**Table
          of Contents**


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)


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





For
                the quarterly period ended:**March****31,
                2006**


Or





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





For
                the transition period from ______________ to
                _______________





Commission
      File Number: **000-28153**




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




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





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




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




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




The
      registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act).     YesoNo þ




APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS:





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act
      of
      1934 subsequent to the distribution of securities under a plan confirmed by
      a
      court. Yes o No o




APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each issuer’s classes of common stock, as of
      the latest practicable date: 12,606,199 issued and outstanding as of May 19,
      2006.





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







**Table
        of Contents**


TABLE
      OF CONTENTS


TO
      QUARTERLY REPORT ON FORM 10-QSB


FOR
      YEAR
      ENDED MARCH 31, 2006




PagePART
                I
            FINANCIAL
                INFORMATION
            4Item
                1.
            Financial
                Statements
            4Consolidated
                Balance Sheets
            4Consolidated
                Statements of Income
            5Consolidated
                Statements of Shareholders’
                Equity
            6Consolidated
                Statements of Cash
                Flows
            7Condensed
                Notes to Consolidated Financial
                Statements
            8Item
                2.
            Management’s
                Discussion and Analysis or Plan
                of Operation
            32Item
                3.
            Controls
                and Procedures
            53PART
                II
            OTHER
                INFORMATION
            54Item
                1.
            Legal
                Proceedings
            54Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            54Item
                3.
            Defaults
                Upon Senior Securities
            54Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            54Item
                5.
            Other
                Information
            54Item
                6.
            Exhibits
                and Reports on Form 8-K
            54Signatures
            56






(REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK)


2
 **Table
          of Contents**


CAUTION
      REGARDING FORWARD-LOOKING INFORMATION





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





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





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


3
 **Table
          of Contents**


**PART
      I - FINANCIAL INFORMATION**





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


**SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND
                  SUBSIDIARY**
              ********
              ******CONSOLIDATED
                  BALANCE SHEETS**
              ******AS
                  OF MARCH 31, 2006 AND DECEMBER 31, 2005**A
                  S S E T S**March
                  31,**
              ****
              **December
                  31,**
              ********
              ****
              **2006**
              ****
              **2005**
              ********
              ****
              **Unaudited**
              ****
              **Audited**CURRENT
                  ASSETS:Cash
              
              $
              36,104
              
              $
              38,498Restricted
                  cash
              
              
              62,400
              
              
              62,000Accounts
                    receivable, trade, net of allowance for doubtful accounts of $72,191
                    and $71,613  as of March 31, 2006 and December 31, 2005,
                    respectively
              
              
              251,081
              
              
              247,354Inventories
              
              
              377,319
              
              
              175,687Deposits
                  and prepaid expenses
              
              
              37,304
              
              
              15,179Loans
                  receivable
              
              
              10,608
              
              
              261,640Amounts
                  due from shareholders
              
              
              91,899
              
              
              122,966Amount
                  due from a related company
              
              
              584,563
              
              
              587,016Other
                  receivables
              
              
              28,730
              
              
              28,008Total
                  current assets
              
              
              1,480,008
              
              
              1,538,348PLANT
                  AND EQUIPMENT, net
              
              
              9,068,951
              
              
              8,564,360OTHER
                  ASSETS:Prepaid
                  land use right, net
              
              
              309,404
              
              
              307,421Intangible,
                  net
              
              
              43,680
              
              
              49,600Total
                  other assets
              
              
              353,084
              
              
              357,021Total
                  assets
              
              $
              10,902,043
              
              $
              10,459,729L
                  I A B I L I T I E S   A N D   S H A R E H O L D E R
                  S’   E Q U I T YCURRENT
                  LIABILITIES:Interest-bearing
                  short-term loan
              
              $
              37,440
              
              $
              37,200Non-interest
                  bearing loan from third parties
              
              
              211,661
              
              
              421,104Accounts
                  payable
              
              
              10,692
              
              
              9,692Accrued
                  expenses and other
              
              
              267,504
              
              
              135,300Taxes
                  payable
              
              
              1,936,217
              
              
              1,811,405Other
                  payables
              
              
              127,177
              
              
              64,496Amount
                  due to a related company
              
              
              24,835
              
              
              24,676Amounts
                  due to shareholders
              
              
              79,186
              
              
              78,678Total
                  current liabilities
              
              
              2,694,712
              
              
              2,582,551Deferred
                  government grant
              
              
              936,000
              
              
              806,000Total
                  liabilities
              
              
              3,630,712
              
              
              3,388,551SHAREHOLDERS’
                  EQUITY:Preferred
                    stock, $0.001 par value, 50,000,000 shares authorized, 2,000,000
                    series
                    “A” shares issued and outstanding as of March 31, 2006 and December
                    31,
                    2005 respectively; Nil and 48,000,000 series “B” shares issued and
                    outstanding as of March 31, 2006 and December 31, 2005
                    respectively.
              
              
              2,000
              
              
              50,000Common
                    stock, $0.001 par value 50,000,000 and 500,000,000 shares authorized
                    as of
                    March 31, 2006 and December 31, 2005 respectively; 12,606,199
                    and 500,000,000 shares issued and outstanding as of March 31,
                    2006 and December 31, 2005 respectively.
              
              
              12,606
              
              
              500,000Paid-in-capital
              
              
              5,910,402
              
              
              3,803,008Statutory
                  reserves
              
              
              364,460
              
              
              364,460Deferred
                  compensation
              
              
              (1,572,000
              )
              
              —Retained
                  earnings
              
              
              2,346,257
              
              
              2,192,365Accumulated
                  other comprehensive income (loss)
              
              
              207,606
              
              
              161,345Total
                  shareholders’ equity
              
              
              7,271,331
              
              
              7,071,178Total
                  liabilities and shareholders’ equity
              
              $
              10,902,043
              
              $
              10,459,729
 The
        accompanying notes are an integral part of this statement.
 4
 **Table
            of Contents**




**SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY**
              ********
              ******CONSOLIDATED
                  STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
                  (LOSS)**
              ******FOR
                  THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005****Three
                  Months ended**
              
              **Three
                  Months ended******
              
              **March
                  31, 2006**
              
              **March
                  31, 2005******
              
              **Unaudited**
              
              **Unaudited**REVENUE
              
              $
              995,188
              
              $
              858,231COST
                  OF SALES
              
              
              520,440
              
              
              415,965GROSS
                  PROFIT
              
              
              474,748
              
              
              442,266RESEARCH
                  AND DEVELOPMENT COST
              
              
              19,339
              
              
              10,285SELLING
                  EXPENSES
              
              
              67,908
              
              
              36,358GENERAL
                  AND ADMINISTRATIVE EXPENSES
              
              
              206,236
              
              
              58,784INCOME
                  FROM OPERATIONS
              
              
              181,265
              
              
              336,839OTHER
                  INCOME, net of other (expense)
              
              
              (216
              )
              
              (6,077
              )INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              181,049
              
              
              330,762PROVISION
                  FOR INCOME TAXES
              
              
              27,157
              
              
              49,614NET
                  INCOME
              
              
              153,892
              
              
              281,148OTHER
                  COMPREHENSIVE INCOME (LOSS):Foreign
                  currency translation adjustment
              
              
              46,261
              
              
              —COMPREHENSIVE
                  INCOME
              
              $
              200,153
              
              $
              281,148EARNINGS
                  PER SHARE (EPS):– Basic
              
              $
              0.03
              
              $
              0.22– Diluted
              
              $
              0.03
              
              $
              0.02Weighted
                  average number of common shares used tocompute
                  EPS:– Basic
              
              
              6,570,030
              
              
              1,260,651– Diluted
              
              
              6,570,030
              
              
              12,006,199
 The
          accompanying notes are an integral part of this
          statement.


5
 **Table
          of Contents**




**SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND
                      SUBSIDIARY**
                  ********
                  ******CONSOLIDATED
                      STATEMENTS OF SHAREHOLDERS’ EQUITY**
                  ******FOR
                      THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005******
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  **Accumulated**
                  ****
                  ****
                  ********
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  **other**
                  ****
                  ****
                  ********
                  ****
                  **Preferred
                      stock**
                  ****
                  **Common
                      stock**
                  ****
                  **Paid-in**
                  ****
                  **Statutory**
                  ****
                  **Retained**
                  ****
                  **Deferred**
                  ****
                  **comprehensive**
                  ****
                  ****
                  ********
                  ****
                  **Shares**
                  ****
                  **Amount**
                  ****
                  **Shares**
                  ****
                  **Amount**
                  ****
                  **capital**
                  ****
                  **reserves**
                  ****
                  **earnings**
                  ****
                  **Compensation**
                  ****
                  **income
                      (loss)**
                  ****
                  **Totals**BALANCE,
                      January 1, 2005, audited
                  
                  
                  50,000,000
                  
                  $
                  50,000
                  
                  
                  500,000,000
                  
                  $
                  500,000
                  
                  $
                  2,266,048
                  
                  $
                  163,396
                  
                  $
                  925,911
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  3,905,355Capital
                      contribution by original shareholders
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,536,960
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,536,960Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  281,148
                  
                  
                  —
                  
                  
                  —
                  
                  
                  281,148BALANCE,
                      March 31, 2005, unaudited
                  
                  
                  50,000,000
                  
                  
                  50,000
                  
                  
                  500,000,000
                  
                  
                  500,000
                  
                  
                  3,803,008
                  
                  
                  163,396
                  
                  
                  1,207,059
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,723,463Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,186,370
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,186,370Foreign
                      currency translation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  161,345
                  
                  
                  161,345Adjustment
                      to statutory reserve
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  201,064
                  
                  
                  (201,064
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —BALANCE,
                      December 31, 2005, audited
                  
                  
                  50,000,000
                  
                  
                  50,000
                  
                  
                  500,000,000
                  
                  
                  500,000
                  
                  
                  3,803,008
                  
                  
                  364,460
                  
                  
                  2,192,365
                  
                  
                  —
                  
                  
                  161,345
                  
                  
                  7,071,178Adjustment
                      to 1-397 reverse stock split
                  
                  
                  
                  
                  
                  
                  
                  
                  (498,739,349
                  )
                  
                  (498,739
                  )
                  
                  498,739
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Share
                      conversion
                  
                  
                  (48,000,000
                  )
                  
                  (48,000
                  )
                  
                  10,745,548
                  
                  
                  10,745
                  
                  
                  37,255
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Share
                      issued for services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  600,000
                  
                  
                  600
                  
                  
                  1,571,400
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,572,000
                  )
                  
                  —
                  
                  
                  —Foreign
                      currency translation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  46,261
                  
                  
                  46,261Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  153,892
                  
                  
                  —
                  
                  
                  —
                  
                  
                  153,892BALANCE,
                      March 31, 2006, unaudited
                  
                  
                  2,000,000
                  
                  $
                  2,000
                  
                  
                  12,606,199
                  
                  $
                  12,606
                  
                  $
                  5,910,402
                  
                  $
                  364,460
                  
                  $
                  2,346,257
                  
                  $
                  (1,572,000
                  )
                  $
                  207,606
                  
                  $
                  7,271,331
  The
          accompanying notes are an integral part of this
          statement.


6
 **Table
          of Contents**
 SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND
                    SUBSIDIARYCONSOLIDATED
                    STATEMENTS OF CASH FLOWSFOR
                    THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005**2006**
                
                **2005******
                
                **Unaudited**
                
                **Unaudited**CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                153,892
                
                $
                281,148Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Depreciation
                    and amortization
                
                
                26,060
                
                
                23,284Loss
                    on disposal of fixed assets
                
                
                —
                
                
                4,555(Increase)
                    decrease in assets:Accounts
                    receivable, trade
                
                
                (2,122
                )
                
                157,823Inventories
                
                
                (199,663
                )
                
                (105,231
                )Deposits
                    and prepaid expenses
                
                
                (21,935
                )
                
                (202,407
                )Other
                    receivables
                
                
                (539
                )
                
                (47,956
                )Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                933
                
                
                (12,838
                )Deposits
                    from customers
                
                
                —
                
                
                29,885Accrued
                    expenses and other payables
                
                
                192,790
                
                
                30,932Taxes
                    payables
                
                
                112,655
                
                
                136,496Net
                    cash provided by operating activities
                
                
                262,071
                
                
                295,691CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of property, plant and equipment
                
                
                (467,311
                )
                
                (59,863
                )Payment
                    of deposits for property, plant and machinery
                
                
                —
                
                
                (451,047
                )Proceeds
                    of disposal of property, plant and equipments
                
                
                —
                
                
                783Decrease
                    (increase) in amounts due from shareholders
                
                
                23,090
                
                
                364,788Net
                    cash used in investing activities
                
                
                (444,221
                )
                
                (145,339
                )CASH
                    FLOWS FROM FINANCING ACTIVITIESIncrease
                    (decrease) in amount due to shareholders
                
                
                8,637
                
                
                (24,096
                )Increase
                    (decrease) in amount due to related companies
                
                
                6,214
                
                
                (11,084
                )Increase
                    in non-interest bearing loan to third parties
                
                
                251,667
                
                
                —Proceeds
                    from government subsidies
                
                
                124,280
                
                
                —Capital
                    contribution in cash by stockholders
                
                
                —
                
                
                1,250,602(Decrease)
                    in non-interest bearing loan from third parties
                
                
                (211,276
                )
                
                —Net
                    cash provided by financing activities
                
                
                179,522
                
                
                1,215,422EFFECT
                    OF EXCHANGE RATE CHANGES ON CASH
                
                
                234
                
                
                —(DECREASE)
                    INCREASE IN CASH
                
                
                (2,394
                )
                
                1,365,774CASH,
                    beginning of period
                
                
                38,498
                
                
                49,606CASH,
                    end of period
                
                $
                36,104
                
                $
                1,415,380SUPPLEMENTAL
                    DISCLOSURE INFORMATIONInterest
                    expense paid
                
                $
                835
                
                $
                1,516Income
                    taxes paid
                
                $
                —
                
                $
                —Non-cash
                    transactionsStock
                    issued for services
                
                $
                1,572,000
                
                $
                —Contribution
                    of a leasehold office building by astockholder
                    as additional capital of Xian Tianxing
                
                $
                —
                
                $
                275,086
 The
            accompanying notes are an integral part of this statement.
 7
 **Table
              of Contents**
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 1.
                DESCRIPTION
                    OF BUSINESS AND ORGANIZATION
 
 Skystar
          Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
          Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
          name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
          2000, the Company changed its name to “The Cyber Group Network Corporation”. On
          February 15, 2006, the Company further changed its name to “Skystar
          Bio-Pharmaceutical Company” to reflect its current business
          operations.
 
 On
          November 7, 2005, the Company completed a stock exchange transaction with
          the
          stockholders of Skystar
          Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), whereby
          48,000,000 shares of the Company’s Series B preferred stock was issued to the
          stockholders of Skystar Cayman in exchange for 100% of the common stock
          of
          Skystar Cayman. The 48,000,000 shares of Series B preferred stock issued
          to the
          stockholders of Skystar Cayman shall be convertible, in aggregate, into
          a number
          of shares of the Company’s common stock that would equal 89.5% of the
          outstanding shares of the Company’s common stock, if the shares were to be
          converted on the closing date of the stock exchange transaction which was
          November 7, 2005. In addition, Skystar Cayman paid $120,000 to the Cyber,
          which
          was used to pay liabilities of Cyber.
 
 In
          connection with the stock exchange transaction, the Company appointed four
          new
          directors, Mr. Weibing Lu, Mr. Wei Wen, Mr. Xinya Zhang and Ms. Erna Gao,
          to the
          Company’s board of directors. Furthermore, concurrent with the closing of the
          stock exchange transaction, all of the Company’s former officers resigned their
          positions and Mr. Weibing Lu was appointed the new chief executive officer,
          Ms.
          Erna Gao the new chief financial officer, and Mr. Wei Wen the new secretary.
          After the closing, one of the three Company’s then current directors, Mr. David
          Wassung also tendered his resignation.
 
 The
          stock
          exchange transaction has been accounted for as a reverse acquisition and
          recapitalization of the Company whereby Skystar Cayman is deemed to be
          the
          accounting acquirer (legal acquiree) and the Company to be the accounting
          acquiree (legal acquirer). The accompanying consolidated financial statements
          are in substance those of Skystar Cayman, with the assets and liabilities,
          and
          revenues and expenses, of the Company being included effective from the
          date of
          the stock exchange transaction. The Company is deemed to be a continuation
          of
          the business of Skystar Cayman. The 2,000,000 shares of the Company’s preferred
          stock and 500,000,000 shares of its common stock outstanding prior to the
          stock
          exchange have been accounted for at their net book value at the time of
          the
          transaction. 
 8
 **Table
                of Contents**
  SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
              TO CONSOLIDATED FINANCIAL
              STATEMENTS
   1.
                    DESCRIPTION
                        OF BUSINESS AND ORGANIZATION(Cont’d)
  Skystar
          Cayman was incorporated under the laws of the Cayman Islands on January
          24,
          2005. It has not carried on any substantive operations of its own, except
          for
          the entering of certain exclusive agreements with Xian Tianxing
          Bio-Pharmaceutical Co., Limited (“Xian Tianxing”).
          Skystar Cayman through its variable interest entity (“VIE”), Xian Tianxing
          Bio-Pharmaceutical Co., Limited engages in research, development, production,
          marketing and sales of bio-pharmaceutical and veterinary products. All
          current
          operations of the Company are in the People’s Republic of China (“China” or the
“PRC”).
 
 Xian
          Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
          company without shares. On December 31, 2003, Xian Tianxing was restructured
          from a limited liability company without shares to a joint stock limited
          company. According to the Company Law of the PRC, a “limited liability company”
is a company whose shareholders shall assume liability towards the company
          to
          the extent of their respective capital contributions, whereas a joint stock
          limited company is a company having its total capital divided into equal
          shares
          and whose shareholders shall assume liability to the extent of their respective
          shareholdings.
 
 The
          paid-in capital of Xian Tianxing was funded by the majority shareholders
          of
          Skystar Cayman. PRC law currently has limits on foreign ownership of companies.
          To comply with these foreign ownership restrictions, on October 28, 2005,
          Skystar Cayman entered into certain exclusive agreements with Xian Tianxing
          and
          its shareholders. Xian Tianxing holds the licenses and approvals necessary
          to
          operate the bio-pharmaceutical business in China. Pursuant to these agreements,
          Skystar Cayman provides exclusive technology consulting and other general
          business operation services to Xian Tianxing in return of a consulting
          services
          fee which is equal to Xian Tianxing’s revenue. In addition, Xian Tianxing’s
          shareholders have pledged their equity interests in Xian Tianxing to Skystar
          Cayman, irrevocably granted Skystar Cayman an exclusive option to purchase,
          to
          the extent permitted under PRC law, all or part of the equity interests
          in Xian
          Tianxing and agreed to entrust all the rights to exercise their voting
          power to
          the person(s) appointed by Skystar Cayman. Through these contractual
          arrangements, Skystar Cayman has the ability to substantially influence
          Xian
          Tianxing’s daily operations and financial affairs, appoint its senior executives
          and approve all matters requiring shareholder approval.
 
 As
          a
          result of these contractual arrangements, which obligates Skystar Cayman
          to
          absorb a majority of the risk of loss from Xian Tianxing’s activities and enable
          Skystar Cayman to receive a majority of its expected residual returns,
          Skystar
          Cayman accounts for Xian Tianxing as a variable interest entity (“VIE”) under
          FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
          Entities, an Interpretation of ARB No. 51”, because the equity investors in Xian
          Tianxing do not have the characteristics of a controlling financial interest
          and
          Skystar Cayman should be considered the primary beneficiary of Xian Tianxing.
          Accordingly, Skystar Cayman consolidates Xian Tianxing’s results, assets and
          liabilities.
  9
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                of Contents**
  SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
              TO CONSOLIDATED FINANCIAL
              STATEMENTS
 
 1.
                    DESCRIPTION
                        OF BUSINESS AND ORGANIZATION(Cont’d)
 Because
          Skystar and Xian Tianxing are under common control, the consolidation of
          Skystar
          Cayman and Xian Tianxing has been accounted for at historical cost and
          prepared
          on the basis as if the aforementioned exclusive agreements between Skystar
          and
          Xian Tianxing had become effective as of the beginning of the first period
          presented in the accompanying consolidated financial statements.
 
 The
          Company’s consolidated assets do not include any collateral for Xian Tianxing’s
          obligations. The creditors of Xian Tianxing do not have recourse to the
          general
          credit of the Company.
 
 2.
                GOING
                    CONCERN AND MANAGEMENT’S PLAN
 
 The
          accompanying financial statements have been prepared on a going concern
          basis,
          which contemplates the realization of assets and the satisfaction of liabilities
          in the normal course of business. As of March 31, 2006, the Company had
          a net
          working capital deficiency of $1,214,704 that indicates the Company may
          need
          additional financing to meet cash requirements for its operations in order
          to
          continue as a going concern.
 
 The
          accompanying financial statements do not include any adjustments relating
          to the
          recoverability and classification of recorded amounts of assets or the
          amounts
          and classification of liabilities that might be necessary should the Company
          be
          unable to continue as a going concern. Management believes the Company’s ability
          to continue as a going concern is dependent upon its ability to maintain
          profitable operations and to obtain additional financing or refinancing
          as may
          be required. The Company has recorded net income and generated positive
          cash
          inflows from operating activities during the 2004 and 2005 years. Furthermore,
          the Company has appointed investment bankers to raise funds in the capital
          market. Management believes the Company will generate sufficient cash flow
          to
          meet its obligations on a timely basis in the foreseeable future.
 
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING
                    POLICIES
 
 Basis
          of presentation and consolidation
 
 The
          accompanying consolidated financial statements are prepared in accordance
          with
          accounting principles generally accepted in the United States of
          America.
 
 10
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
   3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES
                    (Cont’d)
 
 Basis
          of presentation and consolidation (Cont’d)
 
 The
          consolidated financial statements include the financial statements of the
          Company, its subsidiary, Skystar Cayman, and its variable interest entity,
          Xian
          Tianxing. All significant inter-company transactions and balances between
          the
          Company, its subsidiary and VIE are eliminated upon consolidation.
 
 Use
          of
          estimates
 
 The
          preparation of consolidated financial statements in conformity with generally
          accepted accounting principles requires management to make estimates and
          assumptions that affect the reported amounts of assets and liabilities,
          disclosure of contingent assets and liabilities at the date of the financial
          statements, and the reported amounts of revenues and expenses during the
          reporting period. Because of the use of estimates inherent in the financial
          reporting process, actual results could differ from those
          estimates.
 
 Fair
          values of financial instruments
 
 The
          Company values its financial instruments as required by Statement of Financial
          Accounting Standard (SFAS) No. 107, “Disclosures about Fair Value of Financial
          Instruments”. The estimated fair value amounts have been determined by the
          Company, using available market information and appropriate valuation
          methodologies. The estimates presented herein are not necessarily indicative
          of
          amounts that the Company could realize in a current market
          exchange.
 
 The
          Company’s financial instruments primarily consist of cash, accounts receivable,
          loans receivable, other receivables, accounts payable and accruals, and
          short-term related party borrowings.
 
 As
          of the
          balance sheet dates, the estimated fair values of the financial instruments
          were
          not materially different from their carrying values as presented due to
          the
          short term maturities of these instruments and that the interest rates
          on the
          borrowings approximate those that would have been available for loans of
          similar
          remaining maturity and risk profile at respective period/year ends.
 
 11
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
  3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Cash
 
 Cash
          includes cash on hand, demand deposits with banks and liquid investments
          with an
          original maturity of three months or less. All of the Company’s cash on hand and
          certain bank deposits are denominated in Renminbi (“RMB”) and translated at the
          rate of US$1 to RMB8.01.
 
 Restricted
          cash
 
 The
          Company had restricted cash of $62,400 and $62,000 as of March 31, 2006
          and
          December 31, 2005, respectively. The restricted cash was received from
          the PRC
          government subsidies and set aside for the specific usages (see Note 13).
          The
          restricted funds are kept as bank deposits. Restricted cash is classified
          as
          current or non-current assets as of March 31, 2006 and December 31, 2005,
          depending on the expected period when the funds will be put into their
          specific
          usages.
 
 Accounts
          and other receivables
 
 Accounts
          and other receivables are recorded at net realizable value consisting of
          the
          carrying amount less an allowance for uncollectible accounts, as needed.
 
 The
          Company uses the aging method to estimate the valuation allowance for
          anticipated uncollectible receivable balances. Under the aging method,
          bad debts
          percentages determined by management based on historical experience as
          well as
          current economic climate are applied to customers’ balances categorized by the
          number of months the underlying invoices have remained outstanding. The
          valuation allowance balance is adjusted to the amount computed as a result
          of
          the aging method. When facts subsequently become available to indicate
          that the
          allowance provided requires an adjustment, then the adjustment will be
          classified as a change in estimate. Accounts receivables at March 31, 2006
          and
          December 31, 2005 amounted to $251,081 and $247,354 net of allowances of
          $72,191
          and $71,613, respectively.
 
 12
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
  3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Inventories
 
 Inventories
          are stated at the lower of cost, as determined on a first-in, first-out
          basis,
          or market. Costs of inventories include purchase and related costs incurred
          in
          bringing the products to their present location and condition.
 
 Property,
          plant and equipment
 
 Property,
          plant and equipment are recorded at cost. Gains or losses on disposals
          are
          reflected as gain or loss in the year of disposal. The cost of improvements
          that
          extend the life of plant, property and equipment are capitalized. These
          capitalized costs may include structural improvements, equipment and fixtures.
          All ordinary repair and maintenance costs are expensed as incurred.
 
 Depreciation
          for financial reporting purposes is provided using the straight-line method
          over
          the estimated useful lives of the assets: 10 years for plant and machinery;
          10
          years for leasehold office building; 10 years for leasehold improvements;
          5
          years for office equipment; and 10 years for motor vehicles.
 
 The
          carrying value of property, plant and equipment is assessed annually and
          when
          factors indicating impairment is present, the carrying value of the fixed
          assets
          is reduced by the amount of the impairment. The Company determines the
          existence
          of such impairment by measuring the expected future cash flows (undiscounted
          and
          without interest charges) and comparing such amount to the net asset carrying
          value. An impairment loss, if exists, is measured as the amount by which
          the
          carrying amount of the asset exceeds the fair value of the asset.
 
 Leases
          involving part of a building
 
 The
          Company accounts for its leasehold office building as capital leases in
          accordance with SFAS No. 13, “Accounting for Leases” *,* which
          requires that a lease involving only part of a building be accounted for
          as a
          capital lease, if the fair value of the leasehold property cannot be objectively
          determinable and if the term of the lease is 75% or more of the estimated
          remaining economic life of the building in which the leased premises are
          located.
  13
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 
 3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Construction
          in progress
 
 Construction
          in progress includes direct costs of construction of factory building.
          Interest
          incurred during the period of construction has not been capitalized as
          such
          amounts are considered to be immaterial at this time. Construction in progress
          is not depreciated until such time as the assets are completed and put
          into
          operational use.
 
 Prepaid
          land use rights
 
 The
          Company has recorded as prepaid land use rights the costs paid to acquire
          a
          long-term interest to utilize the land underlying the Company’s facility. This
          type of arrangement is common for the use of land in the PRC. The prepaid
          land
          use rights are amortized on the straight-line method over the term of the
          land
          use rights of 50 years.
 
 Intangibles
          - Technological know-how
 
 Purchased
          technological know-how includes secret formulas, manufacturing processes,
          technical and procedural manuals and is amortized using the straight-line
          method
          over the expected useful economic life of 5 years, which reflects the period
          over which those formulas, manufacturing processes, technical and procedural
          manuals are kept secret to the Company as agreed between the Company and
          the
          selling party.
 
 Impairment
 
 The
          Company accounts for property and equipment, construction-in-progress and
          amortizable intangible assets in accordance with SFAS No. 121, “Accounting for
          Impairment of Long-Lived Assets to be Disposed Of”, which requires an impairment
          loss to be recognized on long-lived assets when the sum of the expected
          future
          cash flows (undiscounted and without interest charges) resulting from the
          use of
          the assets and its eventual disposition is less than the carrying amount
          of the
          asset. Otherwise, an impairment loss is not recognized. Measurement of
          the
          impairment loss for long-lived assets is based on the fair value of the
          asset.
  
 14
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 
 3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Comprehensive
          income
 
 SFAS
          No.
          130, “Reporting Comprehensive Income”, requires disclosure of all components of
          comprehensive income and loss on an annual and interim basis. Comprehensive
          income and loss is defined as the change in equity of a business enterprise
          during a period from transactions and other events and circumstances from
          non-owner sources. The Company had comprehensive income of $207,606 and
          $161,345
          for the period ended March 31, 2006 and year ended December 31, 2005,
          respectively. The comprehensive income for 2006 arose from the changes
          in
          foreign currency exchange rates.
 
 Segment
          information
 
 SFAS
          No.
          131, “Disclosures about Segments of an Enterprise and Related Information”,
          requires certain financial and supplementary information to be disclosed
          on an
          annual and interim basis for each reportable segment of an enterprise.
          The
          Company believes that it operates in one business segment - research,
          development, production, marketing and sales of bio-pharmaceutical and
          veterinary products, and in one geographical segment - China, as all of
          the
          Company’s current operations are carried out in China.
 
 Revenue
          recognition
 
 Revenues
          of the Company include sales of bio-pharmaceutical and veterinary products
          in
          China. Sales are recognized when the following four revenue criteria are
          met:
          persuasive evidence of an arrangement exists, delivery has occurred, the
          selling
          price is fixed or determinable, and collectibility is reasonably assured.
          Sales
          are presented net of value added tax (VAT). No return allowance is made
          as
          product returns are insignificant based on historical experience.
 
 Research
          and development costs
 
 Research
          and development costs are expensed to operations as incurred. During the
          period
          ended March 31, 2006 and 2005, a total of $19,339 and $10,285, respectively,
          in
          salaries, professional fees and technical support fees were incurred for
          research and development purposes, which had been expensed in the accompanying
          statements of operations.
  15
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
  3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Income
          taxes
 
 The
          Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
          for Income Taxes”. SFAS No. 109 requires an asset and liability approach for
          financial accounting and reporting for income taxes and allows recognition
          and
          measurement of deferred tax assets based upon the likelihood of realization
          of
          tax benefits in future years. Under the asset and liability approach, deferred
          taxes are provided for the net tax effects of temporary differences between
          the
          carrying amounts of assets and liabilities for financial reporting purposes
          and
          the amounts used for income tax purposes. A valuation allowance is provided
          for
          deferred tax assets if it is more likely than not these items will either
          expire
          before the Company is able to realize their benefits, or that future
          deductibility is uncertain.
 
 Stock
          based compensation
 
 The
          Company has adopted Statement of Financial Accounting Standards No. 123R
          “Accounting for Stock-Based Compensation” (“SFAS 123”), which defines a
          fair-value-based method of accounting for stock based employee compensation
          and
          transactions in which an entity issues its equity instruments to acquire
          goods
          and services from non-employees. Stock compensation for stock granted to
          non-employees has been determined in accordance with SFAS 123R and the
          Emerging
          Issues Task Force consensus in Issue No. 96-18, “Accounting for Equity
          Instruments that are issued to Other than Employees for Acquiring, or in
          Conjunction with Selling Goods or Services” (“EITF 96-18”), as the fair value of
          the consideration received or the fair value of equity instruments issued,
          whichever is more reliably measured.
 
 Earnings
          per share
 
 Basic
          earnings per share (“EPS”) is computed by dividing income available to common
          shareholders by the weighted average number of common shares outstanding
          for the
          period. Diluted EPS includes the effect of the common share equivalents
          of the
          Company’s convertible preferred stock outstanding.
 
 The
          Company accounts for a stock dividend or split in accordance with SFAS
          No. 128,
“Earnings Per Share”, which requires that a stock dividend or split be accounted
          for retrospectively if the stock dividend or split occurs during the period,
          or
          retroactively if the stock dividend or split occurs after the end of the
          period
          but before the release of the financial statements, by considering it
          outstanding for the entirety of each period presented.
  16
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
  3.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES
                        (Cont’d)
 Foreign
          currency translation
 
 The
          Company uses the United States dollar (“U.S. dollars”) for financial reporting
          purposes. The Company’s subsidiary and VIE maintain their books and records in
          their functional currency, being the primary currency of the economic
          environment in which their operations are conducted. In general, for
          consolidation purposes, the Company translates the subsidiary’s and VIE’s assets
          and liabilities into U.S. dollars using the applicable exchange rates prevailing
          at the balance sheet date, and the statement of income is translated at
          average
          exchange rates during the reporting period. Adjustments resulting from
          the
          translation of the subsidiary’s and VIE’s financial statements are recorded as
          accumulated other comprehensive income.
 
 Until
          July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00.
          On
          July 21, 2005, the PRC government reformed the exchange rate system into
          a
          managed floating exchange rate system based on market supply and demand
          with
          reference to a basket of currencies. In addition, the exchange rate of
          RMB to
          US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
          China announces the closing price of a foreign currency such as US$ traded
          against RMB in the inter-bank foreign exchange market after the closing
          of the
          market on each working day, which will become the unified exchange rate
          for the
          trading against RMB on the following working day. The daily trading price
          of US$
          against RMB in the inter-bank foreign exchange market is allowed to float
          within
          a band of ± 0.3%
          around the unified exchange rate published by the People’s Bank of China. This
          quotation of exchange rates does not imply free convertibility of RMB to
          other
          foreign currencies. All foreign exchange transactions continue to take
          place
          either through the Bank of China or other banks authorized to buy and sell
          foreign currencies at the exchange rates quoted by the People’s Bank of China.
          Approval of foreign currency payments by the Bank of China or other institutions
          required submitting a payment application form together with invoices,
          shipping
          documents and signed contracts.
 
 The
          balance sheet amounts with the exception of equity at March 31, 2006 were
          translated at 8.01 RMB to 1.00 USD as compared to 8.06 RMB at December
          31, 2005.
          The equity accounts were stated at their historical rate. The weighted
          average
          translation rate of 8.04 RMB to 1.00 USD for the three months ended March
          31,
          2006 was applied to income statement accounts.
 
 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. These amounts are not material to the
          consolidated financial statements.
  17
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Related
          parties
 
 Parties
          are considered to be related to the Company if the parties that, directly
          or
          indirectly, through one or more intermediaries, control, are controlled
          by, or
          are under common control with the Company. Related parties also include
          principal owners of the Company, its management, members of the immediate
          families of principal owners of the Company and its management and other
          parties
          with which the Company may deal if one party controls or can significantly
          influence the management or operating policies of the other to an extent
          that
          one of the transacting parties might be prevented from fully pursuing its
          own
          separate interests. A
          party
          which can significantly influence the management or operating policies
          of the
          transacting parties or if it has an ownership interest in one of the transacting
          parties and can significantly influence the other to an extent that one
          or more
          of the transacting parties might be prevented from fully pursuing its own
          separate interests is also a related party.
 
 Recently
          issued accounting pronouncements
 
 In
          March
          2005, the FASB published FASB Interpretation No. 47, “Accounting for Conditional
          Asset Retirement Obligations,” which clarifies that the
          term, conditional asset retirement obligations, as used in SFAS No. 143,
          “Accounting for Asset Retirement Obligations,” refers to a legal obligation to
          perform an asset retirement activity in which the timing and (or) method of
          settlement are conditional on a future event that may or may not be within
          the
          control of the entity. The uncertainty about the timing and (or) method
          of
          settlement of a conditional asset retirement obligation should be factored
          into
          the measurement of the liability when sufficient information exists. The
          interpretation also clarifies when an entity would have sufficient information
          to reasonably estimate the fair value of an asset retirement obligation.
          This
          interpretation is effective no later than the end of the Company’s fiscal 2006.
          The adoption of this Interpretation is not expected to have a material
          effect on
          the Company’s consolidated financial position or results of operations.
 
 In
          June
          2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS No. 154 replaces APB No. 20 (“APB 20”) and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and applies to
          all voluntary changes in accounting principle, and changes the requirements
          for
          accounting for and reporting of a change in accounting principle. APB 20
          previously required that most voluntary changes in accounting principle
          be
          recognized by including in net income of the period of change a cumulative
          effect of changing to the new accounting principle whereas SFAS No. 154
          requires
          retrospective application to prior periods’ financial statements of a voluntary
          change in accounting principle, unless it is impracticable. SFAS No. 154
          enhances the consistency of financial information between periods. SFAS
          No. 154
          will be effective
          beginning withtheCompany’s first quarter of fiscal year 2006. The Company does not expect that
          the adoption of SFAS No. 154 will have a material impact on its results
          of
          operations, financial position or cash flows.
 18
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
  3.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES
                        (Cont’d)
  Recently
            issued accounting pronouncements (Cont’d)
 
 In
          June
          2005, the EITF reached a consensus on Issue No. 05-06, “Determining
          the
          Amortization Period for Leasehold Improvements” (EITF 05-06). EITF 05-06
          provides guidance for determining the amortization period used for leasehold
          improvements acquired in
          a
          business combination or purchased after the inception of a lease, collectively
          referred to as subsequently acquired leasehold improvements). EITF 05-06
          provides that the amortization period used for the subsequently acquired
          leasehold improvements to be the lesser of (a) the subsequently acquired
          leasehold improvements’ useful lives, or (b) a period that reflects renewals
          that are reasonably assured upon the acquisition or the purchase. EITF
          05-06 is effective on a prospective basis for subsequently acquired leasehold
          improvements purchased or acquired in periods beginning after the date
          of the
          FASB’s ratification, which was on June 29, 2005. The Company does not anticipate
          that EITF 05-06 will have a material impact on its consolidated results
          of
          operations.
 
 In
          July
          2005, the Financial Accounting Standards Board (FASB) issued an Exposure
          Draft
          of a proposed Interpretation “Accounting for Uncertain Tax Positions—an
          interpretation of FASB Statement No. 109.” Under the proposed Interpretation, a
          company would recognize in its financial statements its best estimate of
          the
          benefit of a tax position, only if the tax position is considered probable
          of
          being sustained on audit based solely on the technical merits of the tax
          position. In evaluating whether the probable recognition threshold has
          been met,
          the proposed Interpretation would require the presumption that the tax
          position
          will be evaluated during an audit by taxing authorities. The proposed
          Interpretation would be effective as of the end of the first fiscal year
          ending
          after December 15, 2005, with a cumulative effect of a change in accounting
          principle to be recorded upon the initial adoption. The proposed Interpretation
          would apply to all tax positions and only benefits from tax positions that
          meet
          the probable recognition threshold at or after the effective date would
          be
          recognized. The Company is currently analyzing the proposed Interpretation
          and
          has not determined its potential impact on our Consolidated Financial
          Statements. While we cannot predict with certainty the rules in the final
          Interpretation, there is risk that the final Interpretation could result
          in a
          cumulative effect charge to earnings upon adoption, increases in future
          effective tax rates, and/or increases in future interperiod effective tax
          rate
          volatility.
  19
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (Cont’d)
 Recently
          issued accounting pronouncements (Cont’d)
 
 In
          October 2005, FASB Staff Position (FSB) FAS 13-1, “Accounting for Rental Costs
          Incurred during a Construction Period” was issued. This FSP concluded that
          rental costs associated with ground or building operating leases that are
          incurred during a construction period be expensed. The guidance in the
          FSP is
          required to be applied to the first reporting period beginning after December
          15, 2005. The adoption of this pronouncement is not expected to have a
          material
          impact on the Company’s financial position or results of
          operations.
 
 The
          management of the Company does not expect these recent pronouncements to
          have a
          material impact on the Company’s financial position or results of
          operations.
 
 4.
                CONCENTRATIONS
                    OF CREDIT RISK
 
 Financial
          instruments that potentially expose the Company to concentrations of credit
          risk
          consist of cash and accounts receivable as of March 31, 2006 and December
          31,
          2005. The Company performs ongoing evaluations of its cash position and
          credit
          evaluations to ensure collections and minimize losses.
 
 As
          of
          March 31, 2006 and December 31, 2005, the Company’s bank deposits were all
          placed with banks in the PRC where there is currently no rule or regulation
          in
          place for obligatory insurance to cover bank deposits in the event of bank
          failure.
 
 For
          the
          period ended March 31, 2006 and year ended December 31, 2005, all of the
          Company’s sales arose in the PRC. In addition, all accounts receivable as at
          March 31 2006 and December 31, 2005 also arose in the PRC.
 
 The
          Company’s three largest customers accounted for approximately 4.89%, of the
          Company’s total revenues for the three month period ended March 31, 2006, while
          the Company’s three largest customers accounted for 4.62% of the Company’s total
          revenues for the three month period ended March 31, 2005.
 
 The
          Company’s three largest vendors accounted for approximately 38.06% of the
          Company’s total purchases for the three month period ended March 31, 2006, while
          the Company’s three largest vendors accounted for 71.90% of the Company’s total
          purchases for the three month period ended March 31, 2005.
  20
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 5.
                RESTRICTED
                    CASH
 
 Restricted
          cash consists of the following:
 
 **March
                    31,**
                
                **December
                    31,******
                
                **2006**
                
                **2005**Funds
                    received from PRC government subsidies (see Note 13)$
                62,400
                
                $
                62,000
 
 6.
                INVENTORIES
 
 Inventories
          consist of the following:
 
 **March
                    31,**
                
                **December
                    31,******
                
                **2006**
                
                **2005**Raw
                    materials
                
                $238,922
                
                $85,563Packing
                    materials
                
                73,980
                
                42,552Finished
                    goods
                
                
                63,683
                
                
                47,172Other
                    inventory
                
                
                734
                
                
                400Total
                
                $
                377,319
                
                $
                175,687
 
 7.
                LOANS
                    RECEIVABLE
 
 The
          loans
          receivable of $10,608 and $261,640 as of March 31, 2006 and December 31,
          2005
          respectively are unsecured, non-interest bearing and for terms less than
          one
          year. The Company has a long standing business relationship with these
          companies
          and in order to maintain these relationships, they have made these short
          term
          loans.
  21
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
  8.
                OTHER
                    RECEIVABLES
 
 Other
          receivables consist of the following:
 
 **March
                    31,**
                
                **December
                    31,******
                
                **2006**
                
                **2005**Cash
                    advances to staff and salespersons for normal business
                    purposes
                
                $20,477
                
                $19,085Others
                
                
                8,253
                
                
                8,923$
                28,730
                
                $
                28,008
 
 9.
                PREPAID
                    LAND USE RIGHTS
 
 The
          Company has recorded as prepaid land use rights the costs paid to acquire
          a
          long-term interest to utilize the land underlying the Company’s facilities. This
          type of arrangement is common for the use of land in the PRC. The prepaid
          land
          use rights are being amortized on the straight-line method over the term
          of the
          land use rights of 50 years. The total cost of the land use rights as of
          March
          31, 2006 and December 31, 2005 amounted to $322,296 and $319,971, net of
          accumulated amortization of $12,892 and $12,550, respectively. Amortization
          expense for the period ended March 31, 2006 and the year ended December
          31, 2005
          amounted to $Nil and $6,301, respectively.
 
 The
          Company has pledged the prepaid land use rights to a third party as security
          against a non-interest bearing loan of the Company.
 
 10.
                PROPERTY,
                    PLANT AND EQUIPMENT
 
 Property,
          plant and equipment consist of the following:
 
 **March
                    31,**
                
                **December
                    31,******
                
                **2006**
                
                **2005**Plant
                    and machinery
                
                $
                257,730
                
                $
                221,475Leasehold
                    improvements and office building
                
                
                325,678
                
                
                323,591Office
                    equipment
                
                
                128,515
                
                
                126,540Motor
                    vehicles
                
                
                111,688
                
                
                110,972823,611
                
                
                782,578Less:
                    Accumulated depreciation
                
                
                (237,714
                )
                
                (216,389
                )585,897
                
                
                566,189Construction
                    in progress
                
                
                8,483,054
                
                
                7,998,171Total,
                    net
                
                $
                9,068,951
                
                $
                8,564,360
 22
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
   10.
                  PROPERTY,
                      PLANT AND EQUIPMENT (Cont’d)
  Construction
            in progress included above was the construction a production base which
            operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
            The construction work commenced in late 2004 and will be completed at
            the end of
            2006.
 
 The
          Company anticipates that the new factory can generate sufficient cash flows
          and
          therefore management does not determine the existence of impairment loss
          on the
          construction in progress.
 
 The
          depreciation expense was $21,325 and $17,259 for the period ended March
          31, 2006
          and 2005, respectively.
 
 The
          Company has pledged its leasehold office building with net book value of
          $250,906 at March 31, 2006 to a bank as the security against the bank borrowing
          of a related party (see Note 19(c)).
 
 11.
                INTANGIBLE
 
 Technological
          know-how consists of the following:
 **March
                    31,**
                
                **December
                    31,******
                
                **2006**
                
                **2005**Cost
                
                $
                124,800
                
                $
                123,948Less:
                    Accumulated amortization
                
                
                (81,120
                )
                
                (74,348
                )Total
                
                $
                43,680
                
                $
                49,600
 
 The
          amortization expense on the technological know-how was $6,772 and $6,024
          for the
          period ended March 31, 2006 and 2005, respectively.
  23
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 12.
                INTEREST-BEARING
                    SHORT-TERM LOAN
 
 The
          short-term loan of $37,440 (RMB300,000) and $37,200 (RMB300,000) as of
          March 31,
          2006 and December 31, 2005 respectively is for a term of one year from
          August
          10, 2005 to August 10, 2006 and secured by a guarantee given by a third
          party,
          and bears interest at 0.8835% per month.
 
 Interest
          expense for the period ended March 31, 2006 and 2005 amounted to $835 and
          $1,516, respectively.
 
 13.
                DEFERRED
                    SUBSIDY GRANT
 
 The
          amounts represent subsidies for hi-tech projects granted by the PRC government.
          A subsidy in the amount of $624,000 was approved by the PRC government
          to be
          granted to the Company for the purpose of constructing a new factory which
          operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
          In 2003, $499,200 was received by the Company and the remaining $124,800
          was
          paid in first quarter of 2006. According to the PRC’s government regulations for
          these types of grants, the funds being granted may be treated as capital
          contributed by the company appointed by the PRC government (“contributing
          company”) or as a loan from such company, which the Company will be required to
          repay. However, no agreement has been reached with the contributing company
          regarding the final treatment of this subsidy. Therefore, the amount is
          included
          under non-current liabilities.
 
 Also
          in
          2003, another subsidy of $249,600 was received for financing the Company’s
          research and development activities. In 2005, the Company applied and utilized
          $187,200 in paying for the construction of the new plant facility. Because
          the
          Company expects that the final arrangement with the Government may not
          be
          confirmed within the year 2006, the amount is included under non-current
          liabilities.
 
 In
          2005,
          another subsidy of $62,400 was received for the Company’s research and
          development activities. This amount was put into use during the year. Since
          the
          final treatment of these funds may not be confirmed in 2006, this amount
          is
          included under non-current liabilities.
 
 14.
                CAPITAL
                    TRANSACTIONS
 
 On
          November 7, 2005, the Company completed a stock exchange transaction with
          the
          stockholders of Skystar Cayman, as more fully described in Note 1.
 
 On
          February 15, 2006, the Company effected a one-for-three hundred ninety
          seven
          (1:397) reverse stock split of the outstanding shares of the Company’s common
          stock. As a result, the
          total
          number of outstanding shares of the Company’s common stock was reduced from
          500,000,000 to 1,260,651 issued and outstanding.
 24
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 14.
                CAPITAL
                    TRANSACTIONS(Cont’d)
 
 On
          February 15, 2006, the Company also effected a one for ten (1:10) reverse
          stock
          split of the Company’s authorized shares of the Company’s preferred stock. As a
          result, the total number of authorized shares was reduced from 500,000,000
          to
          50,000,000. Per the conversion rights set forth in the certificate of
          designation for the series “B” convertible preferred stock, at the same time
          that the amendment to the Company’s articles of incorporation was filed that
          created sufficient authorized shares of common stock to permit full conversion
          of all 48,000,000 series “B” preferred shares, all of the series “B” preferred
          shares automatically was converted into 10,745,548 shares of common stock
          that
          equaled to 89.5% of the total issued and outstanding shares.
 
 In
          March,
          2006, the Company issued a total of 600,000 shares of the Company’s common stock
          to consultants, as more fully described in Note 17.
 
 15.
                STATUTORY
                    RESERVES
 
 As
          stipulated by the PRC’s Company Law and as provided in Xian Tianxing’s Articles
          of Association (as amended on December 31, 2003), Xian Tianxing’s net income
          after taxation can only be distributed as dividends after appropriation
          has been
          made for the following:
 
 (i)
                Making
                    up of cumulative prior years’ losses, if
                    any;
 (ii)
                Allocations
                    to the “Statutory surplus reserve” of at least 10% of income after tax, as
                    determined under PRC accounting rules and regulations, until
                    the fund
                    amounts to 50% of the Company’s registered capital, which is restricted
                    for set off against losses, expansion of production and operation
                    or
                    increase in registered capital;
 (iii)
                Allocations
                    of 5-10% of income after tax, as determined under PRC accounting
                    rules and
                    regulations, to the Company’s “Statutory common welfare fund”, which is
                    restricted for capital expenditure for the collective benefits
                    of the
                    Company’s employees; and
 (iv)
                Allocations
                    to the discretionary surplus reserve, if approved in the shareholders’
                    general meeting.
 
 On
          December 31, 2003, Xian Tianxing established a statutory surplus reserve
          as well
          as a statutory common welfare fund and commenced to appropriate 10% and
          5%,
          respectively of the net income after taxation to these reserves. The amounts
          included in the statutory reserves consisted of surplus reserve of $201,064
          and
          common welfare fund of $163,396 as of March 1, 2006 and of December 31,
          2005,
          respectively.
  25
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 
 16.
                  2006
                      CONSULTANT STOCK PLAN
 
 On
          February 22, 2006, the Company adopted the 2006 Consultant Stock Plan (the
          “Plan”) under
          which 1,199,648 shares of common stock are available for issuance with
          respect
          to awards granted to independent consultants who are crucial to the future
          growth and success of the Company and its subsidiaries and affiliates.
          For the
          period ended March 31, 2006, a total of 600,000 shares were issued pursuant
          to
          the Plan.
 
 17.
                CONSULTING
                    AGREEMENTS AND DEFERRED COMPENSATION
 
 On
          March
          14, 2006, the Company entered into two-year consulting agreement with an
          independent consultant. The services to be rendered include consultation
          and
          advisory services relating to marketing of the Company as mutually agreed
          upon
          between the parties. As consideration for the services to be rendered,
          the
          Company issued 240,000 shares of common stock to the consultant on March
          31,
          2006. The fair market value of the Company’s common stock as of March 14, 2006
          was $2.65 per share.
 
 On
          March
          27, 2006, the Company entered into one-year consulting agreement with another
          independent consultant. The services to be rendered include consultation
          and
          advisory services relating to financing and restructuring of the Company
          as
          mutually agreed upon between the parties. As consideration for the services
          to
          be rendered, the Company issued 360,000 shares of common stock to the consultant
          on March 31, 2006. The fair market value of the Company’s common stock as of
          March 27, 2006 was $2.60 per share.
 
 In
          accordance with SFAS 123 and EITF 96-18, the Company has accounted for
          the
          consulting agreements based on the fair market value of the Company’s common
          stock at the commencement date of the individual consulting agreements.
          For the period
          ended March 31, 2006 ,
          the
          Company did not charge to expense associated with consulting agreements
          and
          recorded deferred consulting fees of $1,572,000 a t
          March
          31, 2006. The deferred consulting fees will be charged to expenses as
          follows:
  **Year
                  ending December
                  31**
                
                **Amount**2006
                
                $
                976,7342007
                
                
                533,4082008
                
                
                61,858Total
                
                $
                1,572,000
 26
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 18.
                EARNINGS
                    PER SHARE
 
 Basic
          earnings per share (EPS) for the periods ended March 31, 2006 and 2005
          were
          determined by dividing net income for the years by the weighted average
          number
          of common shares outstanding. Diluted earnings per share for the periods
          ended
          March 31, 2006 and 2005 included the effect of 48,000,000 shares of the
          Company’s series “B” convertible preferred stock, which were issued pursuant to
          the stock exchange transaction on November 7, 2005, as more fully described
          in
          Note 1, and conferred with the right of conversion into common shares that
          equal
          89.5% of the total issued and outstanding common stock, as more fully described
          in Note 14. The weighted average number of common shares outstanding was
          adjusted to account for the effects of the share exchange transaction as
          a
          reverse acquisition as more fully described in Note 1.
 
 The
          Company has retroactively adjusted the weighted average number of common
          shares
          outstanding by deeming that the one-for-three hundred ninety seven (1:397)
          reverse stock split effected on February 16, 2006 had occurred as of the
          beginning of the earliest period presented.
 
 The
          reconciliations of the denominators of the basic and diluted EPS computations
          are as follows:
 
 **March
                    31,**
                ****
                **March
                    31,**
                ********
                ****
                **2006**
                ****
                **2005**Denominator
                    for Basic EPS
                
                
                6,570,030
                
                
                1,260,651Weighted
                    average effect on denominator for Basic EPS
                
                
                6,570,030
                
                
                1,260,651Effect
                    of series “B” convertible preferred stock
                
                
                —
                
                
                10,745,548Denominator
                    for Diluted EPS
                
                
                6,570,030
                
                
                12,006,199
 27
 **Table
                    of Contents**
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 
  19.
                RELATED
                    PARTY TRANSACTIONS AND
                    ARRANGEMENTS
 
 (a)
                *Related
                    party receivables and payables*
  Amounts
          receivable from and payable to related parties are summarized as
          follows:
 
 **March
                    31,**
                ****
                **December
                    31,**
                ********
                ****
                **2006**
                ****
                **2005**Amounts
                    due from shareholders:Mr.
                    Wei Wen, also a director of the Company
                
                $
                1,049
                
                $
                21,503Mr.
                    Weibing Lu, also a director of the Company
                
                
                90,850
                
                
                101,463Total
                
                $
                91,899
                
                $
                122,966Amount
                    due to shareholders:Ms.
                    Aixia Wang
                
                $
                8,674
                
                $
                8,618Mr.
                    Wucai Ji
                
                
                64,272
                
                
                63,860Mr.
                    Yuantai Wang
                
                
                6,240
                
                
                6,200Total
                
                $
                79,186
                
                $
                78,678Amount
                    due from a related company:Shaanxi
                    Xingji Electronic Sci-Tech Company Limited
                  (“Shaanxi
                    Xingji”) (see (b)(i) to (iii) below)
                
                $
                584,563
                
                $
                587,016Amount
                    due to a related company:Tian
                    Xing Digital - a company owned by a director
                
                $
                24,835
                
                $
                24,676
 
 Balances
          with shareholders and related companies represent advances to or loans
          from the
          respective shareholders or related companies. These balances, except the
          $37,440
          due to Shaanxi Xingji (see (b)(iii) below), are interest free and unsecured
          and
          have no fixed repayment date. It is expected that the balances will be
          received
          or repaid within one year.
 
 (b)
                *Amount
                    due from Shaanxi Xingji*
  (i)
                The
                    wife of a shareholder and director, Mr. Weibing Lu, is the shareholder
                    of
                    Shaanxi Xingji.
 
 (ii)
                The
                    amount of $622,003 due from Shaanxi Xingji is non-interest bearing,
                    unsecured and has no fixed repayment date. On March 26, 2006,
                    Shaanxi
                    Xingji submitted a statement to the Company promising that Shaanxi
                    Xingji
                    would repay the amount in full by December 31,
                    2006.
 28
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 
 19.
                    RELATED
                        PARTY TRANSACTIONS AND ARRANGEMENTS
                        (Cont’d)
 (iii)
                The
                    amount of $37,440 due to Shaanxi Xingji bears interest at 0.885%
                    per
                    month. It is unsecured and has no fixed repayment
                    term.
 
 (c)
                *Security
                    against bank borrowings of a related
                    company*
 
 The
          Company has pledged a leasehold improvement office building with net book
          value
          of $250,906 at March 31, 2006 to a bank as the security against the bank
          borrowings of a related party.
 
 20.
                CURRENT
                    VULNERABILITY DUE TO CERTAIN
                    CONCENTRATIONS
 
 The
          Company’s operations are all carried out in the PRC. Accordingly, the Company’s
          business, financial condition and results of operations may be influenced
          by the
          political, economic and legal environments in the PRC, and by the general
          state
          of the PRC’s economy.
 
 The
          Company’s operations in the PRC are subject to specific considerations and
          significant risks not typically associated with companies in the North
          America
          and Western Europe. These include risks associated with, among others,
          the
          political, economic and legal environments and foreign currency exchange.
          The
          Company’s results may be adversely affected by changes in governmental policies
          with respect to laws and regulations, anti-inflationary measures, currency
          conversion and remittance abroad, and rates and methods of taxation, among
          other
          things.
 
 21.
                COMMITMENTS
                    AND CONTINGENCIES
 
 (a)
                *Capital
                    expenditure commitments*
 
 During
          the fiscal year 2005, the Company entered into various contracts for the
          construction of a new plant. Accommodating the research and development
          center
          and a number of production lines, the new plant will enable the Company
          to
          consolidate its existing operations and to expand production capacity for
          its
          bio-pharmaceutical business. Furthermore, the Company also entered into
          several
          contracts to purchase machinery for its bio-pharmaceutical business.
  29
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 21.
                COMMITMENTS
                    AND CONTINGENCIES (Cont’d)
 
 (a)
                *Capital
                    expenditure commitments
                    (Cont’d)*
 
 The
          Company’s commitments for capital expenditure as of March 31, 2006 are as
          follows:
 
 Contracted
                    but not accrued for:Construction
                    of a new plant
                
                $
                2,087,034Purchase
                    of machinery
                
                
                686,924Total
                
                $
                2,773,958
 
 (b)
                *Lease
                    commitments*
 
 The
          Company has entered into a tenancy agreement for the lease of factory premises
          for a period of ten years from October 1, 2004 to September 30, 2014 with
          an
          annual rent of $10,733, which is subject to a 10% increase every four subsequent
          years. The Company’s commitments for minimum rental payments under this lease
          for the next five years and thereafter are as follows:
 
 **Year:**2007
                
                $
                10,7332008
                
                
                10,7332009
                
                
                11,2702010
                
                
                11,8062011
                
                
                11,806Thereafter
                
                
                39,23295,580
 (c)
                *Guarantee*
 
 The
          Company has given a guarantee to the extent of $31,200 for the bank borrowing
          of
          a third party.
 30
 **Table
                  of Contents**
  SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
  NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 21.
                COMMITMENTS
                    AND CONTINGENCIES (Cont’d)
 (d)
                  *Legal
                      proceedings*
  The
            Company has learned that Gregory Evans (“Plaintiff”) filed suit against the
            Company, R. Scott Cramer, Steve Lowe and David Wassung (“Defendants”) in State
            of Nevada District Court in Clark Country, Nevada, alleging causes of
            action for
“Refusing to Call Vote of Shareholders” and “Conversion” on or about November
            18, 2005. The Company has not been served with a summons or complaint
            in the
            matter. The Company denies the Plaintiff’s claims and intends to vigorously
            defend against them if such complaint is properly served on the
            Company.
 Other
          than the above described legal proceeding, the Company is not aware of
          any legal
          proceedings in which purchasers, any director, officer, or any owner of
          record
          or beneficial owner of more than five percent of any class of voting securities
          of the Company, or any affiliate of purchaser, or of any such director,
          officer,
          affiliate of the Company, or security holder, is a party adverse to Company
          or
          has a material interest adverse to the Company. No provision has been made
          in
          the consolidated financial statements for the above contingencies.
 31
 **Table
            of Contents**


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




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





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





**Overview**





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





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





Skystar
      Cayman was incorporated under the laws of the Cayman Islands on January 24,
      2005. Since incorporation, Skystar has not conducted any substantive operations
      of its own and conducts its primary business operations through its variable
      interest entity (“VIE”), Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian
      Tianxing”). The People’s Republic of China (“PRC” or “China”) law currently has
      limits on foreign ownership of certain companies. To comply with these foreign
      ownership restrictions, on October 28, 2005, Skystar Cayman entered into certain
      exclusive agreements with Xian Tianxing and its shareholders. Xian Tianxing
      engages in research, development, production, marketing and sales of
      bio-pharmaceutical and veterinary products. Xian Tianxing holds the licenses
      and
      approvals necessary to operate our bio-pharmaceutical business in China.
      Pursuant to the exclusive agreements, Skystar Cayman provides exclusive
      technology consulting and other general business operation services to Xian
      Tianxing in exchange for a consulting services fee, which is equal to Xian
      Tianxing’s revenue. In addition, Xian Tianxing’s shareholders have pledged their
      equity interests in Xian Tianxing to Skystar Cayman, irrevocably granted Skystar
      Cayman an exclusive option to purchase, to the extent permitted under PRC law,
      all or part of the equity interests in Xian Tianxing and agreed to entrust
      all
      the rights to exercise their voting power to the person(s) appointed by Skystar
      Cayman.


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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 obligates Skystar Cayman to absorb
      a
      majority of the risk of loss from Xian Tianxing’s activities and enable Skystar
      to receive a majority of its expected residual returns, the Company believes
      Xian Tianxing is a VIE under FASB Interpretation No. 46R (“FIN 46R”),
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”,
      because the equity investors in Xian Tianxing do not have the characteristics
      of
      a controlling financial interest and the Company should be considered the
      primary beneficiary of Xian Tianxing. Accordingly, the Company consolidates
      Xian
      Tianxing’s results, assets and liabilities in the accompanying financial
      statements.


On
      December 19, 2005, the Board and the majority holders of the Company’s capital
      stock jointly approved amendments to our Articles of Incorporation by written
      consent, including: (1) a change of our corporate name (“Name Change”) to our
      current name, Skystar Bio-Pharmaceutical Company, (2) a 1-for-397 reverse stock
      split (the “Reverse Split”); and a (3) decrease in the authorized common stock
      of the Company from 500,000,000 to 50,000,000 shares (the “Authorized Share
      Amendment”). The Certificate of Amendment and Certificate of Change to our
      Articles of Incorporation to effect the Name Change, Reverse Split and the
      Authorized Share Amendment was filed with Nevada’s Secretary of State on
      February 15, 2006.





**Critical
      Accounting Policies**





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




•
            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.





•
            Impairment
                of long-lived assets: We test impairment for long-lived assets, including
                amortizable intangibles, whenever events or changes in circumstances
                indicate that the carrying amount of an asset may not be recoverable.
                Undiscounted cash flow analyses are used to assess long-lived asset
                impairment. If an assessment indicates impairment, the impaired asset
                is
                written down to its fair market value based on the best information
                available. Estimated fair market value is generally measured with
                discounted estimated future cash flows. Considerable management judgment
                is necessary to estimate undiscounted and discounted future cash
                flows.





•
            Contingencies
                and litigation: We evaluate contingent liabilities including threatened
                or
                pending litigation in accordance with SFAS No. 5, “Accounting for
                Contingencies” and record accruals when the outcome of these matters is
                deemed probable and the liability is reasonably estimable. We make
                these
                estimates based on the facts and circumstances and in some instances
                based
                in part on the advice of outside legal counsel.





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**Results
      of Operations - Three months ended March 31, 2006 as compared to three months
      ended March 31, 2005**





REVENUES.
      All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in the PRC. During the three months ended March 31, 2006, we had
      revenues of $995,188 as compared to revenues of $858,231 during the three months
      ended March 31, 2005, an increase of approximately 16%. In general, this
      increase is attributable to our increased sales. In the midst of the avian
      flu
      outbreak, the demand for our products for poultry feeding and immunization
      has
      soared. In particular, among other products, our sales of “xylose probiotics”,
      which is used in poultry breeding for the promotion of growth and prevention
      of
      disease, increased by 149% to $385,676 for the three months ended March 31,
      2006, from $154,615 for the three months ended March 31, 2005. We believe that
      our sales will continue to grow because we are strengthening our sales force
      and
      we will be launching more new products.





GROSS
      PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
      manufacturing overhead, were $520,440 for the three months ended March 31,
      2006
      as compared to $415,965 for the three months ended March 31, 2005. Gross profit
      was $474,748 for the three months ended March 31, 2006 as compared to $442,266
      for the three months ended March 31, 2005, representing gross profit margins
      of
      approximately 48% and 52%, respectively. The decrease in our gross profit margin
      is attributable to an increase in the cost of raw materials. We believe that
      this short term trend and we will have better cost control in the future.





SELLING
      EXPENSES. Selling expenses, which consist of commission, advertising and
      promotion expenses, freight charges and salaries totaled $67,908 for the three
      months ended March 31, 2006 as compared to $36,358 for the three months ended
      March 31, 2005, an increase of approximately 87%. This increase is primarily
      attributable to our expanding sales team and activities, which are, in turn,
      reflected in our increased sales. We believe that our selling expenses will
      continue to increase as our sales continue to grow.





GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $206,236 for the three months ended March 31, 2006, as compared to $58,784
      for
      the three months ended March 31, 2005, an increase of approximately 251%. This
      increase is primarily attributable to the provision for the audit fee, which
      totaled $136,018 for the three months ended March 31, 2006.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, totaled $19,339 for the three months
      ended March 31, 2006, as compared to $10,285 for the three months ended March
      31, 2005, an increase of approximately 88.0%. The increase is attributable
      to
      our continued improvement of existing products and development for new
      products.





NET
      INCOME. Skystar had a net income of $153,892 for the three months ended March
      31, 2006 as compared to $281,148 for the three months ended March 31, 2005.
      The
      decrease in net income is attributable to the provision for the audit fee for
      the three months ended March 31, 2006. Skystar’s management believes that net
      income will increase as our sales increase in the coming quarters.





**Liquidity**





For
      the
      three months ended March 31, 2006, we generated cash from operating activities
      of $262,071, as compared to $295,691 for the three months ended March 31, 2005.
      The decrease is primarily attributable to bulk purchase of raw materials, which
      was used for the production in the second quarter. We used $444,221 in investing
      activities for 2006, as compared to $145,339 for 2005. The expenditure in
      investing activities for 2006 consisted of, among others, payment of $467,311
      for the purchases of property, plant and equipment (net of decrease in deposits
      paid) as the construction of our new plant has been in full swing and is
      expected to be completed at the end of 2006. On the other hand, we generated
      $179,522 from financing activities for 2006 as compared to $1,215,422 for
      2005.


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As
      of
      March 31, 2006, the Company had cash of $36,104. Our total current assets were
      $1,480,008 and our total current liabilities were $2,694,712, which resulted
      in
      a net working capital deficiency of $1,214,704, and which indicates the Company
      may need additional financing to meet cash requirements for its operations
      in
      order to continue as a going concern. Management believes the Company’s ability
      to continue as a going concern is dependent upon its ability to maintain
      profitable operations and to obtain additional financing or refinancing as
      may
      be required. The Company has recorded net income and generated positive cash
      inflows from operating activities during the first quarter of 2006 and the
      year
      of 2005. Furthermore, the Company has appointed investment bankers to raise
      funds in the capital market. Our management believes that the Company will
      generate sufficient cash flow to meet its obligations on a timely basis in
      the
      foreseeable future.





We
      had
      capital expenditure commitments outstanding as of March 31, 2006 in the amount
      of $2,087,034 for the construction of a new plant, which will meet the Good
      Manufacturing Practices Standard, and $686,924 in relation to the purchase
      of
      machinery. The new plant and machinery will enable us to consolidate our
      existing operations and to expand the production capacity for our
      bio-pharmaceutical business.





**Capital
      Resources**





As
      mentioned in the above, we had a net working capital deficiency that indicates
      our need for additional financing. For Company operations and the construction
      of the newest facilities and acquisition of new equipment for these facilities,
      we expect that we will need approximately $12,900,000 in the next twelve months.
      Of the capital raised, we estimate that $3,400,000 will be spent on the
      construction of the new plant, $2,500,000 will be spent on research and
      development of the new products, $1,500,000 will be for the construction of
      a
      new research and development center, $1,000,000 will be spent on marketing
      our
      products, $3,000,000 will be spent on acquisition and the remaining $1,500,000
      will be for working capital. We have appointed investment bankers to raise
      additional funding through public or private equity or debt financing, strategic
      transactions and/or from other sources, although we expect that funding will
      come mainly from private placements.





**Plan
      of Operations**





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





In
      addition, in 2003, the Company received approval from the State Council of
      China
      to expand its production facilities and construct a new Good Manufacturing
      Practice (“GMP”) standard plant. The entire expansion project will cost
      approximately RMB 69,410,000 ($8,500,000). The Company’s total investment in
      this project includes approximately $7,000,000 for the facilities and $1,500,000
      for working capital. The construction work commenced in late 2004 and is
      expected to be completed by the end of 2006. The new plant will occupy
      approximately 31,350 sq. meters and have a total area of approximately 14,000
      sq. meters.





**Product
      Research and Development**





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


35
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**Off-Balance
      Sheet Arrangements**





The
      Company has pledged a leasehold office building with a net book value of
      $250,906 as of March 31, 2006 to a bank as the security against the bank
      borrowings of Shaanxi Xingji Electronic Sci-Tech Company Limited (“Shaanxi
      Xingji”), a company owned by the wife of Mr. Weibing Lu, a director and the
      Chief Executive Officer of the Company. This pledge arrangement was entered
      into
      by Xian Tianxing, because from time to time, the company owned by Mr. Lu’s wife
      has extended non-interest bearing loans to Xian Tianxing as short-term finances
      for Xian Tianxing. The Company intends to terminate this pledge arrangement
      in
      connection with Shaanxi Xingji in 2006.




The
      Company has pledged the prepaid land use rights with a net book value of
      $309,404 to a third party as security against a non-interest bearing loan
      granted to the Company for a short term financing purpose. The outstanding
      non-interest bearing loan was $37,440 as of March 31, 2006.




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




**Exchange
      Rates**





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





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


36
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The
      exchange rates used to translate amounts in RMB into US Dollars for the purposes
      of preparing the consolidated financial statements or otherwise stated in this
      MD&A were as follows:





**March
                31, 2006**
            ****
            **December
                31, 2005**
            ****
            **March
                31, 2005**Balance
                sheet items, except for the registered and paid-up capital, as of
                end of
                period/year
            USD0.1248:RMB1
            
            USD0.124:RMB1
            
            USD0.121:RMB1Amounts
                included in the statement of operations, statement of changes in
                stockholders’ equity and statement of cash flows for the period/ year
                ended
            USD0.12428:RMB1
            
            USD0.122:RMB1
            
            USD0.121: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.


37
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          of Contents**





**RISK
      FACTORS**





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




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




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




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




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





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




•   attract
      additional customers and increase spending per customer;




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





•   respond
      to competitive market conditions;




•   respond
      to changes in our regulatory environment;





•   manage
      risks associated with intellectual property rights;




•   maintain
      effective control of our costs and expenses;





•   raise
      sufficient capital to sustain and expand our business;




•   attract,
      retain and motivate qualified personnel; and




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




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


38
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***We
      Must Obtain Additional Financing to Execute Our Business
      Plan***




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




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




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




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




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




•   terminates
      or suspends its agreement with us




•   causes
      delays




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




•   fails
      to
      adequately perform clinical trials




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




•   otherwise
      fails to meet its contractual obligations.




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


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




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




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




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




•  we
      will
      develop additional patentable products




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




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




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




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




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


40
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          of Contents**




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




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




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




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





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




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




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




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




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


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•  the
      commercialization of our products could be adversely affected;





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





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




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




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




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




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




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




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




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


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




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




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





***If
      we were successfully sued for product liability, we could face substantial
      liabilities that may exceed our resources.***




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





***We
      have no business liability or disruption insurance coverage.***





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





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




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


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**Risks
      Related to Our Corporate Structure**




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




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




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




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




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





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





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





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


44
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          of Contents**




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




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




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




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




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





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




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


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**Risks
      Related to Doing Business in China**




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





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





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




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




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




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




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




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


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





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




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





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




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




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




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


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




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




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




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





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





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





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





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





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


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





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





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





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


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





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





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




Our
      principal shareholders and their affiliated entities will own
      approximately 10,315,570 of our outstanding ordinary shares,
      representing approximately 81.82% of our voting power. These shareholders,
      acting individually or as a group, could exert substantial influence over
      matters such as electing directors and approving mergers or other business
      combination transactions. In addition, because of the percentage of ownership
      and voting concentration in these principal shareholders and their affiliated
      entities, elections of our board of directors will generally be within the
      control of these shareholders and their affiliated entities. While all of our
      shareholders are entitled to vote on matters submitted to our shareholders
      for
      approval, the concentration of shares and voting control presently lies with
      these principal shareholders and their affiliated entities. As such, it would
      be
      difficult for shareholders to propose and have approved proposals not supported
      by management. There can be no assurances that matters voted upon by our
      officers and directors in their capacity as shareholders will be viewed
      favorably by all shareholders of the company.





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





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





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





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


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





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




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




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





•
            actual
                or anticipated fluctuations in our quarterly operating
                results;





•
            changes
                in financial estimates by securities research
                analysts;





•
            conditions
                in bio-pharmaceutical and agricultural
                markets;





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





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





•
            addition
                or departure of key personnel;





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





•
            intellectual
                property litigation;





•
            general
                economic or political conditions in
                China.




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


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




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





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




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




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




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


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





(a)
            Evaluation
                of Disclosure Controls and Procedures.
                As of the end of the period covered by this report, we carried out
                an
                evaluation, under the supervision and with the participation of our
                management, including our Chief Executive Officer and the Chief Financial
                Officer, of the effectiveness of the design and operation of our
                disclosure controls and procedures pursuant to Exchange Act Rule
                13a-14.
                Based upon that evaluation, the Chief Executive Officer and Chief
                Financial Officer concluded that our disclosure controls and procedures
                are effective in timely alerting them to material information relating
                to
                us required to be included in our periodic SEC
                filings.





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





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**PART
      II - OTHER INFORMATION**





**Item
              1.**
            **Legal
                Proceedings.**





Reference
      is made to Item 3 of Part I of our Annual Report on Form 10-KSB for the year
      ended December 31, 2005.





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





None.





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





None.





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





None.





**Item
              5.**
            **Other
                Information**.





On
      November 3, 2005, the Company issued 1,000,000 shares (or 2,519 post 1-for-397
      reverse stock split shares), instead of 2,000,000 shares of the Company’s common
      stock as was inadvertently reported in the section titled “Other Related Party
      Transactions” in Item 12 of Part III of the Company’s Annual Report on Form
      10-KSB for the fiscal year ended December 31, 2005, to Mr. Richard Serrano,
      the
      Company’s former President, to settle the $45,000 amount owed to Mr. Serrano.





**Item
              6.**
            **Exhibits
                And Reports On Form 8-K**





**Exhibit
                Number**
            
            **Description**2.1
            
            Share
                Purchase Agreement by and between The Cyber Group Network, Inc. and
                Howard
                L. Allen and Donald G. Jackson (shareholders of Hollywood Entertainment
                Network, Inc.) dated May 12, 2000 (1)2.2
            
            Plan
                of Merger Agreement between The Cyber Group Network Corp. and CGN
                Acquisitions Corporation dated December 7, 2000 (2)2.3
            
            Share
                Exchange Agreement between The Cyber Group Network Corporation, R.
                Scott
                Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical,
                and the
                Skystar Shareholders dated September 20, 2005 (3)3.1
            
            Charter
                of The Cyber Group Network Corporation as filed with the State of
                Nevada
                (4)3.2
            
            Certificate
                of Amendment and Certificate of Change (6)3.3
            
            Company
                Bylaws (5)




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**Exhibit
                  Number**
              
              **Description**31.1
              
              Section 302
                  Certification by the Corporation’s Chief Executive Officer
                  (7)31.2
              
              Section 302
                  Certification by the Corporation’s Chief Financial Officer
                  (7)32.1
              
              Section 906
                  Certification by the Corporation’s Chief Executive Officer
                  (7)32.2
              
              Section 906
                  Certification by the Corporation’s Chief Financial Officer
                  (7)
  (1)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K/A filed on
                  June 1, 2000.
 (2)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K/A filed on
                  January 12, 2001.
 (3)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  September 26, 2005.
 (4)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  November 14, 2005.
 (5)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K on December
                  16, 2005.(6)
              Incorporated
                  by reference from the Registrant’s Annual Report on Form 10-KSB filed on
                  April 17, 2006.(7)
              Filed
                  herewith.
 
 [SIGNATURE
      PAGE FOLLOWS]


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**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY**
                  (Registrant)Date:
                  May 22, 2006
                By:
                /s/ Weibing
                  LuWeibing
                    Lu
                  Chief Executive
                    Officer
 Date:
                      May 22, 2006
                  By:
                  /s/
                    Erna GaoErna Gao
                    Chief Financial
                      Officer


56