subsequent periods. The resulting accounting estimates will, by
definition, 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
      delivering:Revenue is recognized when the products have been
      delivered to customers.





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




Our
accounts receivable aging was as follows for the periods below:





From Date of Invoice to Customer:
                          
                          June 30,
                            2010
                          
                          
                          December 31,
                            2009
                          
                          
                          
                          June 30,
                            20090-90
      days
                          
                          $
                          6,949,893
                          
                          
                          $
                          4,401,071
                          
                          
                          $
                          3,932,15291 – 180
      days
                          
                          
                          728,200
                          
                          
                          
                          177,416
                          
                          
                          
                          106,895181 – 270
      days
                          
                          
                          444,740
                          
                          
                          
                          21,868
                          
                          
                          
                          32,305271 – 360
      days
                          
                          
                          83,252
                          
                          
                          
                          23,865
                          
                          
                          
                          62,073360
      days and above
                          
                          
                          123,589
                          
                          
                          
                          86,824
                          
                          
                          
                          26,612Allowance
      for bad debts
                          
                          
                          (617,955
                          )
                          
                          
                          (327,857
                          )
                          
                          
                          (327,410
                          )Total
                          
                          $
                          7,711,719
                          
                          
                          $
                          4,383,187
                          
                          
                          $
                          3,832,627




33





On
average, we collect our receivables within 90 days. For the quarter ended June
30, 2010, accounts receivable increased significantly compared to the same
quarter last year due in part to increased sales. The Company’s efforts to
increase market share by relaxing its collections during the quarter also
contributed to the increase in accounts receivable. As a result, the quality of
aging accounts receivable deteriorated, as evidenced by the smaller percentage
of total accounts receivable at June 30, 2010 being comprised of 0-90 day old
accounts (84%) as compared to a year ago (94%). We have increased our bad debt
reserve in response to the higher accounts receivable balance and deterioration
of the aging quality.  Historically, however, we have collected all of
our accounts receivable and have had no write offs, and management expects our
collection rate to normalize in the third quarter. If we are having difficulty
collecting from a customer, we take the following steps: cease existing
shipments to the customer, our sales force actively calls and goes to the
customer’s site reminding the customer of their past due invoice and requesting
payment, and if those methods are unsuccessful we use our outside legal counsel.
If, in the future, those steps are unsuccessful, management would determine
whether or not the receivable should be written off.





•
            Warrants:
      We have adopted the accounting standards of accounting for stock purchase
      warrants and other related derivative accounting standards for valuation
      and accounting treatment of our outstanding
  warrants.





Recent
Issued Accounting Pronouncements





In
December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company adopted this standard and the standard did
not have material effect on the Company’s consolidated financial
statements.





In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary.  Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary.  Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value.  In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.  This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets.  This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009.  The
adoption of this ASU did not have a material impact the Company’s consolidated
financial statements.





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements.  Further, this update
clarifies existing disclosures on level of disaggregation and Disclosures about
inputs and valuation techniques.  A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities
and should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.  The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years.  The Company is currently evaluating the impact of this
ASU; however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.




In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February
2010.


34





In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.





In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update provides
guidance on the recognition of revenue under the milestone method, which allows
a vendor to adopt an accounting policy to recognize all of the arrangement
consideration that is contingent on the achievement of a substantive milestone
(milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The Company does not expect that the adoption of this ASU
will have a material impact on its consolidated financial
statements.





Results
of Operations – Three Months Period ended June 30, 2010 and
2009





The
following table summarizes our results of operations for the three months ended
June 30, 2010 and 2009.





Three Months Ended June 30,2010
                      
                      
                      2009Amount
                      
                      
                      Percentage of
                        total revenue
                      
                      
                      Amount
                      
                      
                      Percentage of
                        total revenueRevenue
                      
                      $
                      8,264,541
                      
                      
                      
                      100.0
                      %
                      
                      $
                      6,243,438
                      
                      
                      
                      100.0
                      %Gross
      Profit
                      
                      $
                      4,359,478
                      
                      
                      
                      52.7
                      %
                      
                      $
                      3,284,601
                      
                      
                      
                      52.6
                      %Operating
      Expense
                      
                      $
                      1,621,932
                      
                      
                      
                      19.6
                      %
                      
                      $
                      1,577,261
                      
                      
                      
                      25.3
                      %Income
      from Operations
                      
                      $
                      2,737,546
                      
                      
                      
                      33.1
                      %
                      
                      $
                      1,707,340
                      
                      
                      
                      27.3
                      %Other
      Expenses
                      
                      $
                      (181,335
                      )
                      
                      
                      (2.2
                      )%
                      
                      $
                      1,481,582
                      
                      
                      
                      23.7
                      %Income
      Tax Expenses
                      
                      $
                      540,486
                      
                      
                      
                      6.5
                      %
                      
                      $
                      342,555
                      
                      
                      
                      5.5
                      %Net
      Income (Loss)
                      
                      $
                      2,378,395
                      
                      
                      
                      28.8
                      %
                      
                      $
                      (116,797
                      )
                      
                      
                      (1.9
                      )%





Revenue.  All of
our revenue is derived from the sale of veterinary healthcare and medical care
products in the PRC. For the three months ended June 30, 2010, we had revenue of
$8,264,541 as compared to revenue of $6,243,438 for the three months ended June
30, 2009, an increase of approximately 32.4%. We generate revenue from sales of
four product lines: veterinary medications, micro-organism, feed additives, and
vaccines.




Veterinary
Medications.  Revenue from sales of our veterinary medications
increased by $1,619,576 or 41% from $3,913,444 for the three months ended
June 30, 2009 to $5,533,020 for the three months ended June 30,
2010.  The increase was primarily due to improved utilization of our
Huxian plant capacity and increased product variety.  Of total revenue
from veterinary medications during the three months ended June 30, 2010,
approximately $1,864,203 or 33.7% resulted from the sale of Praziquantel
tablets which treats schistosomiasis.





Micro-Organism.  Revenue
from sales of our micro-organism products increased by $249,561 or
14.4% from $1,985,095 for the three months ended June 30, 2009 to
$1,985,084 during the three months ended June 30, 2010. The increase was the
result of the added micro-organism production capacity completed at our
Huxian plant in 2009 which commenced production in June 2010.  We
expect the micro-organism line to contribute more to our revenue mix as we ramp
up production in the coming quarters.


35





Feed
Additives.  Revenue from sales of our feed additives product
line increased by $87,076 or 31% from $281,461 for the three months
ended June 30, 2009 to $368,537 for the three months ended June 30, 2010. The
increase was the result of increased sales efforts of our multi-enzyme feed
additive products during the three months ended June 30, 2010.





Vaccines.  Revenue
from sales of our vaccines increased by $64,890 or 21% from
$312,999 for the three months ended June 30, 2009 to $377,889 for the three
months ended June 30, 2010. This increase was the result of increased demands
for our vaccine products during the three months ended June 30, 2010. 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. Construction of the vaccine facility at our Huxian plant
was completed in June 2010.  The Company commenced installation,
tooling and testing of equipment in July 2010.




Cost of
Revenue.  Cost of revenue, which consists of raw materials,
direct labor, and manufacturing overhead for our four product lines, was
$3,905,063 for the three months ended June 30, 2010, as compared to
$2,958,837 for the three months ended June 30, 2009, an increase of
approximately 32%, as a result of increased sales and production.





Veterinary
Medications.  Cost of revenue for our veterinary
medications increased by $921,554 or approximately 40.5% from
$2,276,216 for the three months ended June 30, 2009 to $3,197,770 for the
three months ended June 30, 2010. This increase was mainly due to the
corresponding increase in veterinary medication sales.





Micro-Organism.  Cost
of revenue for our micro-organism products did not increase
significantly, from $513,310 for the three months ended June 30, 2009 to
$520,911 for the three months ended June 30, 2010, for an increase of $7,601 or
approximately 1.5%. Due to increased operating efficiency, revenue growth
outpaced cost increase.





Feed
Additives.  Cost of revenue for our feed additives
increased by $25,617 or 21% from $121,367 for the three months ended June
30, 2009 to $146,984 for the three months ended June 30, 2010. The increase was
primarily due to increased sales and production.





Vaccines.  Cost of
revenue for our vaccines products decreased by $8,546 or 18% from
$47,944 for the three months ended June 30, 2009 to $39,398 for the three
months ended June 30, 2010. This decrease was a result of increased
operating efficiency. Our vaccine facility is presently running at full
capacity.




Operating
Expenses


The three Months Ended June 30,2010
                        
                        
                        2009Amount
                        
                        
                        Percentage of
                          total revenue
                        
                        
                        Amount
                        
                        
                        Percentage of
                          total revenueGross
      Profit
                        
                        $
                        4,359,478
                        
                        
                        
                        52.7
                        %
                        
                        $
                        3,284,601
                        
                        
                        
                        52.6
                        %Operating
      Expenses
                        
                        $
                        1,621,932
                        
                        
                        
                        19.6
                        %
                        
                        $
                        1,577,261
                        
                        
                        
                        25.3
                        %Selling
      Expenses
                        
                        $
                        431,810
                        
                        
                        
                        5.2
                        %
                        
                        $
                        585,207
                        
                        
                        
                        9.4
                        %General
      and Administrative Expenses
                        
                        $
                        998,034
                        
                        
                        
                        12.1
                        %
                        
                        $
                        625,359
                        
                        
                        
                        10.0
                        %Research
      and Development Costs
                        
                        $
                        192,088
                        
                        
                        
                        2.3
                        %
                        
                        $
                        366,695
                        
                        
                        
                        5.9
                        %Income
      from Operations
                        
                        $
                        2,737,546
                        
                        
                        
                        33.1
                        %
                        
                        $
                        1,707,340
                        
                        
                        
                        27.3
                        %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$585,207 for the three months ended June 30, 2009 as compared to $431,810 for
the three months ended June 30, 2010, a decrease of approximately 26%. This
decrease is a result of decreased transportation costs, lower trade show
expenses, and reduced outdoor advertising.





General and Administrative
Expenses.  General and administrative expenses totaled $625,359
for the three months ended June 30, 2009, as compared to $998,034 for the three
months ended June 30, 2010, an increase of approximately 59.6%. General and
administrative expenses for our Chinese operating entity have increased
with our expanded operations and the added acquisition related
expenses.  The Company also increased its bad debt reserve by $288,757
to account for the higher accounts receivable balance.


36





Research and DevelopmentCosts.  Research
and development costs, which consist of salaries, professional fees, and
technical support fees, totaled $366,695 for the three months ended June 30,
2009, as compared to $192,088 for the three months ended June 30, 2010, a
decrease of approximately 47.6%. One notable project the Company has been
working on is a joint research project with Northwestern Agricultural University
to use nano-technology in the prevention of a milk cow disease.  The
project is in the trail stage as of June 30, 2010 with targeted completion date
in June 2011.  During the three months ended June 30, 2010, a
significant portion of the Company’s research and development projects were in
stages that required less cash outlays, compared to the research and development
projects in the same period last year when there were costly testing and
clinical trials.





Results
of Operations – Six Month Periods ended June 30, 2010 and 2009





The
following table summarizes out results of operations for the six months ended
June 30, 2010 and 2009.





Six Months Ended June 30,2010
                      
                      
                      2009Amount
                      
                      
                      Percentage of
                        total revenue
                      
                      
                      Amount
                      
                      
                      Percentage of
                        total revenueRevenue
                      
                      $
                      13,133,784
                      
                      
                      
                      100.0
                      %
                      
                      $
                      10,067,004
                      
                      
                      
                      100.0
                      %Gross
      Profit
                      
                      $
                      6,937,502
                      
                      
                      
                      52.8
                      %
                      
                      $
                      5,161,809
                      
                      
                      
                      51.3
                      %Operating
      Expense
                      
                      $
                      2,456,611
                      
                      
                      
                      18.7
                      %
                      
                      $
                      2,216,703
                      
                      
                      
                      22.0
                      %Income
      from Operations
                      
                      $
                      4,480,891
                      
                      
                      
                      34.1
                      %
                      
                      $
                      2,945,106
                      
                      
                      
                      29.3
                      %Other
      Expenses
                      
                      $
                      140,444
                      
                      
                      
                      1.1
                      %
                      
                      $
                      1,443,184
                      
                      
                      
                      14.3
                      %Income
      Tax Expenses
                      
                      $
                      865,805
                      
                      
                      
                      6.6
                      %
                      
                      $
                      554,075
                      
                      
                      
                      5.5
                      %Net
      Income (loss)
                      
                      $
                      3,474,642
                      
                      
                      
                      26.5
                      %
                      
                      $
                      947,847
                      
                      
                      
                      9.4
                      %





Revenue.  For the
six months ended June 30, 2009, we had revenue of $10,067,004 as compared to
$13,133,784 for the six months ended June 30, 2010, an increase of approximately
30.5%. We generate revenue from sales of four product lines: veterinary
medications, micro-organism, feed additives, and vaccines.





Veterinary
Medications.  Revenue from sales of our veterinary medications
increased by $2,213,339 or 34% from $6,515,940 for the six months ended
June 30, 2009 to $8,729,279 for the six months ended June 30,
2010.  The increase was primarily due to increased sales efforts and
better utilization of production capacity. Approximately $2,694,730 or 31% of
total revenue from veterinary medications resulted from the sale of
Praziquantel tablets which treats schistosomiasis during the six months ended
June 30, 2010, as compared to $1,297,725 or 13% for the same period of
2009.





Micro-Organism.  Revenue
from sales of our micro-organism products increased by $562,846 or 21% from
$2,628,827 for the six months ended June 30, 2009 to $3,191,673 during the six
months ended June 30, 2010. The increase was the result of increased sales
efforts and contribution from newly added production capacity at our Huxian
plant that commenced production in June 2010.





Feed
Additives.  Revenue from sales of our feed additives increased
by $140,805 or 30.4% from $463,772 for the six months ended June 30,
2009 to $604,577 for the six months ended June 30, 2010. The increase was the
result of increased sales efforts.





Vaccines.  Revenue
from sales of our vaccines increased by $149,790 or 32.7% from $458,465 for
the six months ended June 30, 2009 to $ 608,255 for the six months ended June
30, 2010. This increase was a result of increased demand for our products. 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.


37





Cost of
Revenue.  For the six months ended June 30, 2009, cost of
revenues, which consists of raw materials, direct labor, and manufacturing
overhead for our four product lines, was $4,905,195 as compared to
$6,196,282 for the six months ended June 30, 2010, an increase of
approximately 26.3% as a result of increased sales and production.





Veterinary
Medications.  Cost of revenue for our veterinary
medications increased by $1,151,002 or approximately 30% from $3,869,025 for the
six months ended June 30, 2009 to $5,020,027 for the six months ended June 30,
2010. This increase was mainly due to the corresponding increase in
veterinary medication sales.





Micro-Organism.  Cost
of revenue for our micro-organism products increased by $90,083 or approximately
12% from $773,847 for the six months ended June 30, 2009 to $863,930 for
the six months ended June 30, 2010. This increase was mainly due to a
corresponding increase in micro-organism sales.





Feed
Additives.  Cost of revenue for our feed additives products
increased from $198,806 for the six months ended June 30, 2009 to $247,030 for
the six months ended June 30, 2010, an increase of $48,224 or 24%. The increase
was primarily due to increased sales and production





Vaccines.  Cost of
revenue for our vaccines increased from $63,517 for the six months ended
June 30, 2009 to $65,295 for the six months ended June 30, 2010, an increase of
$1,778 or 3%. This increase was the result of an increase of vaccine
product sales. Our vaccine facility is presently running at full
capacity.





Operating
Expenses





The six Months Ended June 30,2010
                      
                      
                      2009Amount
                      
                      
                      Percentage of
                        total revenue
                      
                      
                      Amount
                      
                      
                      Percentage of
                        total revenueGross
      Profit
                      
                      $
                      6,937,502
                      
                      
                      
                      52.8
                      %
                      
                      $
                      5,161,809
                      
                      
                      
                      51.3
                      %Operating
      Expenses
                      
                      $
                      2,456,611
                      
                      
                      
                      18.7
                      %
                      
                      $
                      2,216,703
                      
                      
                      
                      22.0
                      %Selling
      Expenses
                      
                      $
                      602,944
                      
                      
                      
                      4.6
                      %
                      
                      $
                      792,602
                      
                      
                      
                      8.0
                      %General
      and Administrative Expenses
                      
                      $
                      1,617,584
                      
                      
                      
                      12.3
                      %
                      
                      $
                      940,054
                      
                      
                      
                      9.3
                      %Research
      and Development Costs
                      
                      $
                      236,083
                      
                      
                      
                      1.8
                      %
                      
                      $
                      484,047
                      
                      
                      
                      4.9
                      %Income
      from Operations
                      
                      $
                      4,480,891
                      
                      
                      
                      34.1
                      %
                      
                      $
                      2,945,106
                      
                      
                      
                      29.3
                      %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$602,944 for the six months ended June 30, 2010 as compared to $792,602 for the
six months ended June 30, 2009, a decrease of approximately 23.9%. This decrease
is the result reduced transportation costs, lower trade show expenses and
reduced outdoor advertising spending.





General and Administrative
Expenses.  General and administrative expenses totaled $940,054
for the six months ended June 30, 2009, as compared to $1,617,584 for the six
months ended June 30, 2010, an increase of approximately 72.1%. General and
administrative expenses for our Chinese operating entity have increased relative
to revenue due to acquisition related costs and costs related to expanded
operations.  In addition, the Company increased its bad debt reserve
in the current quarter by $288,757 to account for the higher accounts receivable
balance.




Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $484,047 for
the six months ended June 30, 2009, as compared to $236,083 for the six months
ended June 30, 2010, a decrease of approximately 51.2%.  One notable
project the Company has been working on is a joint research project with
Northwestern Agricultural University to use nano-technology in the prevention of
a milk cow disease.  The project is in the trail stage as of June
30, 2010 with targeted completion date in June 2011.  During the
six months ended June 30, 2010, a significant portion of the Company’s research
and development projects were in stages that required less cash outlays,
compared to the research and development projects in the same period last year
when there were costly testing and clinical trials.


38





Liquidity





For the
six months ended June 30, 2009, cash provided by operating activities was
$175,228 compared to cash provided by operating activities of $553,227 for
the same period in 2010.  Higher net income for the six months ended
June 30, 2010 and lower deposit and prepayments were offset by increases in both
accounts receivable and inventory, along with changes in other operating
activities and assets and liabilities, resulting in a marginal increase of
$377,999 over the same period last year. As of June 30, 2010, we had
approximately 33 suppliers that we have made advances to in order to secure our
raw material needs and to obtain favorable pricing.  We have lowered
our advances to suppliers compared to the same period last year to improve our
cash flow positions and will continue to manage the advances
closely.





We used
$722,980 in investing activities for the six months ended June 30, 2009, as
compared to using $8,403,458 in investing activities for the six months ended
June 30, 2010. Cash used in investing activities for the six months ended June
30, 2010 was a result of prepayments for potential acquisitions of $5,518,478,
purchases of plant and equipment of $2,136,531 and payments for ongoing
construction projects of $748,449.  As of June 30, 2010, the aggregate
prepayments the Company made for potential acquisitions were
$12,376,146.  One of the acquisitions subsequently closed on August
11, 2010.





Cash
generated by financing activities was $398,100 for the six months ended June 30,
2009 as compared to cash used in financing activities of $377,927 for the six
months ended June 30, 2010. Cash generated by financing activities for the six
months ended June 30, 2009 was primarily the result of short term loans and
advances from related parties offset by principal payments on short term loans
from shareholders. Cash used in financing activities for the six months ended
June 30, 2010 was the result of repayment of loans, including repayment of a
short term bank loan in January for $220,035 and repayment of loans from
officers and directors in June for $110,018.





As of
June 30, 2010, we had cash of $3,482,558. Our total current assets were
$29,410,972, and our total current liabilities were $5,010,791, which resulted
in a net working capital of $24,400,181.





Capital
Resources





During
the six months ended June 30, 2010, we made additional deposits of $5,518,478
for potential acquisitions. We also repaid $330,053 in short-term loans. The
Company has sufficient capital for its operations.  However, if we are
to acquire another business or further expand our operations, we may need
additional capital.





Payments Due by PeriodContractual Obligations
                    
                    Total
                    
                    
                    Less than
                      1 year
                    
                    
                    1 – 3 years
                    
                    
                    3 – 5 years
                    
                    
                    More than
                      5 yearsR&D
      Project Obligation
                    
                    $
                    543,625
                    
                    
                    $
                    543,625
                    
                    
                    $
                    
                    
                    
                    $
                    
                    
                    
                    $Operating
      Lease Obligations
                    
                    
                    315,846
                    
                    
                    
                    112,202
                    
                    
                    
                    96,131
                    
                    
                    
                    63,325
                    
                    
                    
                    44,188Total
                    
                    $
                    859,471
                    
                    
                    $
                    655,827
                    
                    
                    $
                    96,131
                    
                    
                    $
                    63,325
                    
                    
                    $
                    44,188





In
addition to the contractual obligations listed above, the Company has future
registered capital commitment related to the newly created subsidiary Skystar
Kunshan, located in Kunshan, Jiangsu Province, China.  Skystar
Kunshan has registered capital of $15,000,000, of which the Company has
invested $2,000,000 in cash.  The remaining $13,000,000 of capital is
required to be invested prior to May 7, 2012.  The Company has also
been making prepayments in an effort to acquire a micro-organism manufacturing
facility in Kunshan.  Upon completion of the acquisition, the assets
purchased will be transferred to Skystar Kunshan to satisfy some of its
registered capital commitment. As of the date of this report, the
acquisition has not been completed.


39





Off-Balance Sheet Arrangements





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
stockholders’ equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.





Exchange
Rate





Xian
Tianxing, Sida and Shanghai Siqiang maintain their
respective books and records in Renminbi (“RMB”), the lawful currency of
China. In general, for consolidation purposes, we translate their assets
and liabilities into US$ 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  their financial statements are recorded as
accumulated other comprehensive income.





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





June 30, 2009
                        
                        December 31, 2009
                        
                        June 30, 2010Assets
      and liabilities
                        
                        
                        USD0.14650:
                          RMB1
                        
                        
                        USD0.14670:
                          RMB1
                        
                        
                        USD0.14730:
                          RMB1Statements
      of operations and cash flows for the period/year ended
                        
                        
                        USD0.14657:
                          RMB1
                        
                        
                        USD0.14661:
                          RMB1
                        
                        
                        USD0.14669:
                          RMB1





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





Inflation





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





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
Applicable




ITEM
4. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





As of
June 30, 2010, 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.





In
September of 2009, we engaged Union Strength Business Consulting Co. (“Union
Strength”) to analyze the Company’s business processes and develop internal
control procedures to improve the Company’s internal control.  Union
Strength provided detailed recommendations and prescribed operational procedures
to enhance the Company’s control procedures.  The Company has
implemented some of the recommended control procedures especially surrounding
the area of cash transactions.  As a result, there has been
significant improvement in reducing cash transactions both in sales and
purchases.  The Company is continuing its work with Union Strength to
further improve internal controls in other areas of operations.


40





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the six months ended June 30, 2010 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 us, 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. The 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. A notice of appeal concerning the ruling awarding sanctions against him
was also filed by Mr. Chien.  All appeals, including the one referenced
below concerning Mr. Chien's second lawsuit, were subsequently
consolidated.  On May 26, 2010, the court of appeals for the Second
Circuit upheld Judge Kravtiz’s ruling against Mr. Chien.


41





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 filed another
lawsuit against us, 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.
We argued in response that the new complaint was just as frivolous as Mr.
Chien’s earlier federal action, which the new complaint substantially
duplicated. The earlier federal action, described above, was found to
be completely frivolous and dismissed in its entirety, with substantial
monetary sanctions awarded 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 was assigned to Judge
Kravitz, the federal judge in the related federal case previously
dismissed.  We filed a motion to dismiss Mr. Chien's new action.  In
their motion to dismiss, defendants argued that all the claims asserted by Mr.
Chien were frivolous, including among other grounds that they were time-barred
and otherwise substantively meritless, and that sanctions against Mr. Chien
under Federal Rule of Civil Procedure Rule 11 (“Rule 11”) and the Private
Securities Litigation Reform Act (“PSLRA”) were again warranted.  Rather
than file an opposition to defendants' motion to dismiss, Mr. Chien filed a
motion seeking to amend his complaint along with a proposed first amended
complaint (“FAC”), which the court ultimately granted.  The FAC purported
to drop all eleven claims for securities fraud asserted by Mr. Chien, all of
which defendants had contended were frivolous and meritless.  The court
ruled that these claims, abandoned in the wake of defendants' motion to dismiss,
were all deemed dismissed with prejudice, and that no further briefing on
defendants' pending motion to dismiss the action was required. 
Subsequently, the court granted the defendants' motion to dismiss, dismissing
the action and all claims asserted in their entirety.  In the ruling, the
court held that all claims asserted against the defendants were barred and
failed to state a claim on a multiplicity of grounds, including on the basis
of  res
judicata as well as other substantive defects.The defendants filed a
second motion for sanctions under Rule 11 and the PSLRA.  The motion was
subsequently granted by Judge Kravitz, and Mr. Chien was again ordered to pay
additional monetary sanctions to us.  Mr. Chien filed a notice of appeal
concerning the ruling dismissing his second lawsuit.  In its filings with
the court of appeal, we have argued that the appeals are groundless and the
earlier rulings by Judge Kravitz should be upheld, including the two awards of
sanctions against Mr. Chien.  The court of appeals for the Second Circuit
consolidated all of Mr. Chien's appeals from both of his lawsuits.  On
May 26, 2010, the court of appeals for the Second Circuit upheld Judge Kravtiz’s
ruling against Mr. Chien.





ITEM
1A. RISK FACTORS





Our
business is influenced by many factors that are difficult to predict, involve
uncertainties that may materially affect actual results and are often beyond our
control. We have identified a number of these risk factors in our annual report
on Form 10-K for the year ended December 31, 2009, which factors should be
taken into consideration when reviewing the information contained in this
report. There have been no material changes in our risk factors from those
disclosed in Part I, Item 1A, of our annual report on Form 10-K as of and for
the year ended December 31, 2009.




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





On April
16, 2010, we entered into a restricted stock award agreement with Scott Cramer,
pursuant to which we granted Mr. Cramer 10,000 shares of our restricted common
stock under our 2010 Incentive Stock Plan, to vest in four installments of 2,500
shares at the end of each quarter commencing June 30, 2010.





On April
22, 2010, we issued 8,997 shares of common stock to an affiliate of the
placement agent for our February 2007 private financing who exercised his
warrant issued from that financing on a cashless basis.





ITEM
3.   DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4.   RESERVED





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 Corporation and CGN
      Acquisitions Corporation dated December 7, 2000
  (2)


42




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
              
              Articles
      of Incorporation (4)3.2
              
              Certificate
      of Amendment and Certificate of Change filed with the Nevada Secretary of
      State on February 13, 2006 (5)3.3
              
              Certificate
      of Amendment to Increase Number of Authorized Shares of Common Stock filed
      with the Nevada Secretary of State on July 11, 2008
(11)3.4
              
              Amended
      and Restated Bylaws (12)3.5
              
              Certificate
      of Change Pursuant to NRS 78.209 filed with the Nevada Secretary of State
      on May 7, 2009 and effective on May 12, 2009 (14)3.6
              
              Certificate
      of Change Pursuant to NRS 78.209 as filed with the Nevada Secretary of
      State on November 12, 2009 and effective on November 16, 2009
      (18)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)4.6
              
              Form
      of Common Stock Certificate (17)4.7
              
              Form
      of Common Stock Purchase Option granted to the representative of the
      underwriters (22)10.1
              
              Consulting
      Services Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings
      Co., Ltd. (“Skystar Cayman”) and Xian Tianxing Bio-Pharmaceutical Co.,
      Ltd. (“Xian Tianxing”) dated October 28, 2005 (4)10.2
              
              Operating
      Agreement among Skystar Cayman, Xian Tianxing and  the majority
      stockholders of Xian Tianxing (“Xian Tianxing Majority Stockholders”)
      dated October 28, 2005 (4)10.3
              
              Equity
      Pledge Agreement among Skystar Cayman, Xian Tianxing and the Xian Tianxing
      Majority Stockholders dated October 28, 2005 (4)10.4
              
              Proxy
      Agreement Skystar Cayman, Xian Tianxing and the Xian Tianxing Majority
      Stockholders dated October 28, 2005 (4)10.5
              
              Option
      Agreement Skystar Cayman, Xian Tianxing and the Xian Tianxing Majority
      Stockholders dated October 28, 2005 (4)10.6
              
              Amendment
      to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
      Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
      (7)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 (7)10.8
              
              Amendment
      to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
      (7)10.9
              
              Designation
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, Weibing Lu and Sida dated March 10, 2008
  (7)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
      (7)10.11
              
              Employment
      Agreement with Weibing Lu dated May 5, 2008 (9)10.12
              
              Loanout
      Agreement with Worldwide Officers, Inc. with respect to the services of
      Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008
      (9)10.13
              
              Form
      of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
      (11)10.14
              
              Form
      of Director Offer Letter with Chengtun Qu and Shouguo Zhao
      (12)10.15
              
              Form
      of Amendment to Loanout Agreement with Worldwide Officers, Inc.
      (15)10.16
              
              Form
      of Director Offer Letter with Mark D. Chen (15)10.17
              
              Agreement
      with R. Scott Cramer dated March 30, 2010 (20)10.18
              
              Employment
      Agreement with Michael Hongjie Lan dated April 16, 2010
    (21)10.19
              
              Services
      Agreement with R. Scott Cramer dated April 16, 2010
(21)10.20
              
              Restricted
      Stock Award Agreement with R. Scott Cramer dated April 16, 2010
      (21)24.1
              
              Power
      of Attorney (included as part of the signature page to the registration
      statement)31.1
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *31.2
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *


43




32.1
              
              Certifications
      pursuant to 18 U.S.C. Section 1350 *32.2
              
              Certifications
      pursuant to 18 U.S.C. Section 1350 *99.1
              
              Legal
      Opinion from Allbright Law Offices regarding, among other things, the
      contractual arrangements Skystar Cayman entered into with Xian Tianxing
      and its stockholders, dated November 3, 2005 (10)99.2
              
              Legal
      Opinion from Allbright Law Offices regarding the transfer of the
      contractual arrangements from Skystar Cayman to Sida, dated April 29, 2008
      (10)99.3
              
              Lease
      Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
      (9)99.4
              
              Lease
      Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
      Lu dated June 17, 2007 (10)99.5
              
              Summary
      of Research Arrangement between Shanghai Poultry Verminosis Institute and
      Xian Tianxing (10)99.6
              
              Cooperation
      Agreement between Shaanxi Microbial Institute and Xian Tianxing
      (10)99.7
              
              Technology
      Cooperation Agreement with Fourth Military Medical University
      (20)










* Filed
herewith.





(1)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      June 1, 2000.(2)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on
      January 12, 2001.(3)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      September 26, 2005.(4)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      November 14, 2005.(5)
              
              Incorporated
      by reference from the Registrant’s Annual Report on Form 10-KSB filed on
      April 17, 2006.(6)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      March 5, 2007.(7)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      March 11, 2008.(8)
              
              Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K filed on
      April 2, 2008.(9)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      5, 2008.(10)
              
              Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 26, 2008.(11)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      July 14, 2008.(12)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      July 15, 2008.(13)
              
              Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K filed on
      April 15, 2009.(14)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      18, 2009.(15)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      27, 2009.(16)
              
              Incorporated
      by reference from the Registrant’s Amendment to Registration Statement on
      Form S-1/A filed on June 2, 2009.(17)
              
              Incorporated
      by reference from the Registrant’s Amendment to Registration Statement on
      Form S-1/A filed on June 26, 2009.(18)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      November 17, 2009.(19)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      January 7, 2010.(20)
              
              Incorporate
      by reference from the Registrant’s Annual Report on Form 10-K filed on
      March 31, 2010.(21)
              
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      April 19, 2010.(22)
              
              Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1
      filed on June 1, 2010.


44


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.





August
      16, 2010
                  SKYSTAR
      BIO-PHARMACEUTICAL COMPANYBy:
                  /s/
      Weibing LuWeibing
      Lu
                    Chief
      Executive Officer
                    (Principal
      Executive Officer)By:
                  /s/
      Michael H. LanMichael
      H. Lan
                    Chief
      Financial Officer
                    (Principal
      Financial and Accounting
Officer)


45