**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:**June 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 of origination)
            
            (I.R.S.
                Employer Identification Number)





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




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




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




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




APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS:





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




APPLICABLE
      ONLY TO CORPORATE ISSUERS:





Indicate
      the number of shares outstanding of each
      issuer’s classes of common stock, as of the latest practicable date: 12,606,199
      issued and outstanding as of August 17, 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 JUNE 30, 2006**






PagePART
                I
            FINANCIAL
                INFORMATION
            4Item
                1.
            Financial
                Statements
            4Consolidated
                Balance Sheets
            4Consolidated
                Statements of Income
            5Consolidated
                Statements of Shareholders’
                Equity
            6Consolidated
                Statements of Cash
                Flows
            7Condensed
                Notes to Consolidated Financial
                Statements
            8Item
                2.
            Management’s
                Discussion and Analysis or Plan
                of Operation
            32Item
                3.
            Controls
                and Procedures
            53PART
                II
            OTHER
                INFORMATION
            54Item
                1.
            Legal
                Proceedings
            54Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            54Item
                3.
            Defaults
                Upon Senior Securities
            54Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            54Item
                5.
            Other
                Information
            54Item
                6.
            Exhibits
            54Signatures
            55











(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 JUNE 30, 2006 AND DECEMBER 31, 2005****A
                    S S E T S****June
                    30,**
                ****
                **December
                    31,**
                ********
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **Unaudited**
                ****CURRENT
                    ASSETS:Cash
                
                $
                39,925
                
                $
                38,498Restricted
                    cash
                
                
                62,600
                
                
                62,000Accounts
                      receivable, trade - related parties, net of allowance for doubtful
                      accounts of $72,191 and $71,613as of June 30, 2006 and December
                      31, 2005, respectively
                
                
                507,603
                
                
                247,354Inventories
                
                
                1,248,742
                
                
                175,687Deposits
                    and prepaid expenses
                
                
                18,206
                
                
                15,179Loans
                    receivable
                
                
                3,756
                
                
                261,640Amounts
                    due from shareholders
                
                
                22,774
                
                
                122,966Amounts
                    due from a related company
                
                
                144,430
                
                
                587,016Other
                    receivables
                
                
                34,997
                
                
                28,008Total
                    current assets
                
                
                2,083,033
                
                
                1,538,348PLANT
                    AND EQUIPMENT, net
                
                
                9,591,138
                
                
                8,564,360OTHER
                    ASSETS:Prepaid
                    land use right, net
                
                
                310,396
                
                
                307,421Intangible,
                    net
                
                
                37,560
                
                
                49,600Total
                    other assets
                
                
                347,956
                
                
                357,021Total
                    assets
                
                $
                12,022,127
                
                $
                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
                
                $
                37,560
                
                $
                37,200Non-interest
                    bearing loan from third party
                
                
                174,779
                
                
                421,104Accounts
                    payable
                
                
                14,558
                
                
                9,692Accrued
                    expenses and other
                
                
                173,731
                
                
                135,300Taxes
                    payable
                
                
                2,398,992
                
                
                1,811,405Other
                    payables
                
                
                65,317
                
                
                64,496Amount
                    due to related company
                
                
                24,914
                
                
                24,676Amount
                    due to shareholders
                
                
                70,738
                
                
                78,678Total
                    current liabilities
                
                
                2,960,589
                
                
                2,582,551Deferred
                    government grant
                
                
                939,000
                
                
                806,000Total
                    liabilities
                
                
                3,899,589
                
                
                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 June 30, 2006 and December
                    31,
                    2005 respectively; Nil and 48,000,000 series “B” shares issued and
                    outstanding as June 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 June 30, 2006 and December 31, 2005 respectively; 12,606,199
                      and 500,000,000
                      shares issued and outstanding as of June 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
                
                
                (1,230,855
                )
                
                —Retained
                    earnings
                
                
                2,829,600
                
                
                2,192,365Accumulated
                    other comprehensive income (loss)
                
                
                234,325
                
                
                161,345Total
                    shareholders’ equity
                
                
                8,122,538
                
                
                7,071,178Total
                    liabilities and shareholders’ equity
                
                $
                12,022,127
                
                $
                10,459,729
 The accompanying notes are an integral part of this
          statement.  4
 **Table
                of Contents**
 
 **SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND
                    SUBSIDIARY**
                ********
                ******CONSOLIDATED
                    STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
                    (LOSS)**
                ******FOR
                    THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND
                    2005****Three
                    months ended**
                ****
                **Six
                    months ended**
                ********
                ****
                **June
                    30**
                ****
                **June
                    30**
                ********
                ****
                **2006**
                ****
                **2005**
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **Unaudited**
                ****
                **Unaudited**
                ****
                **Unaudited**
                ****
                **Unaudited**REVENUE
                
                $
                2,762,247
                
                $
                2,038,559
                
                $
                3,757,435
                
                $
                2,896,790COST
                    OF SALES
                
                
                1,506,295
                
                
                949,699
                
                
                2,026,734
                
                
                1,365,664GROSS
                    PROFIT
                
                
                1,255,952
                
                
                1,088,860
                
                
                1,730,701
                
                
                1,531,126RESEARCH
                    AND DEVELOPMENT COST
                
                
                85,747
                
                
                157
                
                
                105,086
                
                
                10,442SELLING
                    EXPENSES
                
                
                75,574
                
                
                206,209
                
                
                143,482
                
                
                242,567GENERAL
                    AND ADMINISTRATIVE EXPENSES
                
                
                104,835
                
                
                119,703
                
                
                311,072
                
                
                178,487AMORTIZATION
                    OF DEFERRED CONSULTING FEES
                
                
                341,145
                
                
                —
                
                
                341,145
                
                
                —INCOME
                    FROM OPERATIONS
                
                
                648,651
                
                
                762,791
                
                
                829,916
                
                
                1,099,630OTHER
                    INCOME, net of other (expense)
                
                
                (1,014
                )
                
                32,661
                
                
                (1,230
                )
                
                26,584INCOME
                    BEFORE PROVISION FOR INCOME TAXES
                
                
                647,637
                
                
                795,452
                
                
                828,686
                
                
                1,126,214PROVISION
                    FOR INCOME TAXES
                
                
                164,294
                
                
                146,616
                
                
                191,451
                
                
                196,230NET
                    INCOME
                
                
                483,343
                
                
                648,836
                
                
                637,235
                
                
                929,984OTHER
                    COMPREHENSIVE INCOME (LOSS):Foreign
                    currency translation adjustment
                
                
                26,719
                
                
                —
                
                
                72,980
                
                
                —COMPREHENSIVE
                    INCOME
                
                $
                510,062
                
                $
                648,836
                
                $
                710,215
                
                $
                929,984EARNINGS
                    PER SHARE (EPS):—
                    Basic
                
                $
                0.05
                
                $
                0.51
                
                $
                0.07
                
                $
                0.74—
                    Diluted
                
                $
                0.05
                
                $
                0.05
                
                $
                0.07
                
                $
                0.08Weighted
                    average number of common shares used to compute
                    EPS:—
                    Basic
                
                
                9,606,115
                
                
                1,260,651
                
                
                9,606,115
                
                
                1,260,651—
                    Diluted
                
                
                9,606,115
                
                
                12,006,199
                
                
                9,606,115
                
                
                12,006,199
 The
          accompanying notes are an integral part of this
          statement.
 5
 **Table
              of Contents**
 **SKYSTAR
                            BIO-PHARMACEUTICAL COMPANY AND
                            SUBSIDIARY**
                        ********
                        ******CONSOLIDATED
                            STATEMENTS OF SHAREHOLDERS’ EQUITY**
                        ******FOR
                            THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005******
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        **Accumulated**
                        ****
                        ****
                        ********
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        **other**
                        ****
                        ****
                        ********
                        ****
                        **Preferred
                            stock**
                        ****
                        **Common
                            stock**
                        ****
                        **Paid-in**
                        ****
                        **Statutory**
                        ****
                        **Retained**
                        ****
                        **Deferred**
                        ****
                        **comprehensive**
                        ****
                        ****
                        ********
                        ****
                        **Shares**
                        ****
                        **Amount**
                        ****
                        **Shares**
                        ****
                        **Amount**
                        ****
                        **capital**
                        ****
                        **reserves**
                        ****
                        **earnings**
                        ****
                        **Compensation**
                        ****
                        **income
                            (loss)**
                        ****
                        **Totals**BALANCE,
                            January 1, 2005
                        
                        
                        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
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        929,984
                        
                        
                        —
                        
                        
                        —
                        
                        
                        929,984BALANCE,
                            June 30, 2005
                        
                        
                        50,000,000
                        
                        
                        50,000
                        
                        
                        500,000,000
                        
                        
                        500,000
                        
                        
                        3,803,008
                        
                        
                        163,396
                        
                        
                        1,855,895
                        
                        
                        —
                        
                        
                        —
                        
                        
                        6,372,299Net
                            income
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        537,534
                        
                        
                        —
                        
                        
                        —
                        
                        
                        537,534Foreign
                            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
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        341,145
                        
                        
                        —
                        
                        
                        341,145Foreign
                            currency translation
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        72,980
                        
                        
                        72,980Net
                            income
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        637,235
                        
                        
                        —
                        
                        
                        —
                        
                        
                        637,235BALANCE,
                            June 30, 2006
                        
                        
                        2,000,000
                        
                        $
                        2,000
                        
                        
                        12,606,199
                        
                        $
                        12,606
                        
                        $
                        5,910,402
                        
                        $
                        364,460
                        
                        $
                        2,829,600
                        
                        $
                        (1,230,855
                        )
                        $
                        234,325
                        
                        $
                        8,122,538
 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 SIX MONTHS ENDED JUNE 30, 2006 AND 2005****2006**
                  ****
                  **2005**
                  ********
                  ****
                  **Unaudited**
                  ****
                  **Unaudited**CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      income
                  
                  $
                  637,235
                  
                  $
                  929,984Adjustments
                      to reconcile net income to cash
                      provided
                        by (used in) operating activities:Depreciation
                      and amortization
                  
                  
                  53,541
                  
                  
                  62,699Loss
                      on disposal of fixed assets
                  
                  
                  —
                  
                  
                  4,555Amortization
                      of deferred compensation
                  
                  
                  341,145
                  
                  
                  —(Increase)
                      decrease in assets:Accounts
                      receivable, trade
                  
                  
                  (256,661
                  )
                  
                  301,615Inventories
                  
                  
                  (1,066,392
                  )
                  
                  (123,454
                  )Deposits
                      and prepaid expenses
                  
                  
                  (2,868
                  )
                  
                  (246,381
                  )Other
                      receivables
                  
                  
                  (6,686
                  )
                  
                  (260,114
                  )Increase
                      (decrease) in liabilities:Accounts
                      payable
                  
                  
                  4,750
                  
                  
                  15,280Deposits
                      from customers
                  
                  
                  —
                  
                  
                  15,608Accrued
                      expenses and other payables
                  
                  
                  37,146
                  
                  
                  32,145Taxes
                      payables
                  
                  
                  567,416
                  
                  
                  434,078Net
                      cash provided by operating activities
                  
                  
                  308,626
                  
                  
                  1,166,015CASH
                      FLOWS FROM INVESTING ACTIVITIES:Increase
                      in interest-bearing loans to third parties
                  
                  
                  259,210
                  
                  
                  (138,263
                  )Payment
                      of deposits for property, plant and machinery
                  
                  
                  —
                  
                  
                  (408,769
                  )Proceeds
                      from investment gain
                  
                  
                  —
                  
                  
                  783Decrease
                      in amounts due from shareholders
                  
                  
                  92,251
                  
                  
                  329,837Decrease
                      in amounts due from a related company
                  
                  
                  446,189
                  
                  
                  —Purchase
                      of property, plant and equipment
                  
                  
                  (980,603
                  )
                  
                  (1,786,792
                  )Net
                      cash used in investing activities
                  
                  
                  (182,953
                  )
                  
                  (2,003,204
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIESDecrease
                      in non-interest bearing loan from third parties
                  
                  
                  (249,240
                  )
                  
                  —Proceeds
                      from government subsidies
                  
                  
                  124,620
                  
                  
                  —Capital
                      contribution in cash by stockholders
                  
                  
                  —
                  
                  
                  1,250,602Net
                      cash (used in) provided by financing activities
                  
                  
                  (124,620
                  )
                  
                  1,250,602EFFECT
                      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  374
                  
                  
                  —INCREASE
                      IN CASH
                  
                  
                  1,427
                  
                  
                  413,413CASH,
                      beginning of period
                  
                  
                  38,498
                  
                  
                  49,606CASH,
                      end of period
                  
                  $
                  39,925
                  
                  $
                  463,019SUPPLEMENTAL
                      DISCLOSURE INFORMATIONInterest
                      expense paid
                  
                  $
                  1,608
                  
                  $
                  1,861Income
                      taxes paid
                  
                  $
                  —
                  
                  $
                  9,314Non-cash
                      transactionsStock
                      issued for services
                  
                  $
                  1,572,000
                  
                  $
                  —Contribution
                      of a leasehold office building by a stockholder as additional
                      capital of
                      Xian Tianxing
                  
                  $
                  —
                  
                  $
                  275,086
 The accompanying notes are an integral part of this
            statement.
 7
 **Table
                  of Contents**
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  1.
              DESCRIPTION
                  OF BUSINESS AND ORGANIZATION
 
 Skystar
        Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
        Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
        name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
        2000, the Company changed its name to “The Cyber Group Network Corporation”. On
        February 15, 2006, the Company further changed its name to “Skystar
        Bio-Pharmaceutical Company” to reflect its current business
        operations.
 
 On
        November 7, 2005, the Company completed a stock exchange transaction with
        the
        stockholders of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., 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 the Cyber, which was used to pay liabilities of Cyber.
 
 In
        connection with the stock exchange transaction, the Company appointed four
        new
        directors, Mr. Weibing Lu, Mr. Wei Wen, Mr. Xinya Zhang and Ms. Erna Gao,
        to the
        Company’s board of directors. Furthermore, concurrent with the closing of the
        stock exchange transaction, all of the Company’s former officers resigned their
        positions and Mr. Weibing Lu was appointed the new chief executive officer,
        Ms.
        Erna Gao the new chief financial officer, and Mr. Wei Wen the new secretary.
        After the closing, one of the three Company’s then current directors, Mr. David
        Wassung also tendered his resignation.
 
 The
        stock
        exchange transaction has been accounted for as a reverse acquisition and
        recapitalization of the Company whereby Skystar Cayman is deemed to be the
        accounting acquirer (legal acquiree) and the Company to be the accounting
        acquiree (legal acquirer). The accompanying consolidated financial statements
        are in substance those of Skystar Cayman, with the assets and liabilities,
        and
        revenues and expenses, of the Company being included effective from the date
        of
        the stock exchange transaction. The Company is deemed to be a continuation
        of
        the business of Skystar Cayman. The 2,000,000 shares of the Company’s preferred
        stock and 500,000,000 shares of its common stock outstanding prior to the
        stock
        exchange have been accounted for at their net book value at the time of the
        transaction.
 8
 **Table
              of Contents**
 SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 1.
                DESCRIPTION
                    OF BUSINESS AND ORGANIZATION
                    (Cont’d)
 Skystar
        Cayman was incorporated under the laws of the Cayman Islands on January 24,
        2005. It has not carried on any substantive operations of its own, except
        for
        the entering of certain
        exclusive agreements with Xian Tianxing Bio-Pharmaceutical Co., Limited (“Xian
        Tianxing”). Skystar Cayman through its variable interest entity (“VIE”), Xian
        Tianxing Bio-Pharmaceutical Co., Limited engages in research, development,
        production, marketing and sales of bio-pharmaceutical and veterinary products.
        All current operations of the Company are in the People’s Republic of China
        (“China” or the “PRC”).
 
 Xian
        Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
        company without shares. On December 31, 2003, Xian Tianxing was restructured
        from a limited liability company without shares to a joint stock limited
        company. According to the Company Law of the PRC, a “limited liability company”
is a company whose shareholders shall assume liability towards the company
        to
        the extent of their respective capital contributions, whereas a joint stock
        limited company is a company having its total capital divided into equal
        shares
        and whose shareholders shall assume liability to the extent of their respective
        shareholdings.
 
 The
        paid-in capital of Xian Tianxing was funded by the majority shareholders
        of
        Skystar Cayman. PRC law currently has limits on foreign ownership of companies.
        To comply with these foreign ownership restrictions, on October 28, 2005,
        Skystar Cayman entered into certain exclusive agreements with Xian Tianxing
        and
        its shareholders. Xian Tianxing holds the licenses and approvals necessary
        to
        operate the bio-pharmaceutical business in China. Pursuant to these agreements,
        Skystar Cayman provides exclusive technology consulting and other general
        business operation services to Xian Tianxing in return of a consulting services
        fee which is equal to Xian Tianxing’s revenue. In addition, Xian Tianxing’s
        shareholders have pledged their equity interests in Xian Tianxing to Skystar
        Cayman, irrevocably granted Skystar Cayman an exclusive option to purchase,
        to
        the extent permitted under PRC law, all or part of the equity interests in
        Xian
        Tianxing and agreed to entrust all the rights to exercise their voting power
        to
        the person(s) appointed by Skystar Cayman. Through these contractual
        arrangements, Skystar Cayman has the ability to substantially influence Xian
        Tianxing’s daily operations and financial affairs, appoint its senior executives
        and approve all matters requiring shareholder approval.
 
 As
        a
        result of these contractual arrangements, which obligates Skystar Cayman
        to
        absorb a majority of the risk of loss from Xian Tianxing’s activities and
        enables Skystar Cayman to receive a majority of its expected residual returns,
        Skystar Cayman accounts for Xian Tianxing as a variable interest entity (“VIE”)
        under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable
        Interest Entities, an Interpretation of ARB No. 51”, because the equity
        investors in Xian Tianxing do not have the characteristics of a controlling
        financial interest and Skystar Cayman should be considered the primary
        beneficiary of Xian Tianxing. Accordingly, Skystar Cayman consolidates Xian
        Tianxing’s results, assets and liabilities.
 9
 **Table
                of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 1.
                  DESCRIPTION
                      OF BUSINESS AND ORGANIZATION
                      (Cont’d)
 Because
        Skystar and Xian Tianxing are under common control, the consolidation of
        Skystar
        Cayman and Xian Tianxing has been accounted for at historical cost and prepared
        on the basis as if the aforementioned exclusive agreements between Skystar
        and
        Xian Tianxing had become effective as of the beginning of the first period
        presented in the accompanying consolidated financial statements.
 
 The
        Company’s consolidated assets do not include any collateral for Xian Tianxing’s
        obligations. The creditors of Xian Tianxing do not have recourse to the general
        credit of the Company.
 
 2.  GOING
        CONCERN AND MANAGEMENT’S PLAN
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. As of June 30, 2006, the Company had a
        net
        working capital deficiency of $877,556 that indicates the Company may need
        additional financing to meet cash requirements for its operations in order
        to
        continue as a going concern.
 
 The
        accompanying financial statements do not include any adjustments relating
        to the
        recoverability and classification of recorded amounts of assets or the amounts
        and classification of liabilities that might be necessary should the Company
        be
        unable to continue as a going concern. Management believes the Company’s ability
        to continue as a going concern is dependent upon its ability to maintain
        profitable operations and to obtain additional financing or refinancing as
        may
        be required. The Company has recorded net income and generated positive cash
        inflows from operating activities during the 2004 and 2005 years. Furthermore,
        the Company has appointed investment bankers to raise funds in the capital
        market. Management believes the Company will generate sufficient cash flow
        to
        meet its obligations on a timely basis in the foreseeable future.
 
 3.  SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis
        of presentation and consolidation
 
 The
        accompanying consolidated financial statements are prepared in accordance
        with
        accounting principles generally accepted in the United States of
        America.
 10
 **Table
                of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 3.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 
 Basis
        of presentation and consolidation (Cont’d)
 
 The
        consolidated financial statements include the financial statements of the
        Company, its subsidiary, Skystar Cayman, and its variable interest entity,
        Xian
        Tianxing. All significant inter-company transactions and balances between
        the
        Company, its subsidiary and VIE are eliminated upon consolidation.
 
 Use
        of
        estimates
 
 The
        preparation of consolidated financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities,
        disclosure of contingent assets and liabilities at the date of the financial
        statements, and the reported amounts of revenues and expenses during the
        reporting period. Because of the use of estimates inherent in the financial
        reporting process, actual results could differ from those
        estimates.
 
 Fair
        values of financial instruments
 
 The
        Company values its financial instruments as required by Statement of Financial
        Accounting Standard (SFAS) No. 107, “Disclosures about Fair Value of Financial
        Instruments”. The estimated fair value amounts have been determined by the
        Company, using available market information and appropriate valuation
        methodologies. The estimates presented herein are not necessarily indicative
        of
        amounts that the Company could realize in a current market
        exchange.
 
 The
        Company’s financial instruments primarily consist of cash, accounts receivable,
        other receivables, other investments, 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.
  11
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Cash
 
 Cash
        includes cash on hand, demand deposits with banks and liquid investments
        with an
        original maturity of three months or less. All of the Company’s cash on hand and
        certain bank deposits are denominated in Renminbi (“RMB”) and translated at the
        rate of US$1 to RMB7.99.
 
 Restricted
        cash
 
 The
        Company had restricted cash of $62,600 and $62,000 as of June 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 13).
        The
        restricted funds are kept as bank deposits. Restricted cash is classified
        as
        current or non-current assets as of June 30, 2006 and December 31, 2005,
        depending on the expected period when the funds will be put into their specific
        usages.
 
 Accounts
        and other receivables
 
 Accounts
        and other receivables are recorded at net realizable value consisting of
        the
        carrying amount less an allowance for uncollectible accounts, as needed.
 
 The
        Company uses the aging method to estimate the valuation allowance for
        anticipated uncollectible receivable balances. Under the aging method, bad
        debts
        percentages determined by management based on historical experience as well
        as
        current economic climate are applied to customers’ balances categorized by the
        number of months the underlying invoices have remained outstanding. The
        valuation allowance balance is adjusted to the amount computed as a result
        of
        the aging method. When facts subsequently become available to indicate that
        the
        allowance provided requires an adjustment, then the adjustment will be
        classified as a change in estimate. Accounts receivables at June 30, 2006
        and
        December 31, 2005 amounted to $507,603 and $247,354 net of allowances of
        $72,191
        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.
 12
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 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 it exists, is measured as the amount by which
        the
        carrying amount of the asset exceeds the fair value of the asset.
 
 Leases
        involving part of a building
 
 The
        Company accounts for its leasehold office building as capital leases in
        accordance with SFAS No. 13, “Accounting for Leases” *,* which
        requires that a lease involving only part of a building be accounted for
        as a
        capital lease, if the fair value of the leasehold property cannot be objectively
        determinable and if the term of the lease is 75% or more of the estimated
        remaining economic life of the building in which the leased premises are
        located.
 
 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.
 13
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 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.
 
 Comprehensive
        income
 
 SFAS
        No.
        130, “Reporting Comprehensive Income”, requires disclosure of all components of
        comprehensive income and loss on an annual and interim basis. Comprehensive
        income and loss is defined as the change in equity of a business enterprise
        during a period from transactions and other events and circumstances from
        non-owner sources. The Company had comprehensive income of $234,325 and $161,345
        for the period ended June 30, 2006 and year ended December 31, 2005,
        respectively. The comprehensive income for 2006 arose from the changes in
        foreign currency exchange rates.
 14
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Segment
          information
 
 SFAS
        No.
        131, “Disclosures about Segments of an Enterprise and Related Information”,
        requires certain financial and supplementary information to be disclosed
        on an
        annual and interim basis for each reportable segment of an enterprise. The
        Company believes that it operates in one business segment - research,
        development, production, marketing and sales of bio-pharmaceutical and
        veterinary products, and in one geographical segment - China, as all of the
        Company’s current operations are carried out in China.
 
 Revenue
        recognition
 
 Revenues
        of the Company include sales of bio-pharmaceutical and veterinary products
        in
        China. Sales are recognized when the following four revenue criteria are
        met:
        persuasive evidence of an arrangement exists, delivery has occurred, the
        selling
        price is fixed or determinable, and collectibility is reasonably assured.
        Sales
        are presented net of value added tax (VAT). No return allowance is made as
        product returns are insignificant based on historical experience.
 
 Research
        and development costs
 
 Research
        and development costs are expensed to operations as incurred. During the
        period
        ended June 30, 2006 and 2005, a total of $105,086 and $10,442, respectively,
        in
        salaries, professional fees and technical support fees were incurred for
        research and development purposes, which had been expensed in the accompanying
        statements of operations.
 
 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.
 15
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 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.
 
 Foreign
        currency translation
 
 The
        Company uses the United States dollar (“U.S. dollars”) for financial reporting
        purposes. The Company’s subsidiary and VIE maintain their books and records in
        their functional currency, being the primary currency of the economic
        environment in which their operations are conducted. In general, for
        consolidation purposes, the Company translates the subsidiary’s and VIE’s assets
        and liabilities into U.S. dollars using the applicable exchange rates prevailing
        at the balance sheet date, and the statement of income is translated at average
        exchange rates during the reporting period. Adjustments resulting from the
        translation of the subsidiary’s and VIE’s financial statements are recorded as
        accumulated other comprehensive income.
 16
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Foreign
          currency translation (Cont’d)
 
 Until
        July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30: US$1.00.
        On
        July 21, 2005, the PRC government reformed the exchange rate system into
        a
        managed floating exchange rate system based on market supply and demand with
        reference to a basket of currencies. In addition, the exchange rate of RMB
        to
        US$ was adjusted to RMB8.11: US$1.00 as of July 21, 2005. The People’s Bank of
        China announces the closing price of a foreign currency such as US$ traded
        against RMB in the inter-bank foreign exchange market after the closing of
        the
        market on each working day, which will become the unified exchange rate for
        the
        trading against RMB on the following working day. The daily trading price
        of US$
        against RMB in the inter-bank foreign exchange market is allowed to float
        within
        a band of ± 0.3%
        around the unified exchange rate published by the People’s Bank of China. This
        quotation of exchange rates does not imply free convertibility of RMB to
        other
        foreign currencies. All foreign exchange transactions continue to take place
        either through the Bank of China or other banks authorized to buy and sell
        foreign currencies at the exchange rates quoted by the People’s Bank of China.
        Approval of foreign currency payments by the Bank of China or other institutions
        required submitting a payment application form together with invoices, shipping
        documents and signed contracts.
 
 The
        balance sheet amounts with the exception of equity at June 30, 2006 were
        translated at 7.99 RMB to 1.00 USD as compared to 8.06 RMB at December 31,
        2005.
        The equity accounts were stated at their historical rate. The weighted average
        translation rate of 8.024 RMB to 1.00 USD for the six months ended June 30,
        2006
        was applied to income statement accounts.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. These amounts are not material to the
        consolidated financial statements.
  17
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Related
        parties
 
 Parties
        are considered to be related to the Company if the parties that, directly
        or
        indirectly, through one or more intermediaries, control, are controlled by,
        or
        are under common control with the Company. Related parties also include
        principal owners of the Company, its management, members of the immediate
        families of principal owners of the Company and its management and other
        parties
        with which the Company may deal if one party controls or can significantly
        influence the management or operating policies of the other to an extent
        that
        one of the transacting parties might be prevented from fully pursuing its
        own
        separate interests. A party which can significantly influence the management
        or
        operating policies of the transacting parties or if it has an ownership interest
        in one of the transacting parties and can significantly influence the other
        to
        an extent that one or more of the transacting parties might be prevented
        from
        fully pursuing its own separate interests is also a related party.
 
 Recently
        issued accounting pronouncements
 
 In
        March
        2005, the FASB published FASB Interpretation No. 47, “Accounting for Conditional
        Asset Retirement Obligations,” which clarifies that the
        term, conditional asset retirement obligations, as used in SFAS No. 143,
        “Accounting for Asset Retirement Obligations,” refers to a legal obligation to
        perform an asset retirement activity in which the timing and (or) method of
        settlement are conditional on a future event that may or may not be within
        the
        control of the entity. The uncertainty about the timing and (or) method of
        settlement of a conditional asset retirement obligation should be factored
        into
        the measurement of the liability when sufficient information exists. The
        interpretation also clarifies when an entity would have sufficient information
        to reasonably estimate the fair value of an asset retirement obligation.
        This
        interpretation is effective no later than the end of the Company’s fiscal 2006.
        The adoption of this Interpretation is not expected to have a material effect
        on
        the Company’s consolidated financial position or results of operations.
 
 In
        June
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS No. 154 replaces APB No. 20 (“APB 20”) and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and applies to
        all voluntary changes in accounting principle, and changes the requirements
        for
        accounting for and reporting of a change in accounting principle. APB 20
        previously required that most voluntary changes in accounting principle be
        recognized by including in net income of the period of change a cumulative
        effect of changing to the new accounting principle whereas SFAS No. 154 requires
        retrospective application to prior periods’ financial statements of a voluntary
        change in accounting principle, unless it is impracticable. SFAS No. 154
        enhances the consistency of financial information between periods. The Company
        has adopted SFAS No. 154 during the first quarter of 2006 and the adoption
        of
        SFAS No. 154 did
        not
        have a material impact on its results of operations, financial position or
        cash
        flows.
 18
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Recently
          issued accounting pronouncements (Cont’d)
 In
        June
        2005, the EITF reached a consensus on Issue No. 05-06, “Determining the
        Amortization Period for Leasehold Improvements” (EITF 05-06). EITF 05-06
        provides guidance for determining the amortization period used for leasehold
        improvements acquired in
        a
        business combination or purchased after the inception of a lease, collectively
        referred to as subsequently acquired leasehold improvements. EITF 05-06 provides
        that the amortization period used for the subsequently acquired leasehold
        improvements to be the lesser of (a) the subsequently acquired leasehold
        improvements’ useful lives, or (b) a period that reflects renewals that are
        reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective
        on a prospective basis for subsequently acquired leasehold improvements
        purchased or acquired in periods beginning after the date of the FASB’s
        ratification, which was on June 29, 2005. The adoption of EITF 05-06 did
        not
        have a material impact on its consolidated results of operations.
 
 In
        July
        2005, the Financial Accounting Standards Board (FASB) issued an Exposure
        Draft
        of a proposed Interpretation “Accounting for Uncertain Tax Positions—an
        interpretation of FASB Statement No. 109.” Under the proposed Interpretation, a
        company would recognize in its financial statements its best estimate of
        the
        benefit of a tax position, only if the tax position is considered probable
        of
        being sustained on audit based solely on the technical merits of the tax
        position. In evaluating whether the probable recognition threshold has been
        met,
        the proposed Interpretation would require the presumption that the tax position
        will be evaluated during an audit by taxing authorities. The proposed
        Interpretation would be effective as of the end of the first fiscal year
        ending
        after December 15, 2005, with a cumulative effect of a change in accounting
        principle to be recorded upon the initial adoption. The proposed Interpretation
        would apply to all tax positions and only benefits from tax positions that
        meet
        the probable recognition threshold at or after the effective date would be
        recognized. The Company is currently analyzing the proposed Interpretation
        and
        has not determined its potential impact on our Consolidated Financial
        Statements. While we cannot predict with certainty the rules in the final
        Interpretation, there is risk that the final Interpretation could result
        in a
        cumulative effect charge to earnings upon adoption, increases in future
        effective tax rates, and/or increases in future interperiod effective tax
        rate
        volatility.
 19
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 3.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES(Cont’d)
 Recently
        issued accounting pronouncements (Cont’d)
 
 In
        October 2005, FASB Staff Position (FSB) FAS 13-1, “Accounting for Rental Costs
        Incurred during a Construction Period” was issued. This FSP concluded that
        rental costs associated with ground or building operating leases that are
        incurred during a construction period be expensed. The guidance in the FSP
        is
        required to be applied to the first reporting period beginning after December
        15, 2005. The adoption of this pronouncement did not have a material impact
        on
        the Company’s financial position or results of operations.
 
 4.
              CONCENTRATIONS
                  OF CREDIT RISK
 
 Financial
        instruments that potentially expose the Company to concentrations of credit
        risk
        consist of cash and accounts receivable as of June 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
        June 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 June 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
        June 30, 2006 and December 31, 2005 also arose in the PRC.
 
 The
        Company’s three largest customers accounted for approximately 3.28%, of the
        Company’s total revenues for the six month period ended June 30, 2006, while the
        Company’s three largest customers accounted for 3.27% of the Company’s total
        revenues for the six month period ended June 30, 2005.
 
 The
        Company’s three largest vendors accounted for approximately 57.59% of the
        Company’s total purchases for the six month period ended June 30, 2006, while
        the Company’s three largest vendors accounted for 24.87% of the Company’s total
        purchases for the six month period ended June 30, 2005.
  20
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 5.
              RESTRICTED
                  CASH
 
 Restricted
        cash consists of the following:
 
 **June
                  30**
              
              **December
                  31******
              
              **2006**
              
              **2005**Funds
                  received from PRC government subsidies (see Note 13)Total
              
              $
              62,600
              
              $
              62,000
 
 6.
              INVENTORIES
 
 Inventories
        consist of the following:
 
 **June
                  30**
              
              **December
                  31******
              
              **2006**
              
              **2005**Raw
                  materials
              
              $
              590,843
              
              $
              85,563Packing
                  materials
              
              
              150,083
              
              
              42,552Finished
                  goods
              
              
              503,021
              
              
              47,172Other
                  inventory
              
              
              4,795
              
              
              400Total
              
              $
              1,248,742
              
              $
              175,687
 
 7.
              LOANS
                  RECEIVABLE
 
 The
        loans
        receivable of $3,756 and $261,640 as of June 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.
 21
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 8.
                OTHER
                    RECEIVABLES
 Other
        receivables consist of the following:
 
 **June
                  30**
              
              **December
                  31******
              
              **2006**
              
              **2005**Cash
                  advances to staff and salespersons for normal business
                  purposes
              
              $
              26,008
              
              $
              19,085Others
              
              
              8,989
              
              
              8,923Total
              
              $
              34,997
              
              $
              28,008
 
 9.
              PREPAID
                  LAND USE RIGHTS
 
 The
        Company has recorded as prepaid land use rights the costs paid to acquire
        a
        long-term interest to utilize the land underlying the Company’s facilities. This
        type of arrangement is common for the use of land in the PRC. The prepaid
        land
        use rights are being amortized on the straight-line method over the term
        of the
        land use rights of 50 years. The total cost of the land use rights as of
        June
        30, 2006 and December 31, 2005 amounted to $323,329 and $319,971, net of
        accumulated amortization of $12,933 and $12,550, respectively. Amortization
        expense for the period ended June 30, 2006 and the year ended December 31,
        2005
        amounted to $3,329 and $6,301, respectively.
 
 The
        Company has pledged the prepaid land use rights to a third party as security
        against a non-interest bearing loan of the Company.
  22
 **Table
                of Contents**
 SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 10.
              PROPERTY,
                  PLANT AND EQUIPMENT
 
 Property,
        plant and equipment consist of the following:
 
 **June
                  30**
              ****
              **December
                  31**
              ********
              ****
              **2006**
              ****
              **2005**Plant
                  and machinery
              
              $
              258,556
              
              $
              221,475Leasehold
                  improvements and office building
              
              
              343,202
              
              
              323,591Office
                  equipment
              
              
              131,577
              
              
              126,540Motor
                  vehicles
              
              
              133,870
              
              
              110,972867,205
              
              
              782,578Less:
                  Accumulated depreciation
              
              
              (259,753
              )
              
              (216,389
              )607,452
              
              
              566,189Construction
                  in progress
              
              
              8,983,686
              
              
              7,998,171Total,
                  net
              
              $
              9,591,138
              
              $
              8,564,360
 
 Construction
        in progress included above is the construction of a new factory which the
        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 will generate sufficient cash flows
        and
        therefore management has determined that no impairment loss exists on the
        construction in progress.
 
 The
        depreciation expense was $ 43,364
        and $47,539 for the six months ended June 30, 2006 and 2005, respectively.
 
 The
        Company has pledged its leasehold office building with a net book value of
        $240,537 at June 30, 2006 to an unrelated third party as the security against
        a
        non-interest bearing loan.
 23
 **Table
                    of Contents**
 SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                    TO
                    CONSOLIDATED FINANCIAL STATEMENTS
 11.
              INTANGIBLE
 
 Technological
        know-how consists of the following:
  **June
                  30,**
              
              **December
                  31******
              
              **2006**
              
              **2005**Cost
              
              $
              125,200
              
              $
              123,948Less:
                  Accumulated amortization
              
              
              (87,640
              )
              
              (74,348
              )Total
              
              $
              37,560
              
              $
              49,600
 
 The
        amortization expense on the technological know-how was $13,292 and $12,048
        for
        the period ended June 30, 2006 and 2005, respectively.
 
 12.
              INTEREST-BEARING
                  SHORT-TERM LOAN
 
 The
        short-term loan of $37,560 and $37,200 as of June 30, 2006 and December 31,
        2005
        respectively is for a term of one year from August 10, 2005 to August 10,
        2006
        and secured by a guarantee given by a third party, and bears interest at
        0.8835%
        per month.
 
 Interest
        expense for the period ended June 30, 2006 and 2005 amounted to $1,511 and
        $1,602, respectively.
 
 13.
              DEFERRED
                  GOVERNMENT GRANT
 
 The
        amounts represent subsidies for hi-tech projects granted by the PRC government.
        A subsidy in the amount of $626,000 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, $501,380 was received by
        the
        Company and the remaining $124,620 was received in the first quarter of 2006.
        According to the PRC’s government regulations for these types of grants, the
        funds being granted may be treated as capital contributed by the company
        appointed by the PRC government (“contributing company”) or as a loan from such
        company, which the Company will be required to repay. However, no agreement
        has
        been reached with the contributing company regarding the final treatment
        of this
        subsidy. Therefore, the amount is included under non-current liabilities.
 
 Also
        in
        2003, another subsidy of $250,400 was received for financing the Company’s
        research and development activities. In 2005, the Company applied and utilized
        $187,800 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.
 24
 **Table
                  of Contents**
 SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
  13.
              DEFERRED
                  GOVERNMENT GRANT(Cont’d)
 
 In
        2005,
        another subsidy of $62,600 was received for the Company’s research and
        development activities. This amount was put into use during the year. Since
        the
        final treatment of these funds may not be confirmed in 2006, this amount
        is
        included under non-current liabilities.
 
 14.  CAPITAL
        TRANSACTIONS
 
 On
        November 7, 2005, the Company completed a stock exchange transaction with
        the
        stockholders of Skystar Cayman, as more fully described in Note 1.
 
 On
        February 15, 2006, the Company effected a one-for-three hundred ninety seven
        (1:397) reverse stock split of the outstanding shares of the Company’s common
        stock. As a result, the total number of outstanding shares of the Company’s
        common stock was reduced from 500,000,000 to 1,260,651 issued and outstanding.
 
 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 was converted into 10,745,548 shares of common stock
        that
        equaled to 89.5% of the total issued and outstanding shares.
 
 In
        March,
        2006, the Company issued a total of 600,000 shares of the Company’s common stock
        to consultants, as more fully described in Note 17.
 25
 **Table
                    of Contents**
 SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                    TO
                    CONSOLIDATED FINANCIAL STATEMENTS
 15.
              STATUTORY
                  RESERVES
 
 As
        stipulated by the PRC’s Company Law and as provided in Xian Tianxing’s Articles
        of Association (as amended on December 31, 2003), Xian Tianxing’s net income
        after taxation can only be distributed as dividends after appropriation has
        been
        made for the following:
 
 (i)
              Making
                  up of cumulative prior years’ losses, if
                  any;
 
 (ii)
              Allocations
                  to the “Statutory surplus reserve” of at least 10% of income after tax, as
                  determined under PRC accounting rules and regulations, until the
                  fund
                  amounts to 50% of the Company’s registered capital, which is restricted
                  for set off against losses, expansion of production and operation
                  or
                  increase in registered capital;
 
 (iii)
              Allocations
                  of 5-10% of income after tax, as determined under PRC accounting
                  rules and
                  regulations, to the Company’s “Statutory common welfare fund”, which is
                  restricted for capital expenditure for the collective benefits
                  of the
                  Company’s employees; and
 
 (iv)
              Allocations
                  to the discretionary surplus reserve, if approved in the shareholders’
                  general meeting.
 
 On
        December 31, 2003, Xian Tianxing established a statutory surplus reserve
        as well
        as a statutory common welfare fund and commenced to appropriate 10% and 5%,
        respectively of the net income after taxation to these reserves. The amounts
        included in the statutory reserves consisted of surplus reserve of $201,064
        and
        common welfare fund of $163,396 as of June 30, 2006 and of December 31, 2005,
        respectively.
 
 16.
              2006
                  CONSULTANT STOCK PLAN
 
 On
        February 22, 2006, the Company adopted the 2006 Consultant Stock Plan (the
        “Plan”) under which 1,199,648 shares of common stock are available for issuance
        with respect to awards granted to independent consultants who are crucial
        to the
        future growth and success of the Company and its subsidiaries and affiliates.
        For the period ended June 30, 2006, a total of 600,000 shares were issued
        pursuant to the Plan.
 
 17.
              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. The fair market value of the Company’s common stock as of March 14, 2006
        was $2.65 per share.
 26
 **Table
                    of Contents**
 SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                    TO
                    CONSOLIDATED FINANCIAL STATEMENTS
 17.
              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. 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 June 30, 2006 ,
        the
        Company charged $341,145 to expense associated with consulting agreements
        and
        recorded deferred consulting fees of $1,230,855 a t
        June
        30, 2006. The deferred consulting fees will be charged to expenses as
        follows:-
  **Year
                ending December
                31**
              ****
              **Amount**2006
              
              $
              389,4082007
              
              
              779,5892008
              
              
              61,858Total
              
              $
              1,230,855
 
 18.
              EARNINGS
                  PER SHARE
 
 Basic
        earnings per share (EPS) for the periods ended June 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
        June 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
        14. The weighted average number of common shares outstanding was adjusted
        to
        account for the effects of the share exchange transaction as a reverse
        acquisition as more fully described in Note 1.
 
 The
        Company has retroactively adjusted the weighted average number of common
        shares
        outstanding by deeming that the one-for-three hundred ninety seven (1:397)
        reverse stock split effected on February 16, 2006 had occurred as of the
        beginning of the earliest period presented.
 27
 **Table
                      of Contents**
 SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 18.
              EARNINGS
                  PER SHARE(Cont’d)
 
 The
        reconciliations of the denominators of the basic and diluted EPS computations
        are as follows:
 
 **June
                  30**
              
              **June
                  30******
              
              **2006**
              
              **2005**Denominator
                  for Basic EPS
              
              
              9,606,115
              
              
              1,260,651Weighted
                  average effect on denominator for Basic EPS
              
              
              9,606,115
              
              
              1,260,651Effect
                  of series “B” convertible preferred stock
              
              
              —
              
              
              10,745,548Denominator
                  for Diluted EPS
              
              
              9,606,115
              
              
              12,006,199
 
 19.
              RELATED
                  PARTY TRANSACTIONS AND
                  ARRANGEMENTS
 
 (a)
              *Related
                  party receivables and payables*
  Amounts
        receivable from and payable to related parties are summarized as
        follows:
 
 **June
                  30,**
              ****
              **December
                  31**
              ********
              ****
              **2006**
              ****
              **2005**Amounts
                  due from shareholders:Mr.
                  Wei Wen, also a director of the Company
              
              $
              12,340
              
              $
              21,503Mr.
                  Weibing Lu, also a director of the Company
              
              
              10,372
              
              
              101,463Ms.
                  Aixia Wang
              
              
              62
              
              
              —Total
              
              $
              22,774
              
              $
              122,966Amount
                  due to shareholders:Ms.
                  Aixia Wang
              
              $
              —
              
              $
              8,618Mr.
                  Wucai Ji
              
              
              64,478
              
              
              63,860Mr.
                  Yuantai Wang
              
              
              6,260
              
              
              6,200Total
              
              $
              70,738
              
              $
              78,678Amount
                  due from a related company:Shaanxi
                  Xingji Electronic Sci-Tech Company Limited(“Shaanxi Xingji”) (see (b)(i) to (iii) below)
              
              $
              144,430
              
              $
              587,016Amount
                  due to a related company:Tian
                  Xing Digital - a company owned by a director
              
              $
              24,914
              
              $
              24,676
 28
 **Table
                      of Contents**
 SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 19.
              RELATED
                  PARTY TRANSACTIONS AND ARRANGEMENTS(Cont’d)
 
 (a)
              *Related
                  party receivables and payables**(Cont’d)*
 
 Balances
        with shareholders and related companies represent advances to or loans from
        the
        respective shareholders or related companies. These balances, except the
        $37,200, due to Shaanxi Xingji, as of December 31, 2005 (see (b)(iii) below),
        are interest free and unsecured and have no fixed repayment date.
 
 (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 $144,430 (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 as of December 21, 2005
                  with
                  interest bearing at 0.885% per month was fully repaid during the
                  period
                  ended June 30, 2006.
 
 20.
              CURRENT
                  VULNERABILITY DUE TO CERTAIN
                  CONCENTRATIONS
 
 The
        Company’s operations are all carried out in the PRC. Accordingly, the Company’s
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environments in the PRC, and by the general
        state
        of the PRC’s economy.
 29
 **Table
                    of Contents**
 SKYSTAR
                    BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                    TO
                    CONSOLIDATED FINANCIAL STATEMENTS
 20.
              CURRENT
                  VULNERABILITY DUE TO CERTAIN CONCENTRATIONS(Cont’d)
 
 The
        Company’s operations in the PRC are subject to specific considerations and
        significant risks not typically associated with companies in the North America
        and Western Europe. These include risks associated with, among others, the
        political, economic and legal environments and foreign currency exchange.
        The
        Company’s results may be adversely affected by changes in governmental policies
        with respect to laws and regulations, anti-inflationary measures, currency
        conversion and remittance abroad, and rates and methods of taxation, among
        other
        things.
 
 21.
              COMMITMENTS
                  AND CONTINGENCIES
 
 (a)
              *Capital
                  expenditure commitments*
 
 During
        the fiscal year 2005, the Company entered into various contracts for the
        construction of a new plant. Accommodating the research and development center
        and a number of production lines, the new plant will enable the Company to
        consolidate its existing operations and to expand production capacity for
        its
        bio-pharmaceutical business. Furthermore, the Company also entered into several
        contracts to purchase machinery for its bio-pharmaceutical business.
 
 The
        Company’s commitments for capital expenditure as of June 30, 2006 are as
        follows:
 
 Contracted
                  but not accrued for:Construction
                  of a new plant
              
              $
              2,087,463Purchase
                  of machinery
              
              
              666,840Total
              
              $
              2,754,303
 30
 **Table
                      of Contents**
 SKYSTAR
                      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARY
 
 NOTES
                      TO
                      CONSOLIDATED FINANCIAL STATEMENTS
 21.
              COMMITMENTS
                  AND CONTINGENCIES(Cont’d)
 
 (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
                
                $
                10,4061
                    to 2 year
                
                
                10,767
                
                
                10,4062
                    to 3 year
                
                
                11,575
                
                
                10,4063
                    to 4 year
                
                
                11,844
                
                
                11,1864
                    to 5 year
                
                
                11,844
                
                
                11,447Thereafter
                
                
                40,862
                
                
                50,937$
                97,659
                
                $
                104,788
 
 (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.
 31
 **Table
                      of Contents**
 **Item
                                2.**
                            **Management’s
                                Discussion and Analysis or Plan of
                                Operation.**




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





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





**Overview**





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





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





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.





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. 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 shall automatically be converted into 10,745,548 shares of common stock
      that shall equal to 89.5% of the total issued and outstanding
      shares.




32
 **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 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 month period ended June 30, 2006 as compared to three
      month period ended June 30, 2005**





REVENUES.
      All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in the PRC. During the three month period ended June 30, 2006, we
      had
      revenues of $2,762,247 as compared to revenues of $2,038,559 during the three
      month period ended June 30, 2005, an increase of approximately 35%. In general,
      this increase is attributable to our increased volume of sales, partially offset
      by a decline in unit selling prices. The increase is 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.





33
 **Table
          of Contents**


GROSS
      PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
      manufacturing overhead, were $1,506,295 for the three month period ended June
      30, 2006 as compared to $949,699 for the three month period ended June 30,
      2005.
      Gross profit was $1,255,952 for the three month period ended June 30, 2006
      as
      compared to $1,088,860 for the three month period ended June 30, 2005,
      representing gross profit margins of approximately 45% and 53%, respectively.
      The decrease in our gross profit margin is attributable to 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. On the one hand, we will purchase raw
      materials in bulk to have a better pricing. On the other hand, we will improve
      the formula so as to lower the cost of raw materials consumed.





SELLING
      EXPENSES. Selling expenses, which consist of commission, advertising and
      promotion expenses, freight charges and salaries totaled $75,574 for the three
      month period ended June 30, 2006 as compared to $206,209 for the three month
      period ended June 30, 2005, a decrease of approximately 63%. This decrease
      is
      primarily attributable to a change in our commission policy from an aggressive
      commission rate to a flat rate.





GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $104,835 for the three month period ended June 30, 2006, as compared to $119,703
      for the three month period ended June 30, 2005, a decrease of approximately
      12%.
      This decrease is primarily attributable to a decrease in traveling expenses
      that totaled $15,002 during the three month period ended June 30,
      2006.





AMORTIZATION
      OF DEFERRED CONSULTING FEE. Deferred consulting fee, which paid for the
      consultation and advisory services relating to marketing, financing and
      restructuring of the Company, totaled $341,145 and amortization of this fee
      commenced in the three month period ended June 30, 2006, whereas there was
      no
      such expenses during the three month period ended June 30, 2005.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs, which consist of
      salaries, professional and technical support fees, totaled $85,747 for the
      three
      month period ended June 30, 2006, as compared to $157 for the three month period
      ended June 30, 2005, an increase of approximately 545%. 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 $483,343 for the three month period ended
      June 30, 2006 as compared to $648,836 for the three month period ended June
      30,
      2005. The decrease in net income is attributable to the amortization of the
      deferred consulting fees and the increase in cost of raw materials for the
      three
      month period ended June 30, 2006. Skystar’s management believes that net income
      will increase as sales increase in the coming quarters.





**Results
      of Operations - Six month period ended June 30, 2006 as compared to six month
      period ended June 30, 2005**





REVENUES.
      All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in the PRC. During the six month period ended June 30, 2006, we had
      revenues of $3,757,435 as compared to revenues of $2,896,790 during the six
      month period ended June 30, 2005, an increase of approximately 30%. In general,
      this increase is attributable to our increased sales, which, in turn, is mainly
      attributable to the increase in the number of promotional activities we carried
      out during the period.





34
 **Table
          of Contents**




GROSS
      PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
      manufacturing overhead, were $2,026,734 for the six month period ended June
      30,
      2006 as compared to $1,365,664 for the six month period ended June 30, 2005.
      Gross profit was $1,730,701 for the six month period ended June 30, 2006 as
      compared to $1,531,126 for the six month period ended June 30, 2005,
      representing gross profit margins of approximately 46% and 53%, respectively.
      The decrease in our gross profit margin is attributable to a decrease in unit
      price due to keen competition and also due to 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 will have better cost control in the future.
      On the one hand, we will purchase raw materials in bulk to have a better
      pricing. On the other hand, we will improve the formula so as to lower the
      cost
      of raw materials consumed.





SELLING
      EXPENSES. Selling expenses, which consist of commission, advertising and
      promotion expenses, freight charges and salaries, totaled $143,482 for the
      six
      month period ended June 30, 2006 as compared to $242,567 for the six month
      period ended June 30, 2005, a decrease of approximately 41%. This decrease
      is
      primarily attributable to a change in our commission policy from an aggressive
      commission rate to a flat rate.




GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $311,072 for the six month period ended June 30, 2006, as compared to $178,487
      for the six month period ended June 30, 2005, an increase of approximately
      74%.
      This increase is primarily attributable to a provision for audit fees to comply
      with the SEC reporting rules, which totaled $135,767 for the period ended June
      30, 2006.





AMORTIZATION
      OF DEFERRED CONSULTING FEE. Deferred consulting fee, which paid for the
      consultation and advisory services relating to marketing, financing and
      restructuring of the Company, totaled $341,145 and amortization of this fee
      commenced in the six month period ended June 30, 2006, whereas there was no
      such
      expenses during the six month period ended June 30, 2005.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs, which consist of
      salaries, professional and technical support fees, totaled $105,086 for the
      six
      month period ended June 30, 2006, as compared to $10,442 for the six month
      period ended June 30, 2005, an increase of approximately 906%. 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 $637,235 for the six month period ended
      June
      30, 2006 as compared to $929,984 for the six month period ended June 30, 2005.
      The decrease in net income is attributable to the amortization of the deferred
      consulting fee for the six month period ended June 30, 2006. Skystar’s
      management believes that net income will increase as the sales increase in
      the
      coming quarters.




**Liquidity**





For
      the
      six month period ended June 30, 2006, we generated cash from operating
      activities of $308,626, as compared to $1,166,015 for the six months ended
      June
      30, 2005. The decrease is primarily attributable to an increase in inventory
      that will be used for the production in the third quarter of 2006. We used
      $182,953 in investing activities for the six month period ended June 30, 2006,
      as compared to $2,003,204 for the same period in 2005. The cash used in
      investing activities for 2006 consisted of, among others, a payment of $980,603
      for the purchases of property, plant and equipment (net of decrease in deposits
      paid), as compared with $1,786,792 for such purchases for the same six month
      period in 2005 as the construction of our new plant has been in full swing
      since
      2004 and is expected to be completed at the end of 2006. Also, the repayment
      from a related company of $446,189 contributed to the decrease in net cash
      used
      in investing activities. On the other hand, we used $124,620 in financing
      activities for 2006 as compared to the $1,250,602 in cash generated from
      stockholders for 2005.





35
 **Table
          of Contents**




As
      of
      June 30, 2006, the Company had cash of $39,925. Our total current assets were
      $2,083,033 and our total current liabilities were $2,960,589, which resulted
      in
      a net working capital deficiency of $877,556, and which indicates the Company
      may need additional financing to meet cash requirements for its operations
      in
      order to continue as a going concern. Management believes the Company’s ability
      to continue as a going concern is dependent upon its ability to maintain
      profitable operations and to obtain additional financing or refinancing as
      may
      be required. The Company has recorded net income and generated positive cash
      inflows from operating activities during the second quarter of 2006 and the
      year
      of 2005. Furthermore, the Company has appointed investment bankers to raise
      funds in the capital market, although there are no assurances that we will
      be
      able to successfully obtain additional financing at terms acceptable to us.
      Failure to obtain such financing could have a material adverse effect on our
      ability to operate as a going concern. However, our management believes that
      the
      Company will generate sufficient cash flow to meet its obligations on a timely
      basis in the foreseeable future.





We
      had
      capital expenditure commitments outstanding as of June 30, 2006 in the amount
      of
      $2,087,463 for the construction of a new plant which will meet the Good
      Manufacturing Practices Standard and $666,840 in relation to the purchase of
      machinery. The new plant and machinery will enable us to consolidate our
      existing operations and to expand the production capacity for our
      bio-pharmaceutical business.





**Capital
      Resources**





As
      mentioned above, we had a net working capital deficiency that indicates our
      need
      for additional financing. For Company operations and the construction of the
      newest facilities and acquisition of new equipment for these facilities, we
      expect that we will need approximately $12,900,000 in the next twelve months.
      Of
      the capital raised, we estimate that $3,400,000 will be spent on the
      construction of the new plant, $2,500,000 will be spent on research and
      development of the new products, $1,500,000 will be for the construction of
      a
      new research and development center, $1,000,000 will be spent on marketing
      our
      products, 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. While
      there can be no assurances that we will be able to obtain such additional
      financing, on terms acceptable to us and at the times required, or at all,
      we
      believe that sufficient capital can be raised in the foreseeable
      future.





**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, Xian Tianxing 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**





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





36
 **Table
          of Contents**




**Off-Balance
      Sheet Arrangements**





Xian
      Tianxing has pledged a leasehold office building with a net book value of
      $240,537 as of June 30, 2006 to an unrelated third party as the security against
      a non-interest bearing loan to Xian Tianxing for a short term financing
      purposes. The outstanding non-interest bearing loan was $137,720 as of June
      30,
      2006.





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.





**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:





**June
                30, 2006**
            
            **December
                31, 2005**
            
            **June
                30, 2005**Balance
                sheet items, except for the registered and paid-up capital, as of
                end of
                period/year
            USD0.1252:RMB1
            
            USD0.124:RMB1
            
            USD0.12048:RMB1Amounts
                included in the statement of operations, statement of changes in
                stockholders’ equity and statement of cash flows for the period/ year
                ended
            USD0.1246:RMB1
            
            USD0.122:RMB1
            
            USD0.12048:RMB1





37
 **Table
          of Contents**




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.





**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; 
 38
 **Table
            of Contents**
 ·
            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.





***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 
 39
 **Table
            of Contents**
 ·
            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.




***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.




40
 **Table
          of Contents**




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




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




***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.




41
 **Table
          of Contents**




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




·
            the
                commercialization of our products could be adversely
                affected;





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





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




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




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




42
 **Table
          of Contents**




***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.




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.





43
 **Table
          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.




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




44
 **Table
          of Contents**




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




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




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




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




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





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




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




45
 **Table
          of Contents**




**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.***




Skystar
      Cayman is an intermediate holding company incorporated in the Cayman Islands
      and
      does 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
      Skystar Cayman’s 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.




46
 **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, our management or the experts named in the
      prospectus.***




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




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




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




47
 **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.





48
 **Table
          of Contents**




***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.





49
 **Table
          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 will own approximately
      81%
      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.





50
 **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.  51
 **Table
            of Contents**




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




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




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





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




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




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




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





52
 **Table
          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 the Chief Financial
                Officer, of the effectiveness of the design and operation of our
                disclosure controls and procedures pursuant to Exchange Act Rule
                13a-14.
                Based upon that evaluation, the Chief Executive Officer and Chief
                Financial Officer concluded that our disclosure controls and procedures
                are effective in timely alerting them to material information relating
                to
                us required to be included in our periodic SEC
                filings.





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





53
 **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]**  54
 **Table
            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:
                  August 18, 2006
                By:
                /s/ Weibing
                  LuWeibing
                    Lu
                  Chief Executive
                    Officer
 Date:
                      August 18, 2006
                  By:
                  /s/
                    Erna GaoErna Gao
                    Chief Financial
                      Officer


55