**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:**September 30****,
                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 or organization)
            
            (I.R.S.
                Employer Identification Number)





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




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




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




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




APPLICABLE
      ONLY TO CORPORATE ISSUERS:




Indicate
        the number of shares outstanding of each issuer’s classes of common stock, as of
        the latest practicable date: 12,606,199 issued and outstanding as of November
        13, 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
      QUARTER ENDED SEPTEMBER 30, 2006**






PagePART
                I
            FINANCIAL
                INFORMATION
            4Item
                1.
            Financial
                Statements
            4Consolidated
                Balance Sheets
            4Consolidated
                Statements of Income and Other Comprehensive
                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
            31Item
                3.
            Controls
                and Procedures
            52PART
                II
            OTHER
                INFORMATION
            53Item
                1.
            Legal
                Proceedings
            53Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            53Item
                3.
            Defaults
                Upon Senior Securities
            53Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            53Item
                5.
            Other
                Information
            53Item
                6.
            Exhibits
            53Signatures
            54











(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 “Skystar” 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 SEPTEMBER 30, 2006 AND DECEMBER 31, 2005****A
                    S S E T S****September
                    30,**
                ****
                **December
                    31,**
                ********
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **Unaudited**CURRENT
                    ASSETS:Cash
                
                $
                31,832
                
                $
                38,498Restricted
                    cash
                
                
                63,300
                
                
                62,000Accounts
                        receivable, trade, net of allowance for doubtful accounts
                        of $73,115 and
                        $71,613 as of September 30, 2006 and December 31, 2005,
                        respectively
                
                
                726,739
                
                
                247,354Inventories
                
                
                1,166,539
                
                
                175,687Deposits
                    and prepaid expenses
                
                
                14,719
                
                
                15,179Loans
                    receivable
                
                
                3,798
                
                
                261,640Amounts
                    due from shareholders
                
                
                13,174
                
                
                122,966Amount
                    due from a related company
                
                
                9,457
                
                
                587,016Other
                    receivables
                
                
                37,448
                
                
                28,008Total
                    current assets
                
                
                2,067,006
                
                
                1,538,348PLANT
                    AND EQUIPMENT, net
                
                
                9,858,555
                
                
                8,564,360OTHER
                    ASSETS:Prepaid
                    land use right, net
                
                
                313,867
                
                
                307,421Intangible,
                    net
                
                
                31,650
                
                
                49,600Total
                    other assets
                
                
                345,517
                
                
                357,021Total
                    assets
                
                $
                12,271,078
                
                $
                10,459,729**L
                    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 Y**CURRENT
                    LIABILITIES:Interest-bearing
                    short-term loan
                
                $
                37,980
                
                $
                37,200Non-interest
                    bearing loans from third parties
                
                
                176,734
                
                
                421,104Accounts
                    payable
                
                
                49,155
                
                
                9,692Accrued
                    expenses and others
                
                
                191,493
                
                
                135,300Taxes
                    payable
                
                
                1,167,833
                
                
                1,811,405Other
                    payables
                
                
                188,590
                
                
                64,496Amount
                    due to a related company
                
                
                25,193
                
                
                24,676Amounts
                    due to shareholders
                
                
                143,646
                
                
                78,678Total
                    current liabilities
                
                
                1,980,624
                
                
                2,582,551Deferred
                    government grant
                
                
                949,500
                
                
                806,000Total
                    liabilities
                
                
                2,930,124
                
                
                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 September 30, 2006
                          and December
                          31, 2005 respectively; Nil and 48,000,000 series “B” shares
                          issued and outstanding as of September 30, 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 September 30, 2006 and December 31, 2005 respectively;
                          12,606,199 and
                          500,000,000 shares issued and outstanding as of September
                          30, 2006 and
                          December 31, 2005 respectively.
                
                
                12,606
                
                
                500,000Paid-in
                    capital
                
                
                5,910,402
                
                
                3,803,008Statutory
                    reserves
                
                
                364,460
                
                
                364,460Deferred
                    compensation
                
                
                (914,778
                )
                
                —Retained
                    earnings
                
                
                3,629,257
                
                
                2,192,365Accumulated
                    other comprehensive income (loss)
                
                
                337,007
                
                
                161,345Total
                    shareholders’ equity
                
                
                9,340,954
                
                
                7,071,178Total
                    liabilities and shareholders’ equity
                
                $
                12,271,078
                
                $
                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**
                  ******FOR
                      THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
                      2005****Three
                      months ended**
                  ****
                  **Nine
                      months ended**
                  ********
                  ****
                  **September
                      30**
                  ****
                  **September
                      30**
                  ********
                  ****
                  **2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005****Unaudited**
                  
                  **Unaudited**
                  
                  **Unaudited**
                  
                  **Unaudited**REVENUE
                  
                  $
                  3,558,344
                  
                  $
                  1,632,336
                  
                  $
                  7,315,779
                  
                  $
                  4,529,126COST
                      OF SALES
                  
                  
                  1,928,606
                  
                  
                  818,539
                  
                  
                  3,955,340
                  
                  
                  2,184,203GROSS
                      PROFIT
                  
                  
                  1,629,738
                  
                  
                  813,797
                  
                  
                  3,360,439
                  
                  
                  2,344,923OPERATION
                      EXPENSES:RESEARCH
                      AND DEVELOPMENT COST
                  
                  
                  19,372
                  
                  
                  3,755
                  
                  
                  124,458
                  
                  
                  14,197SELLING
                      EXPENSES
                  
                  
                  125,793
                  
                  
                  82,107
                  
                  
                  269,275
                  
                  
                  324,674GENERAL
                      AND ADMINISTRATIVE EXPENSES
                  
                  
                  167,306
                  
                  
                  130,875
                  
                  
                  478,378
                  
                  
                  309,362AMORTIZATION
                      OF DEFERRED CONSULTING FEES
                  
                  
                  316,077
                  
                  
                  —
                  
                  
                  657,222
                  
                  
                  —TOTAL
                      OPERATION EXPENSES
                  
                  
                  628,548
                  
                  
                  216,737
                  
                  
                  1,529,333
                  
                  
                  648,233INCOME
                      FROM OPERATIONS
                  
                  
                  1,001,190
                  
                  
                  597,060
                  
                  
                  1,831,106
                  
                  
                  1,696,690OTHER
                      INCOME, net of other (expense)
                  
                  
                  (1,055
                  )
                  
                  38,580
                  
                  
                  (2,285
                  )
                  
                  65,164INCOME
                      BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  1,000,135
                  
                  
                  635,640
                  
                  
                  1,828,821
                  
                  
                  1,761,854PROVISION
                      FOR INCOME TAXES
                  
                  
                  200,478
                  
                  
                  112,080
                  
                  
                  391,929
                  
                  
                  308,310NET
                      INCOME
                  
                  
                  799,657
                  
                  
                  523,560
                  
                  
                  1,436,892
                  
                  
                  1,453,544OTHER
                      COMPREHENSIVE INCOME (LOSS):Foreign
                      currency translation adjustment
                  
                  
                  102,682
                  
                  
                  —
                  
                  
                  175,662
                  
                  
                  —COMPREHENSIVE
                      INCOME
                  
                  $
                  902,339
                  
                  $
                  523,560
                  
                  $
                  1,612,554
                  
                  $
                  1,453,544EARNINGS
                      PER SHARE (EPS):– Basic
                  
                  $
                  0.06
                  
                  $
                  0.42
                  
                  $
                  0.14
                  
                  $
                  1.15– Diluted
                  
                  $
                  0.06
                  
                  $
                  0.04
                  
                  $
                  0.14
                  
                  $
                  0.12Weighted
                      average number of common shares used to compute
                      EPS:– Basic
                  
                  
                  12,606,199
                  
                  
                  1,260,651
                  
                  
                  10,617,132
                  
                  
                  1,260,651– Diluted
                  
                  
                  12,606,199
                  
                  
                  12,006,199
                  
                  
                  10,617,132
                  
                  
                  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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
                            2005****(Unaudited)******
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        **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
                        
                        
                        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
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        1,453,544
                        
                        
                        —
                        
                        
                        —
                        
                        
                        1,453,544BALANCE,
                            September 30, 2005
                        
                        
                        50,000,000
                        
                        
                        50,000
                        
                        
                        500,000,000
                        
                        
                        500,000
                        
                        
                        3,803,008
                        
                        
                        163,396
                        
                        
                        2,379,455
                        
                        
                        —
                        
                        
                        —
                        
                        
                        6,895,859Net
                            income
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        13,974
                        
                        
                        —
                        
                        
                        —
                        
                        
                        13,974Foreign
                            currency translation
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        161,345
                        
                        
                        161,345Adjustment
                            to statutory reserve
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        201,064
                        
                        
                        (201,064
                        )
                        
                        —
                        
                        
                        —
                        
                        
                        —BALANCE,
                            December 31, 2005
                        
                        
                        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
                        )
                        
                        —
                        
                        
                        —Amortization
                            of deferred compensation
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        657,222
                        
                        
                        —
                        
                        
                        657,222Net
                            income
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        1,436,892
                        
                        
                        —
                        
                        
                        —
                        
                        
                        1,436,892Foreign
                            currency translation
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        175,662
                        
                        
                        175,662BALANCE,
                            September 30, 2006
                        
                        
                        2,000,000
                        
                        $
                        2,000
                        
                        
                        12,606,199
                        
                        $
                        12,606
                        
                        $
                        5,910,402
                        
                        $
                        364,460
                        
                        $
                        3,629,257
                        
                        $
                        (914,778
                        )
                        $
                        337,007
                        
                        $
                        9,340,954
 The
              accompanying notes are an integral part of this
              statement.
 6
 **Table
              of Contents**
 **SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND
                      SUBSIDIARY**
                  ******CONSOLIDATED
                      STATEMENTS OF CASH FLOWS**
                  ******FOR
                      THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005****2006**
                  ****
                  **2005**
                  ********
                  ****
                  **(Unaudited)**
                  ****
                  **(Unaudited)**CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      income
                  
                  $
                  1,436,892
                  
                  $
                  1,453,544Adjustments
                        to reconcile net income to cash provided by (used in) operating
                        activities:Amortization
                      of deferred compensation
                  
                  
                  657,222
                  
                  
                  —Depreciation
                      and amortization
                  
                  
                  81,204
                  
                  
                  85,655Bad
                      debt expense
                  
                  
                  578
                  
                  
                  —Loss
                      on disposal of equipment
                  
                  
                  —
                  
                  
                  4,600(Increase)
                      decrease in assets:Accounts
                      receivable
                  
                  
                  (468,709
                  )
                  
                  409,629Other
                      receivables
                  
                  
                  (8,740
                  )
                  
                  (420,939
                  )Deposit
                      and prepaid expenses
                  
                  
                  768
                  
                  
                  (490,338
                  )Inventories
                  
                  
                  (974,536
                  )
                  
                  (188,729
                  )Increase
                      (decrease) in liabilities:Accounts
                      payable
                  
                  
                  38,757
                  
                  
                  14,324Accrued
                      expenses and other payables
                  
                  
                  174,099
                  
                  
                  (49,219
                  )Receipt
                      in advance
                  
                  
                  —
                  
                  
                  30,087Taxes
                      payable
                  
                  
                  (672,832
                  )
                  
                  682,717Net
                      cash provided by operating activities
                  
                  
                  264,703
                  
                  
                  1,531,331CASH
                      FLOWS FROM INVESTING ACTIVITIES:Decrease
                      in amounts of short-term investment
                  
                  
                  —
                  
                  
                  243,360Proceeds
                      from disposal of fixed assets
                  
                  
                  —
                  
                  
                  791Purchase
                      of property, plant and equipment
                  
                  
                  (1,162,813
                  )
                  
                  (3,282,909
                  )Net
                      cash used in investing activities
                  
                  
                  (1,162,813
                  )
                  
                  (3,038,758
                  )CASH
                      FLOWS FINANCING ACTIVITIES:Decrease
                      in restricted cash
                  
                  
                  —
                  
                  
                  182,520Increase
                      (decrease) in amounts due to shareholders
                  
                  
                  71,194
                  
                  
                  (39,293
                  )Decrease
                      in amounts due from shareholders
                  
                  
                  102,246
                  
                  
                  (12,901
                  )Decrease
                      in amount due to a related company
                  
                  
                  —
                  
                  
                  (11,195
                  )Decrease
                      in amount due from a related company
                  
                  
                  582,319
                  
                  
                  —Decrease
                      in non-interest bearing loans from third parties
                  
                  
                  (249,960
                  )
                  
                  —Payments
                      to short-term loan
                  
                  
                  37,000
                  
                  
                  —Payments
                      from short-term loan
                  
                  
                  (37,000
                  )
                  
                  —Proceeds
                      from deferred government grant
                  
                  
                  124,980
                  
                  
                  60,840Capital
                      contributed
                  
                  
                  —
                  
                  
                  1,245,600Increase
                      in interest-bearing loans to third parties
                  
                  
                  259,958
                  
                  
                  80,751Net
                      cash provided by financing activities
                  
                  
                  890,737
                  
                  
                  1,506,322NET
                      DECREASE IN CASH
                  
                  
                  (7,373
                  )
                  
                  (1,105
                  )EFFECT
                      ON EXCHANGE RATE CHANGES ON CASH
                  
                  
                  707
                  
                  
                  19,092CASH,
                      beginning of period
                  
                  
                  38,498
                  
                  
                  49,606CASH,
                      end of period
                  
                  $
                  31,832
                  
                  $
                  67,593Supplemental
                      disclosure informationFinance
                      costs paid
                  
                  $
                  2,670
                  
                  $
                  1,934Income
                      taxes paid
                  
                  $
                  516,659
                  
                  $
                  —Non-cash
                      transactionsStock
                      issued for services
                  
                  $
                  1,572,000
                  
                  $
                  —Contribution
                        of a leasehold office building by a shareholder as additional
                        capital of
                        Xian Tianxing
                  
                  $
                  —
                  
                  $
                  275,080
 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
 September
                30, 2006
 (Unaudited)
  1.
                    DESCRIPTION
                        OF BUSINESS AND ORGANIZATION
 
 Skystar
              Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
              Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
              name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
              2000, the Company changed its name to “The Cyber Group Network Corporation”. On
              February 15, 2006, the Company further changed its name to “Skystar
              Bio-Pharmaceutical Company” to reflect its current business
              operations.
 
 On
              November 7, 2005, the Company completed a stock exchange transaction
              with the
              stockholders of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Limited
              (“Skystar Cayman”), whereby 48,000,000 shares of the Company’s Series B
              preferred stock was issued to the stockholders of Skystar Cayman in
              exchange for
              100% of the common stock of Skystar Cayman. The 48,000,000 shares of
              Series B
              preferred stock issued to the stockholders of Skystar Cayman shall
              be
              convertible, in aggregate, into a number of shares of the Company’s common stock
              that would equal 89.5% of the outstanding shares of the Company’s common stock,
              if the shares were to be converted on the closing date of the stock
              exchange
              transaction which was November 7, 2005. In addition, Skystar Cayman
              paid
              $120,000 to Cyber, which was used to pay liabilities of Cyber.
  In
                connection with the stock exchange transaction, the Company appointed
                four new
                directors, Mr. Weibing Lu, Mr. Wei Wen, Mr. Xinya Zhang and Ms. Erna
                Gao, to the
                Company’s board of directors. Furthermore, concurrent with the closing of
                the
                stock exchange transaction, all of the Company’s former officers and a director,
                Mr. David Wassung resigned their positions and Mr. Weibing Lu was
                appointed the
                new chief executive officer, Ms. Erna Gao the new chief financial
                officer, and
                Mr. Wei Wen the new secretary.
 
 The
                stock
                exchange transaction has been accounted for as a reverse acquisition
                and
                recapitalization of the Company whereby Skystar Cayman is deemed
                to be the
                accounting acquirer (legal acquiree) and the Company to be the accounting
                acquiree (legal acquirer). The accompanying consolidated financial
                statements
                are in substance those of Skystar Cayman, with the assets and liabilities,
                and
                revenues and expenses, of the Company being included effective from
                the date of
                the stock exchange transaction. The Company is deemed to be a continuation
                of
                the business of Skystar Cayman. 2,000,000 shares of the Company’s preferred
                stock and 500,000,000 shares of its common stock outstanding prior
                to the stock
                exchange have been accounted for at their net book value at the time
                of the
                transaction.
  8
 **Table
                      of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 September
                  30, 2006
 (Unaudited)
  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 PRC law, a “limited liability company” is a company
              whose shareholders shall assume liability towards the company to the
              extent of
              their respective capital contributions, whereas a joint stock limited
              company is
              a company having its total capital divided into equal shares and whose
              shareholders shall assume liability to the extent of their respective
              shareholdings.
  The
              paid-in capital of Xian Tianxing was funded by the majority shareholders
              of
              Skystar Cayman. PRC law currently has limits on foreign ownership of
              companies.
              To comply with these foreign ownership restrictions, on October 28,
              2005,
              Skystar Cayman entered into certain exclusive agreements with Xian
              Tianxing and
              its shareholders. Xian Tianxing holds the licenses and approvals necessary
              to
              operate the bio-pharmaceutical business in China. Pursuant to these
              agreements,
              Skystar Cayman provides exclusive technology consulting and other general
              business operation services to Xian Tianxing in return for a consulting
              services
              fee which is equal to Xian Tianxing’s revenue. In addition, Xian Tianxing’s
              shareholders have pledged their equity interests in Xian Tianxing to
              Skystar
              Cayman, irrevocably granted Skystar Cayman an exclusive option to purchase,
              to
              the extent permitted under PRC law, all or part of the equity interests
              in Xian
              Tianxing and agreed to entrust all the rights to exercise their voting
              power to
              the person(s) appointed by Skystar Cayman. Through these contractual
              arrangements, Skystar Cayman has the ability to substantially influence
              Xian
              Tianxing’s daily operations and financial affairs, appoint its senior executives
              and approve all matters requiring shareholder approval.
  As
              a
              result of these contractual arrangements, which obligates Skystar Cayman
              to
              absorb a majority of the risk of loss from Xian Tianxing’s activities and enable
              Skystar Cayman to receive a majority of its expected residual returns,
              Skystar
              Cayman accounts for Xian Tianxing as a variable interest entity (“VIE”) under
              FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
              Entities, an Interpretation of ARB No. 51”. Accordingly, Skystar Cayman
              consolidates Xian Tianxing’s results, assets and liabilities.
 9
 **Table
                          of Contents**
 SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 September
                      30, 2006
 (Unaudited)
 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.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING
                        POLICIES
 
 Basis
              of presentation and consolidation
 
 The
              accompanying consolidated financial statements are prepared in accordance
              with
              accounting principles generally accepted in the United States of
              America.
 
 The
              consolidated financial statements include the financial statements
              of the
              Company, its 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.
  10
 **Table
                      of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 September
                  30, 2006
 (Unaudited)
  2.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 
 Fair
              values of financial instruments (Cont’d)
  The
              Company’s financial instruments primarily consist of cash, accounts receivable,
              other receivables, other 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
              year ends.
  Cash
 
 Cash
              includes cash on hand, demand deposits with banks and liquid investments
              with an
              original maturity of three months or less.
 
 Restricted
              cash
  The
              Company had restricted cash of $63,300 and $62,000 as of September
              30, 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
              12). The
              restricted funds are kept as bank deposits. Restricted cash is classified
              as
              current assets as of September 30, 2006 and December 31, 2005, based
              on the
              expected period when the funds will be put into their specific
              usages.
  Accounts
              and other receivables
 
 Accounts
              and other receivables are recorded at net realizable value consisting
              of the
              carrying amount less an allowance for uncollectible accounts, as needed.
  11
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 
 The
                Company uses the aging method to estimate the valuation allowance
                for
                anticipated uncollectible receivable balances. Under the aging method,
                bad debt
                percentages determined by management based on historical experience
                as well as
                current economic climate are applied to customers’ balances categorized by the
                number of months the underlying invoices have remained outstanding.
                The
                valuation allowance balance is adjusted to the amount computed as
                a result of
                the aging method. When facts subsequently become available to indicate
                that the
                allowance provided requires an adjustment, then the adjustment will
                be
                classified as a change in estimate. Accounts receivables at September
                30, 2006
                and December 31, 2005 amounted to $726,739 and $247,354 net of allowances
                of
                $73,115 and $71,613, respectively.
 
 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.
  12
 **Table
                      of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 September
                  30, 2006
 (Unaudited)
  2.
                    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.
  13
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    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. Accumulated other comprehensive income 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 and
                include
                salaries, professional fees and technical support fees.
 14
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    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.
  15
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    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. Equity accounts are translated
              at
              historical rates. Adjustments resulting from the translation of the
              subsidiary’s
              and VIE’s financial statements are recorded as accumulated other comprehensive
              income.
  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.
  Assets
              and liabilities at September 30, 2006 were translated at US$0.12660:RMB1
              as compared to US$0.124:RMB1 at December 31, 2005. The weighted average
              translation rate of US$0.12498:RMB1 and US$0.12168:RMB1 for the nine
              months
              ended September 30, 2006 and 2005 respectively were 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.
  16
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    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
                became effective
                with the Company’s first quarter of fiscal year 2006.  SFAS No. 154 did not have
                material impact on the Company’s results of operations, financial position or
                cash flows.
 17
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    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. EITF 05-06 did not
                have a
                material impact on the Company’s consolidated results of operations, financial
                positions or cash flows.
 
 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. This Interpretation became effective in 2005, and did not
                have a
                material impact on the Company’s consolidated results of operations, financial
                position or cash flows.
  18
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 2.
                    SUMMARY
                        OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 
 Recently
              issued accounting pronouncements (Cont’d)
  In
              October 2005, FASB Staff Position (FSP) 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. FSP13-1 did not have a material impact on the Company's financial
              position, results of operations, or cash flows.
  3.
                    CONCENTRATIONS
                        OF CREDIT RISK
 
 Financial
              instruments that potentially expose the Company to concentrations of
              credit risk
              consist of cash and accounts receivable as of September 30, 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
              September 30, 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 September 30, 2006 and year ended December 31, 2005, all
              of the
              Company’s sales arose in the PRC. In addition, all accounts receivable as at
              September 30, 2006 and December 31, 2005 also arose in the PRC.
 
 The
              Company’s three largest customers accounted for approximately 2.08%, of the
              Company’s total revenues for the nine month period ended September 30, 2006,
              while the Company’s three largest customers accounted for 2.18% of the Company’s
              total revenues for the nine month period ended September 30, 2005.
 
 The
              Company’s three largest vendors accounted for approximately 72.89% of the
              Company’s total purchases for the nine month period ended September 30, 2006,
              while the Company’s three largest vendors accounted for 62.42% of the Company’s
              total purchases for the nine month period ended September 30, 2005.
  19
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 4.
                    RESTRICTED
                        CASH
 
 Restricted
              cash consists of the following:
 
 **September
                        30**
                    
                    **December
                        31******
                    
                    **2006**
                    
                    **2005**Funds
                        received from PRC government subsidies (see Note 12)$
                    63,300
                    
                    $
                    62,000
 
 5.
                    INVENTORIES
 
 Inventories
              consist of the following:
 
 **September
                        30**
                    
                    **December
                        31******
                    
                    **2006**
                    
                    **2005**Raw
                        materials
                    
                    $
                    467,704
                    
                    $
                    85,563Packing
                        materials
                    
                    
                    121,130
                    
                    
                    42,552Finished
                        goods
                    
                    
                    571,175
                    
                    
                    47,172Other
                        inventory
                    
                    
                    6,530
                    
                    
                    400Total
                    
                    $
                    1,166,539
                    
                    $
                    175,687
 
 6.
                    LOANS
                        RECEIVABLE
 
 The
              loans
              receivable of $3,798 and $261,640 as of September 30, 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.
  20
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 7.
                    OTHER
                        RECEIVABLES
 
 Other
              receivables consist of the following:
 **September
                        30**
                    ****
                    **December
                        31**
                    ********
                    ****
                    **2006**
                    ****
                    **2005**Cash
                        advances to staff and salespersons for normal business
                        purposes
                    
                    $
                    20,484
                    
                    $
                    19,085Prepaid
                        operating expenses
                    
                    
                    4,640
                    
                    
                    —Others
                    
                    
                    12,324
                    
                    
                    8,923$
                    37,448
                    
                    $
                    28,008
 
 8.
                    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
                September 30, 2006 and December 31, 2005 amounted to $326,945 and
                $319,971, net
                of accumulated amortization of $13,078 and $12,550, respectively.
                Amortization
                expense for the period ended September 30, 2006 and the year ended
                December 31,
                2005 amounted to $6,455 and $6,301, respectively.
  21
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 9.
                    PROPERTY,
                        PLANT AND EQUIPMENT
 
 Property,
              plant and equipment consist of the following:
 
 **September
                        30**
                    
                    **December
                        31******
                    
                    **2006**
                    
                    **2005**Plant
                        and machinery
                    
                    $
                    266,081
                    
                    $
                    221,475Leasehold
                        improvements and office building
                    
                    
                    347,039
                    
                    
                    323,591Office
                        equipment
                    
                    
                    134,397
                    
                    
                    126,540Motor
                        vehicles
                    
                    
                    140,608
                    
                    
                    110,972888,125
                    
                    
                    782,578Less:
                        Accumulated depreciation
                    
                    
                    (284,192
                    )
                    
                    (216,389
                    )603,933
                    
                    
                    566,189Construction
                        in progress
                    
                    
                    9,254,622
                    
                    
                    7,998,171Total,
                        net
                    
                    $
                    9,858,555
                    
                    $
                    8,564,360
 
 Construction
              in progress included above was the construction of a production base
              which
              operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
              The construction work commenced in late 2004 and 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 $ 62,457
              and $47,539 for the period ended September 30, 2006 and 2005, respectively.
 
 The
              Company has pledged its leasehold office building at cost of $275,080
              at
              September 30, 2006 to an unrelated third party as the security against
              a
              non-interest bearing loan.
  22
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 10.
                    INTANGIBLE
 
 Technological
              know-how consists of the following:
 **September
                        30,**
                    
                    **December
                        31******
                    
                    **2006**
                    
                    **2005**Cost
                    
                    $
                    126,600
                    
                    $
                    123,948Less:
                        Accumulated amortization
                    
                    
                    (94,950
                    )
                    
                    (74,348
                    )Total
                    
                    $
                    31,650
                    
                    $
                    49,600
 
 The
              amortization expense on the technological know-how was $18,747 and
              $18,252 for
              the period ended September 30, 2006 and 2005, respectively.
 
 11.
                    INTEREST-BEARING
                        SHORT-TERM LOAN
  The
              short-term loan of $37,980 and $37,200 as of September 30, 2006 and
              December 31,
              2005 respectively is for a term of one year from August 10, 2005 to
              August 9,
              2006, is secured by a guarantee given by a third party, and bears interest
              at
              0.8835% per month. During the third quarter, the short term loan was
              renewed for
              a term of one year from August 10, 2006 to August 9, 2007, is secured
              by a
              guarantee given by a third party and bears interest at 0.92625% per
              month.
  Interest
              expense for the period ended September 30, 2006 and 2005 amounted to
              $2,549 and
              $1,948, respectively.
 
 12.
                    DEFERRED
                        GOVERNMENT GRANT
 
 The
              amounts represent subsidies for hi-tech projects granted by the PRC
              government.
              A subsidy in the amount of $633,000 was approved by the PRC government
              to be
              granted to the Company for the purpose of constructing a new factory
              which
              operations will meet the GMP Standard. In 2003, $506,400 was received
              by the
              Company and the remaining $126,600 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 $253,200 was received for financing the Company’s
              research and development activities. In 2005, the Company applied and
              utilized
              $189,900 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.
  23
 **Table
                      of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 September
                  30, 2006
 (Unaudited)
  12.
                    DEFERRED
                        GOVERNMENT GRANT(Cont’d)
 
 In
              2005,
              another subsidy of $63,300 was received for the Company’s research and
              development activities. This amount was put into use during the period.
              Since
              the final treatment of these funds may not be confirmed in 2006, this
              amount is
              included under non-current liabilities.
 
 13.
                    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.
  On
              February 15, 2006, the Company also affected
              a one for ten (1:10) reverse stock split of the Company’s authorized shares of
              the Company’s preferred stock. As a result, the total number of authorized
              shares was reduced from 500,000,000 to 50,000,000. Per the conversion
              rights set
              forth in the certificate of designation for the series “B” convertible preferred
              stock, at the same time that the amendment to the Company’s articles of
              incorporation was filed that created sufficient authorized shares of
              common
              stock to permit full conversion of all 48,000,000 series “B” preferred shares,
              all of the series “B” preferred shares automatically were converted into
              10,745,548 shares of common stock that equaled to 89.5% of the total
              issued and
              outstanding shares.
  In
              March
              2006, the Company issued a total of 600,000 shares of the Company’s common stock
              to consultants, as more fully described in Note 16.
  24
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 14.
                    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 September 30, 2006 and of December
              31,
              2005.
 
 15.
                    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 nine-month period ended September 30, 2006, a total of 600,000
              shares
              were issued pursuant to the Plan.
  16.
                    CONSULTING
                        AGREEMENTS AND DEFERRED CONSULTING FEES
 
 On
                March
                14, 2006, the Company entered into two-year consulting agreement
                with an
                independent consultant. The services to be rendered include consultation
                and
                advisory services relating to marketing of the Company as mutually
                agreed upon
                between the parties. As consideration for the services to be rendered,
                the
                Company issued 240,000 shares of common stock to the consultant on
                March 31,
                2006. These shares were issued pursuant to the 2006 consultant stock
                plan. The
                fair market value of the Company's common stock as of March 14, 2006
                was $2.65
                per share.
  25
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 16.
                    CONSULTING
                        AGREEMENTS AND DEFERRED CONSULTING FEES(Cont’d)
 
 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. These
                shares were issued pursuant to the 2006 consultant stock plan. The
                fair
                market value of the Company's common stock as of March 27, 2006 was
                $2.60 per
                share.
 
 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 September 30, 2006 ,
                the
                Company charged $657,222 to expense associated with consulting agreements
                and
                recorded deferred consulting fees of $ 914,778 a t
                September 30, 2006. The deferred consulting fees will be charged
                to expenses as
                follows:
  Year ending December 31
                    
                    **Amount**2006
                    
                    $
                    534,0492007
                    
                    
                    318,0002008
                    
                    
                    62,729Total
                    
                    $
                    914,778
 
 17.
                    EARNINGS
                        PER SHARE
 
 Basic
              earnings per share (EPS) for the periods ended September 30, 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
              September 30, 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 13. 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.
  26
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 17.
                    EARNINGS
                        PER SHARE(Cont’d)
 
 The
              reconciliations of the denominators of the basic and diluted EPS computations
              are as follows:
 
 **September
                        30**
                    
                    **September
                        30******
                    
                    **2006**
                    
                    **2005**Denominator
                        for Basic EPS
                    
                    
                    10,617,132
                    
                    
                    1,260,651Weighted
                        average effect on denominator for Basic EPS
                    
                    
                    10,617,132
                    
                    
                    1,260,651Effect
                        of series “B” convertible preferred stock
                    
                    
                    —
                    
                    
                    10,745,548Denominator
                        for Diluted EPS
                    
                    
                    10,617,132
                    
                    
                    12,006,199
 
 18.
                    RELATED
                        PARTY TRANSACTIONS AND
                        ARRANGEMENTS
 
 (a)
                    *Related
                        party receivables and payables*
  Amounts
              receivable from and payable to related parties are summarized as
              follows:
 
 **September
                        30,**
                    
                    **December
                        31******
                    
                    **2006**
                    
                    **2005**Amounts
                        due from shareholders:Ms.
                        Aixia Wang
                    
                    $
                    63
                    
                    $
                    —Mr.
                        Wei Wen, also a director of the Company
                    
                    
                    13,111
                    
                    
                    21,503Mr.
                        Weibing Lu, also a director of the Company
                    
                    
                    —
                    
                    
                    101,463Total
                    
                    $
                    13,174
                    
                    $
                    122,966Amounts
                        due to shareholders:Ms.
                        Aixia Wang
                    
                    $
                    —
                    
                    $
                    8,618Mr.
                        Weibing Lu, also a director of the Company
                    
                    
                    65,787
                    
                    
                    —Mr.
                        Wucai Ji
                    
                    
                    71,529
                    
                    
                    63,860Mr.
                        Yuantai Wang
                    
                    
                    6,330
                    
                    
                    6,200Total
                    
                    $
                    143,646
                    
                    $
                    78,678Amount
                        due from a related company:Shaanxi
                        Xingji Electronic Sci-Tech Company Limited(“Shaanxi Xingji”) (see (b)(i) to (iii) below)
                    
                    $
                    9,457
                    
                    $
                    587,016Amount
                        due to a related company:Tian
                        Xing Digital - a company owned by a director
                    
                    $
                    25,193
                    
                    $
                    24,676
 27
 **Table
                        of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 September
                  30, 2006
 (Unaudited)
 18.
                    RELATED
                        PARTY TRANSACTIONS AND ARRANGEMENTS(Cont’d)
 
 (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 $9,457 (December 31, 2005: $624,216) 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.
 
 (iii)
                    The
                          amount of $37,200 due to Shaanxi Xingji with interest bearing
                          at 0.8835%
                          per month as of December 31, 2005 was fully repaid during
                          the period ended
                          June 30, 2006with funds provided by a third party.
 
 19.
                    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.
  28
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 20.
                    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.
 
 The
              Company’s commitments for capital expenditure as of September 30, 2006 are
              as
              follows:
 
 Contracted
                        but not accrued for:Construction
                        of a new plant
                    
                    $
                    2,116,046Purchase
                        of machinery
                    
                    
                    717,024Total
                    
                    $
                    2,833,070
 
 (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 $10,767, 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:
                    
                    **2006**
                    ****
                    **2005**Within
                        1 year
                    
                    $
                    10,767
                    
                    
                    10,7671
                        to 2 year
                    
                    
                    10,767
                    
                    
                    10,7672
                        to 3 year
                    
                    
                    11,844
                    
                    
                    11,0363
                        to 4 year
                    
                    
                    11,844
                    
                    
                    11,8444
                        to 5 year
                    
                    
                    11,844
                    
                    
                    11,844Thereafter
                    
                    
                    37,900
                    
                    
                    46,783$
                    94,966
                    
                    
                    103,041
  29
 **Table
                      of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 September
                30, 2006
 (Unaudited)
 
 20.
                    COMMITMENTS
                        AND CONTINGENCIES(Cont’d)
 
 (c)
                    *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.
 30
 **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.
 
 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 presently issued and
        outstanding.
 
 Furthermore,
        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. Pursuant to 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 were automatically be converted into 10,745,548 shares of common stock
        or
        89.5% of the then total issued and outstanding shares.
 31
 **Table
              of Contents**
 Having
        no
        substantive operation of its own, Skystar Cayman, through its VIE, Xian
        Tianxing, engages in research, development, production, marketing and sales
        of
        bio-pharmaceutical and veterinary products in the People’s Republic of China
        (“China” or the “PRC”). Please see Note 1 to our consolidated financial
        statements included in this report for a description of the contractual
        arrangements between Skystar Cayman and Xian Tianxing and their impact on
        our
        consolidated financial statements.
  **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.
 
 **Results
        of Operations - Three months ended September 30, 2006 as compared to three
        months ended September 30, 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 September 30, 2006, we
        had
        revenues of $3,558,344 as compared to revenues of $1,632,336 during the three
        months ended September 30, 2005, an increase of approximately 118%. In general,
        this increase is attributable to our increased volume of sales, partially
        offset
        by a decline in unit selling prices. The increase is also largely attributable
        to the increase in the number of promotional activities that we carried out
        during the period. We believe that our sales will continue to grow because
        we
        are strengthening our sales force and improving our product quality.
 
 GROSS
        PROFIT. Cost of goods sold, which consist of raw materials, direct labor
        and
        manufacturing overhead, were $1,928,606 for the three months ended September
        30,
        2006 as compared to $818,539 for the three months ended September 30, 2005.
        Gross profit was $1,629,738 for the three months ended September 30, 2006
        as
        compared to $813,797 for the three months ended September 30, 2005, representing
        gross profit margins of approximately 46% and 50%, respectively. The decrease
        in
        our gross profit margin is attributable to a decrease in unit prices and
        an
        increase in cost of raw materials. We believe that this is a short term trend
        and that we will have better cost control in the future.
 32
 **Table
              of Contents**
  SELLING
            EXPENSES. Selling expenses, which consist of commission, advertising
            and
            promotion expenses, freight charges and salaries, totaled $125,793 for
            the three
            months ended September 30, 2006 as compared to $82,107 for the three
            months
            ended September 30, 2005, an increase of approximately 53%. This increase
            is
            primarily attributable to increase in sales commission of $19,875 and
            freight of
            $29,647 as a result of an increase in revenues during the three months
            ended
            September 30, 2006.
 
 GENERAL
        AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
        $167,306 for the three months ended September 30, 2006, as compared to $130,875
        for the three months ended September 30, 2005, an increase of approximately
        28%.
        This increase is primarily attributable to increased expenses due to our
        company’s expansion.
 
 AMORTIZATION
        OF DEFERRED CONSULTING FEES. Deferred consulting fees, which paid for the
        consultation and advisory services relating to marketing, financing and
        restructuring of the Company, totaled $316,077 and amortization of these
        fees
        commenced in the three months ended September 30, 2006, whereas there was
        no
        such expenses during the three months ended September 30, 2005.
 
 RESEARCH
        AND DEVELOPMENT COSTS. Research and development costs, which consist of
        salaries, professional and technical support fees, totaled $19,372 for the
        three
        months ended September 30, 2006, as compared to $3,755 for the three months
        ended September 30, 2005, an increase of approximately 416%. The increase
        is
        attributable to our continued improvement of existing products and our
        development of new products.
 
 NET
        INCOME. Skystar had a net income of $799,657 for the three months ended
        September 30, 2006 as compared to $523,560 for the three months ended September
        30, 2005. The increase in net income is attributable to the increase in sales
        for the three months ended September 30, 2006. Skystar’s management believes
        that net income will increase as the sales will increase in the coming quarters.
  **Results
        of Operations - Nine months ended September 30, 2006 as compared to nine
        months
        ended September 30, 2005**
 
 REVENUES.
        All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
        products in the PRC. During the nine months ended September 30, 2006, we
        had
        revenues of $7,315,779 as compared to revenues of $4,529,126 during the nine
        months ended September 30, 2005, an increase of approximately 62%. In general,
        this increase is attributable to our increased sales, which is mainly
        attributable to the increase in the number of promotional activities that
        we
        carried out during the period.
 
 GROSS
        PROFIT. Cost of goods sold, which consist of raw materials, direct labor
        and
        manufacturing overhead, were $3,955,340 for the nine months ended September
        30,
        2006 as compared to $2,184,203 for the nine months ended September 30, 2005.
        Gross profit was $3,360,439 for the nine months ended September 30, 2006
        as
        compared to $2,344,923 for the nine months ended September 30, 2005,
        representing gross profit margins of approximately 46% and 52%, respectively.
        The decrease in our gross profit margin is attributable to a decrease in
        unit
        prices due to keen competition and an increase in the cost of raw materials.
        We
        believe that this is a short term trend and we will be strengthening our
        sales
        force and have better cost control in the future.
 
 SELLING
        EXPENSES. Selling expenses, which consist of commission, advertising and
        promotion expenses, freight charges and salaries, totaled $269,275 for the
        nine
        months ended September 30, 2006 as compared to $324,674 for the nine months
        ended September 30, 2005, a decrease of approximately 17%. This decrease
        is
        primarily attributable to a change in our commission policy from an aggressive
        commission rate to a flat rate.
 33
 **Table
              of Contents**
  GENERAL
            AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
            $478,378 for the nine months ended September 30, 2006, as compared to
            $309,362
            for the nine months ended September 30, 2005, an increase of approximately
            55%.
            This increase is primarily attributable to a provision for audit fees
            to comply
            with SEC reporting rules, which totaled $138,284 for the period ended
            September
            30, 2006.
 
 AMORTIZATION
        OF DEFERRED CONSULTING FEES. Deferred consulting fees, which paid for the
        consultation and advisory services relating to marketing, financing and
        restructuring of the Company, totaled $657,222 and amortization of these
        fees
        commenced in the nine month ended September 30, 2006, whereas there was no
        such
        expenses during the nine month ended September 30, 2005.
 
 RESEARCH
        AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
        professional and technical support fees, totaled $124,458 for the nine months
        ended September 30, 2006, as compared to $14,197 for the nine months ended
        September 30, 2005, an increase of approximately 777%. The increase is
        attributable to our continued improvement of existing products and our
        development of new products.
 
 NET
        INCOME. Skystar had a net income of $1,436,892 for the nine months ended
        September 30, 2006, a slight decrease as compared to net income of $1,453,544
        for the nine months ended September 30, 2005. Skystar’s management believes that
        net income will increase as the sales will increase in the coming quarters.
 
 **Liquidity**
 
 For
        the
        nine months ended September 30, 2006, we generated cash from operating
        activities of $264,703, as compared to $1,531,331 for the nine months ended
        September 30, 2005. The decrease is primarily attributable to an increase
        in
        inventory, which was used for the production in the third quarter. We used
        $1,162,813 in investing activities for 2006, as compared to $3,038,758 for
        2005.
        The expenditure in investing activities for 2006 consisted of a payment of
        $1,162,813 for the purchases of property, plant and equipment (net of decrease
        in deposits paid) whereas compared with $3,282,909 for the nine month period
        in
        2005 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 $890,737 in cash from financing activities for 2006 as
        compared to $1,506,322 in cash generated for 2005.  Also, the repayment
        from a related company of $582,319 had contributed to the increase in net
        cash
        provided by financing activities.
 
 As
        of
        September 30, 2006, the Company had cash of $31,832. Our total current assets
        were $2,067,006 and our total current liabilities were $1,980,624, which
        resulted in a net working capital of $86,382.
 
 We
        had
        capital expenditure commitments outstanding as of September 30, 2006 in the
        amount of $2,116,046 for the construction of a new plant, which will meet
        the
        Good Manufacturing Practices Standard and $717,024 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.
 34
 **Table
              of Contents**
 **Capital
        Resources**
 
 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, and the remaining $4,500,000 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 RMB69,410,000 ($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 14,100 sq. meters.
 
 **Product
        Research and Development**
 
 We
        believe that Xian Tianxing will continue developing several products including
        new bio-pharmaceutical products for animal immunization, non-pathogenic
        micro-organisms for the cure and prevention of livestock disease, complex
        enzyme
        preparations as animal feed additives, and other new veterinary medicine
        products within the next 12 months.
 
 **Off-Balance
        Sheet Arrangements**
 
 The
        Company has pledged a leasehold office building with a net book value of
        $235,552 as of September 30, 2006 to an unrelated third party as the security
        against a non-interest bearing loan.
 
 Other
        than the arrangement 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.
 35
 **Table
              of Contents**
 **Exchange
        Rates**
 
 Xian
        Tianxing maintains its books and records in Renminbi (“RMB”), the lawful
        currency of the PRC. In general, for consolidation purposes, the Company
        translates Xian Tianxing’s assets and liabilities into US Dollars using the
        applicable exchange rates prevailing at the balance sheet date, and the
        statement of income is translated at average exchange rates during the reporting
        period. Adjustments resulting from the translation of Xian Tianxing’s financial
        statements are recorded as accumulated other comprehensive income.
 
 Until
        July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00.
        On
        July 21, 2005, the PRC government reformed the exchange rate system into
        a
        managed floating exchange rate system based on market supply and demand with
        reference to a basket of currencies. In addition, the exchange rate of RMB
        to
        US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
        China announces the closing price of a foreign currency such as US$ traded
        against RMB in the inter-bank foreign exchange market after the closing of
        the
        market on each working day, which will become the unified exchange rate for
        the
        trading against RMB on the following working day. The daily trading price
        of US$
        against RMB in the inter-bank foreign exchange market is allowed to float
        within
        a band of ± 0.3%
        around the unified exchange rate published by the People’s Bank of China. This
        quotation of exchange rates does not imply free convertibility of RMB to
        other
        foreign currencies. All foreign exchange transactions continue to take place
        either through the Bank of China or other banks authorized to buy and sell
        foreign currencies at the exchange rates quoted by the People’s Bank of China.
        Approval of foreign currency payments by the Bank of China or other institutions
        required submitting a payment application form together with invoices, shipping
        documents and signed contracts.
 
 The
        exchange rates used to translate amounts in RMB into US Dollars for the purposes
        of preparing the consolidated financial statements or otherwise stated in
        this
        MD&A were as follows:


**September
                  30, 2006**
              ****
              **December
                  31, 2005**
              ****
              **September
                  30, 2005**Balance
                  sheet items, except for the registered and paid-up capital, as
                  of end of
                  period/year
              
              US$0.12660:RMB1
              
              US$0.124:RMB1
              
              US$0.12380:RMB1Amounts
                  included in the statement of operations, statement of changes in
                  stockholders’ equity and statement of cash flows for the period/ year
                  ended
              
              US$0.12498:RMB1
              
              US$0.122:RMB1
              
              US$0.12168: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.
 36
 **Table
              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.
 37
 **Table
              of Contents**
 ***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.
 38
 **Table
              of Contents**
 ***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.
 39
 **Table
              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:
 40
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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.  If 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, 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.
 41
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              of Contents**
 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.
 42
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              of Contents**
  **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.
 43
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              of Contents**
 The
        interpretation and application of existing PRC laws, regulations and policies
        and possible new laws, regulations or policies have created substantial
        uncertainties regarding the legality of existing and future foreign investments
        in, and the businesses and activities of, bio-pharmaceutical businesses in
        China, including our business.
  ***In
        order to comply with PRC laws limiting foreign ownership of Chinese companies,
        we conduct our bio-pharmaceutical business through Xian Tianxing by means
        of
        contractual arrangements. If the PRC government determines that these
        contractual arrangements do not comply with applicable regulations, our business
        could be adversely affected.***
  The
        PRC
        government restricts foreign investment in bio-pharmaceutical businesses
        in
        China. Accordingly, we operate our business in China through Xian Tianxing,
        a Chinese joint stock company. Xian Tianxing holds the licenses and
        approvals necessary to operate our website and our online advertising business
        in China. We have contractual arrangements with Xian Tianxing and its
        shareholders that allow us to substantially control Xian Tianxing. We cannot
        assure you, however, that we will be able to enforce these contracts.
  Although
        we believe we comply with current PRC regulations, we cannot assure you that
        the
        PRC government would agree that these operating arrangements comply with
        PRC
        licensing, registration or other regulatory requirements, with existing policies
        or with requirements or policies that may be adopted in the future. If the
        PRC
        government determines that we do not comply with applicable law, it could
        revoke
        our business and operating licenses, require us to discontinue or restrict
        our
        operations, restrict our right to collect revenues, require us to restructure
        our operations, impose additional conditions or requirements with which we
        may
        not be able to comply, impose restrictions on our business operations or
        on our
        customers, or take other regulatory or enforcement actions against us that
        could
        be harmful to our business.
  ***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.
 45
 **Table
              of Contents**
  ***Uncertainties
            with respect to the PRC legal system could adversely affect us.***
  We
        conduct our business primarily through our affiliated Chinese entity, Xian
        Tianxing. Our operations in China are governed by PRC laws and regulations.
        We
        are generally subject to laws and regulations applicable to foreign investments
        in China and, in particular, laws applicable to wholly foreign-owned
        enterprises. The PRC legal system is based on written statutes. Prior court
        decisions may be cited for reference but have limited precedential value.
  Since
        1979, PRC legislation and regulations have significantly enhanced the
        protections afforded to various forms of foreign investments in China. However,
        China has not developed a fully integrated legal system and recently enacted
        laws and regulations may not sufficiently cover all aspects of economic
        activities in China. In particular, because these laws and regulations are
        relatively new, and because of the limited volume of published decisions
        and
        their nonbinding nature, the interpretation and enforcement of these laws
        and
        regulations involve uncertainties. In addition, the PRC legal system is based
        in
        part on government policies and internal rules (some of which are not published
        on a timely basis or at all) that may have a retroactive effect. As a result,
        we
        may not be aware of our violation of these policies and rules until some
        time
        after the violation. In addition, any litigation in China may be protracted
        and
        result in substantial costs and diversion of resources and management attention.
 
 ***You
        may experience difficulties in effecting service of legal process, enforcing
        foreign judgments or bringing original actions in China based on United States
        or other foreign laws against us or our management.***
  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.
 46
 **Table
              of Contents**
 ***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.
  ***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.
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 ***Our
        Common Shares are Thinly Traded and, You May be Unable to Sell at or Near
        Ask
        Prices or at All if You Need to Sell Your Shares to Raise Money or Otherwise
        Desire to Liquidate Your Shares.***
 
 The
        Company cannot predict the extent to which an active public market for its
        common stock will develop or be sustained. However, the Company does not
        rule
        out the possibility of applying for listing on the Nasdaq National Market
        or
        other exchanges.
  Our
        common shares have historically been sporadically or “thinly-traded” on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
        in purchasing our common shares at or near bid prices at any given time may
        be
        relatively small or non-existent. This situation is attributable to a number
        of
        factors, including the fact that we are a small company which is relatively
        unknown to stock analysts, stock brokers, institutional investors and others
        in
        the investment community that generate or influence sales volume, and that
        even
        if we came to the attention of such persons, they tend to be risk-averse
        and
        would be reluctant to follow an unproven company such as ours or purchase
        or
        recommend the purchase of our shares until such time as we became more seasoned
        and viable. As a consequence, there may be periods of several days or more
        when
        trading activity in our shares is minimal or non-existent, as compared to
        a
        seasoned issuer which has a large and steady volume of trading activity that
        will generally support continuous sales without an adverse effect on share
        price. We cannot give you any assurance that a broader or more active public
        trading market for our common stock will develop or be sustained, or that
        current trading levels will be sustained.
 
 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.
 48
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              of Contents**
  Shareholders
            should be aware that, according to SEC Release No. 34-29093, the market
            for
            penny stocks has suffered in recent years from patterns of fraud and
            abuse. Such
            patterns include (1) control of the market for the security by one or
            a few
            broker-dealers that are often related to the promoter or issuer; (2)
            manipulation of prices through prearranged matching of purchases and
            sales and
            false and misleading press releases; (3) boiler room practices involving
            high-pressure sales tactics and unrealistic price projections by inexperienced
            sales persons; (4) excessive and undisclosed bid-ask differential and
            markups by
            selling broker-dealers; and (5) the wholesale dumping of the same securities
            by
            promoters and broker-dealers after prices have been manipulated to a
            desired
            level, along with the resulting inevitable collapse of those prices and
            with
            consequent investor losses. Our management is aware of the abuses that
            have
            occurred historically in the penny stock market. Although we do not expect
            to be
            in a position to dictate the behavior of the market or of broker-dealers
            who
            participate in the market, management will strive within the confines
            of
            practical limitations to prevent the described patterns from being established
            with respect to our securities. The occurrence of these patterns or practices
            could increase the volatility of our share price.
 
 ***Volatility
        in Our Common Share Price May Subject Us to Securities Litigation.***
 
 The
        market for our common stock is characterized by significant price volatility
        when compared to seasoned issuers, and we expect that our share price will
        continue to be more volatile than a seasoned issuer for the indefinite future.
        In the past, plaintiffs have often initiated securities class action litigation
        against a company following periods of volatility in the market price of
        its
        securities. We may, in the future, be the target of similar litigation.
        Securities litigation could result in substantial costs and liabilities and
        could divert management’s attention and resources.
 
 ***Our
        corporate actions are substantially controlled by our principal shareholders
        and
        affiliated entities.***
  Our
        principal shareholders and their affiliated entities own approximately 81%
        of
        our outstanding ordinary shares, representing approximately 81% of our voting
        power. These shareholders, acting individually or as a group, could exert
        substantial influence over matters such as electing directors and approving
        mergers or other business combination transactions. In addition, because
        of the
        percentage of ownership and voting concentration in these principal shareholders
        and their affiliated entities, elections of our board of directors will
        generally be within the control of these shareholders and their affiliated
        entities. While all of our shareholders are entitled to vote on matters
        submitted to our shareholders for approval, the concentration of shares and
        voting control presently lies with these principal shareholders and their
        affiliated entities. As such, it would be difficult for shareholders to propose
        and have approved proposals not supported by management. There can be no
        assurances that matters voted upon by our officers and directors in their
        capacity as shareholders will be viewed favorably by all shareholders of
        the
        company.
 
 ***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.
 49
 **Table
              of Contents**
  ***Legislative
            Actions, Higher Insurance Costs and Potential New Accounting Pronouncements
            may
            Impact our Future Financial Position and Results of
            Operations.***
 
 There
        have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
        there may potentially be new accounting pronouncements or additional regulatory
        rulings that will have an impact on our future financial position and results
        of
        operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well
        as
        proposed legislative initiatives following the Enron bankruptcy are likely
        to
        increase general and administrative costs and expenses. In addition, insurers
        are likely to increase premiums as a result of high claims rates over the
        past
        several years, which we expect will increase our premiums for insurance
        policies. Further, there could be changes in certain accounting rules. These
        and
        other potential changes could materially increase the expenses we report
        under
        generally accepted accounting principles, and adversely affect our operating
        results.
 
 ***Past
        Activities Of The Company And Its Affiliates May Lead To Future Liability
        For
        The Company.***
 
 Prior
        to
        our entry into the contractual arrangements with Xian Tianxing on October
        28,
        2005, the Company engaged in businesses unrelated to its current operations.
        Although the CGPN Shareholders are providing certain indemnifications against
        any loss, liability, claim, damage or expense arising out of or based on
        any
        breach of or inaccuracy in any of their representations and warranties made
        regarding such acquisition, any liabilities relating to such prior business
        against which Skystar is not completely indemnified may have a material adverse
        effect on the Company.
  ***The
        market price for our stock may be volatile.***
  The
        market price for our stock may be volatile and subject to wide fluctuations
        in
        response to factors including the following:
 
 •
              actual
                  or anticipated fluctuations in our quarterly operating
                  results;
 
 •
              changes
                  in financial estimates by securities research
                  analysts;
 
 •
              conditions
                  in bio-pharmaceutical and agricultural
                  markets;
 
 •
              changes
                  in the economic performance or market valuations of other
                  bio-pharmaceutical companies;
 
 •
              announcements
                  by us or our competitors of new products, acquisitions, strategic
                  partnerships, joint ventures or capital
                  commitments;
 
 •
              addition
                  or departure of key personnel;
 
 •
              fluctuations
                  of exchange rates between RMB and the U.S.
                  dollar;
 
 •
              intellectual
                  property litigation; and
 
 •
              general
                  economic or political conditions in
                  China.
  In
        addition, the securities market has from time to time experienced significant
        price and volume fluctuations that are not related to the operating performance
        of particular companies. These market fluctuations may also materially and
        adversely affect the market price of our stock.
 50
 **Table
              of Contents**
 ***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 and anticipated cash
        flow from operations 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.


51
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          of Contents**







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


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





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


52
 **Table
          of Contents**


**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**.





None.





**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)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.





**[SIGNATURES
      PAGE FOLLOWS]**  53
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            of Contents**


**SIGNATURES**





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


**SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY**
                  (Registrant)Date:
                  November 14, 2006
                By:
                /s/ Weibing
                  LuWeibing
                    Lu
                  Chief Executive
                    Officer
 Date:
                      November 14, 2006
                  By:
                  /s/
                    Erna GaoErna Gao
                    Chief Financial
                      Officer


54