*Table
              of Contents*
 
 **U.
        S. SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
 
 **FORM
        10-QSB**
 
 þ
                  Quarterly
                      report pursuant to Section 13 or 15(d) of the Securities Exchange
                      Act of
                      1934
 For
            the
            quarterly period ended **September
            30, 2007**
  ̈
              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 small business issuer as specified in its charter)
 
 **Nevada**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              **33-0901534**
                (I.R.S.
                  employer
                identification
                  number)**Rm.
                  10601, Jiezuo Plaza, No. 4, Fenghui Road South,**
                **Gaoxin
                  District, Xian Province, People’s Republic of China**
                (Address
                  of principal executive offices and zip code)
                **(8629)
                  8819-3188**
                (Registrant’s
                  telephone number, including area
                  code)
 
 Check
        mark whether the issuer (1) has filed all reports required to be filed by
        Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
        such
        shorter period that the registrant was required to file such reports), and
        (2)
        has been subject to such filing requirements for the past 90 days.  YES þ NO  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). YES  ̈ NO þ
 
 Number
        of
        shares of common stock outstanding as of November
        12, 2007: **** 12,999,299
 
 Transitional
        Small Business Disclosure Format YES  ̈  NO þ
  
 *Table
          of Contents*
  **SKYSTAR
        BIO-PHARMACEUTICAL COMPANY**
  **FORM 10-Q** **SB**
  **INDEX**
  Page
                Number**SPECIAL
                  NOTE REGARDING FORWARD-LOOKING
                  STATEMENTS**
              3**PART
                  I. FINANCIAL INFORMATION**
              4Item
                  1.
              Financial
                  Statements (unaudited)
              4Consolidated
                  Balance Sheet as of September 30,
                  2007
              4Consolidated
                  Statements of Income and Other Comprehensive
                  Income for the Three Months and Nine Months Ended September 30,
                  2007 and
                  2006
              5Consolidated
                  Statements of Shareholders’
                  Equity
              6Consolidated
                  Statements of Cash Flows for the Nine Months Ended
                  September 30, 2007 and 2006
              7Notes
                  to Consolidated Financial Statements - September 30,
                  2007
              8Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of
                  Operations
              30Item
                  3.
              Controls
                  and Procedures
              44**PART
                  II. OTHER INFORMATION**
              45Item
                  1.
              Legal
                  Proceedings
              45Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              45Item
                  3.
              Defaults
                  Upon Senior Securities
              45Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              45Item
                  5.
              Other
                  Information
              46Item
                  6.
              Exhibits
              46**SIGNATURES**
              47
 
 
 -2-
 *Table
              of Contents*
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING
        STATEMENTS**
 
 All
        statements contained in this Quarterly Report on Form 10-QSB, 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 are summarized in the section entitled “Risk Factors” and
        in our previous SEC filings.
 
 Consequently,
        all of the forward-looking statements made in this Quarterly Report on 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.
  -3-
 *Table
            of Contents*
  **PART
        I. FINANCIAL INFORMATION**
 
 **ITEM
        1.****FINANCIAL
        STATEMENTS**


SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARYCONSOLIDATED
                BALANCE SHEETAS
                OF SEPTEMBER 30, 2007




September
                30,2007UnauditedASSETSCURRENT
                ASSETS:Cash
            
            $
            262,212Restricted
                cash
            
            
            72,946Accounts
                receivable, trade, net of allowance for doubtful accounts of
                $15,011
            
            
            1,210,226Inventories
            
            
            2,674,092Deposits
                and prepaid expenses
            
            
            1,225,847Loans
                receivable
            
            
            573,620Other
                receivables
            
            
            45,643Other
                receivables- related parties
            
            
            1,620,812Total
                current assets
            
            
            7,685,398PLANT
                AND EQUIPMENT, net
            
            
            11,551,440OTHER
                ASSETS:Deferred
                financing costs
            
            
            694,895Intangible,
                net
            
            
            325,338Total
                other assets
            
            
            1,020,233Total
                assets
            
            $
            20,257,071LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            264,406Accrued
                expenses
            
            
            332,930Taxes
                payable
            
            
            738,658Other
                payables
            
            
            637,531Other
                payables - related parties
            
            
            49,212Total
                current liabilities
            
            
            2,022,737OTHER
                LIABILITIES:Deferred
                government grant
            
            
            1,000,500Liquidated
                damages
            
            
            345,017Convertible
                debenture, net of $2,898,382 discount
            
            
            399,106Total
                other liabilities
            
            
            1,744,623Total
                liabilities
            
            
            3,767,360COMMITMENTS
                AND CONTINGENCIES
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock, $0.001 par value, 50,000,000 shares authorized, 2,000,000
                series
                "A"shares
                issued and outstanding; Nil series"B" shares issued and
                outstanding.
            
            
            2,000Common
                stock, $0.001 par value, 50,000,000 shares authorized; 12,874,299
                sharesissued
                and outstanding.
            
            
            12,874Paid-in-capital
            
            
            11,080,286Deferred
                compensation
            
            
            (142,258
            )Statutory
                reserves
            
            
            1,190,585Retained
                earnings
            
            
            3,390,895Accumulated
                other comprehensive income
            
            
            955,329Total
                shareholders' equity
            
            
            16,489,711Total
                liabilities and shareholders' equity
            
            $
            20,257,071


The
        accompanying notes are an integral part of this consolidated
        statement.




-4-
 *Table
          of Contents*




SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARYCONSOLIDATED
                  STATEMENTS OF INCOME AND OTHER COMPREHENSIVE
                  INCOMEFOR
                  THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
                  2006
  Three
                  months ended
              
              Nine
                  months endedSeptember
                  30
              
              September
                  302007
              
              2006
              
              2007
              
              2006Unaudited
              
              Unaudited
              
              Unaudited
              
              UnauditedREVENUE
              
              $
              5,448,561
              
              $
              3,558,344
              
              $
              10,190,830
              
              $
              7,315,779COST
                  OF SALES
              
              
              2,268,344
              
              
              1,928,606
              
              
              4,376,670
              
              
              3,955,340GROSS
                  PROFIT
              
              
              3,180,217
              
              
              1,629,738
              
              
              5,814,160
              
              
              3,360,439OPERATING
                  EXPENSESResearch
                  and development
              
              
              117,605
              
              
              19,372
              
              
              224,486
              
              
              124,458Amortization
                  of deferred compensation
              
              
              101,345
              
              
              316,077
              
              
              563,619
              
              
              657,222Selling
                  expenses
              
              
              176,438
              
              
              125,793
              
              
              434,005
              
              
              269,275General
                  and administrative expenses
              
              
              286,571
              
              
              167,306
              
              
              1,008,193
              
              
              478,378INCOME
                  FROM OPERATIONS
              
              
              2,498,258
              
              
              1,001,190
              
              
              3,583,857
              
              
              1,831,106OTHER
                  INCOME (EXPENSES)Other
                  expense
              
              
              (183,119
              )
              
              (1,055
              )
              
              (324,345
              )
              
              (2,285
              )Interest
                  expense
              
              
              (827,639
              )
              
              -
              
              
              (1,694,154
              )
              
              -INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              1,487,500
              
              
              1,000,135
              
              
              1,565,358
              
              
              1,828,821PROVISION
                  FOR INCOME TAXES
              
              
              415,578
              
              
              200,478
              
              
              715,845
              
              
              391,929NET
                  INCOME
              
              
              1,071,922
              
              
              799,657
              
              
              849,513
              
              
              1,436,892OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              211,633
              
              
              102,682
              
              
              495,309
              
              
              175,662COMPREHENSIVE
                  INCOME
              
              $
              1,283,555
              
              $
              902,339
              
              $
              1,344,822
              
              $
              1,612,554EARNINGS
                  PER SHARE-
                  Basic
              
              $
              0.08
              
              $
              0.06
              
              $
              0.07
              
              $
              0.14-
                  Diluted
              
              $
              (0.17
              )
              $
              0.06
              
              $
              (0.19
              )
              $
              0.14Weighted
                  average number of common shares-
                  Basic
              
              
              12,865,739
              
              
              12,606,199
              
              
              12,819,290
              
              
              10,617,132-
                  Diluted
              
              
              17,306,203
              
              
              12,606,199
              
              
              16,409,236
              
              
              10,617,132




The
        accompanying notes are an integral part of this consolidated
        statement.




-5-
 *Table
          of Contents*




SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARYCONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS'
                  EQUITY
 Retained
                    Earnings
                
                
                
                Accumulated
                    otherPreferred
                    stock
                
                Common
                    stock
                
                Paid-in
                
                Statutory
                
                
                
                Deferred
                
                comprehensiveShares
                
                Amount
                
                Shares
                
                Amount
                
                capital
                
                reserves
                
                Unrestricted
                
                Compensation
                
                income
                
                TotalBALANCE,
                    January 1, 2006
                
                
                50,000,000
                
                $
                50,000
                
                
                1,260,651
                
                $
                1,261
                
                $
                4,301,747
                
                $
                364,460
                
                $
                2,192,365
                
                $
                -
                
                $
                161,345
                
                $
                7,071,178Share
                    conversion
                
                
                (48,000,000
                )
                
                (48,000
                )
                
                10,745,548
                
                
                10,745
                
                
                37,255
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Share
                    issued for services
                
                
                
                
                
                
                
                
                600,000
                
                
                600
                
                
                1,571,400
                
                
                
                
                
                
                
                
                (1,572,000
                )
                
                
                
                
                -Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                657,222
                
                
                
                
                
                657,222Foreign
                    currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                175,662
                
                
                175,662Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,436,892
                
                
                
                
                
                -
                
                
                1,436,892BALANCE,
                    September 30, 2006 (unaudited)
                
                
                2,000,000
                
                $
                2,000
                
                
                12,606,199
                
                $
                12,606
                
                $
                5,910,402
                
                $
                364,460
                
                $
                3,629,257
                
                $
                (914,778
                )
                $
                337,007
                
                $
                9,340,954Share
                    issued for services
                
                
                
                
                
                
                
                
                189,350
                
                
                189
                
                
                335,923
                
                
                
                
                
                
                
                
                (336,112
                )
                
                
                
                
                -Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                545,013
                
                
                
                
                
                545,013Foreign
                    currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                123,013
                
                
                123,013Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (261,750
                )
                
                
                
                
                
                
                
                (261,750
                )Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                415,164
                
                
                (415,164
                )
                
                
                
                
                
                
                
                -BALANCE,
                    December 31, 2006
                
                
                2,000,000
                
                $
                2,000
                
                $
                12,795,549
                
                $
                12,795
                
                $
                6,246,325
                
                $
                779,624
                
                $
                2,952,343
                
                $
                (705,877
                )
                $
                460,020
                
                $
                9,747,230Share
                    issued for services
                
                
                
                
                
                
                
                
                78,750
                
                
                79
                
                
                115,684
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                115,763Beneficial
                    conversion feature of debentures
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,130,575
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,130,575Warrants
                    issued to debenture holders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,944,425
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,944,425Warrants
                    issued to placement agent
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                643,277
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                643,277Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                563,619
                
                
                
                
                
                563,619Foreign
                    currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                495,309
                
                
                495,309Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                849,513
                
                
                
                
                
                
                
                
                849,513Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                410,961
                
                
                (410,961
                )
                
                
                
                
                
                
                
                -BALANCE,
                    September 30, 2007 (unaudited)
                
                
                2,000,000
                
                $
                2,000
                
                
                12,874,299
                
                $
                12,874
                
                $
                11,080,286
                
                $
                1,190,585
                
                $
                3,390,895
                
                $
                (142,258
                )
                $
                955,329
                
                $
                16,489,711


The
        accompanying notes are an integral part of this consolidated
        statement.




-6-
 *Table
          of Contents*


SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARYCONSOLIDATED
                  STATEMENTS OF CASH FLOWSFOR
                  THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
  2007
              
              2006Unaudited
              
              UnauditedCASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              849,513
              
              $
              1,436,892Adjustments
                  to reconcile net income to cash(used
                  in) provided by operating activities:Depreciation
                  and amortization
              
              
              204,454
              
              
              81,204Amortization
                  of deferred debenture expenses
              
              
              286,132
              
              
              -Amortization
                  of discount on debentures
              
              
              1,176,618
              
              
              -Amortization
                  of deferred compensation
              
              
              563,619
              
              
              657,222Issuance
                  of common stock for service
              
              
              115,763
              
              
              -Bad
                  debt expense
              
              
              -
              
              
              578Change
                  in operating assets and liabilitiesAccounts
                  receivable, trade
              
              
              (1,051,083
              )
              
              (468,709
              )Inventories
              
              
              (2,080,140
              )
              
              (974,536
              )Deposits
                  and prepaid expenses
              
              
              (1,169,972
              )
              
              768Other
                  receivables
              
              
              (5,078
              )
              
              (8,740
              )Other
                  receivables - related parties
              
              
              (1,620,812
              )
              
              -Other
                  payables
              
              
              5,388
              
              
              -Accounts
                  payable
              
              
              186,357
              
              
              38,757Accrued
                  expenses and other payables
              
              
              (201,124
              )
              
              174,099Taxes
                  payables
              
              
              500,991
              
              
              (672,832
              )Liquidated
                  damages payable
              
              
              345,017
              
              
              -Net
                  cash (used in) provided by operating activities
              
              
              (1,894,357
              )
              
              264,703CASH
                  FLOWS FROM INVESTING ACTIVITIES:Loan
                  to third parties
              
              
              (553,031
              )
              
              -Purchase
                  of plant and equipment
              
              
              (373,629
              )
              
              (1,162,813
              )Net
                  cash used in investing activities
              
              
              (926,660
              )
              
              (1,162,813
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Increase
                  in restricted cash
              
              
              (501
              )
              
              -Proceeds
                  from related parties
              
              
              33,188
              
              
              -Proceeds
                  from shareholder
              
              
              -
              
              
              173,440Proceeds
                  from a related company
              
              
              -
              
              
              582,319Payments
                  on non-interest bearing loans from third parties
              
              
              -
              
              
              (249,960
              )Payments
                  on short-term loan, interest bearing
              
              
              (39,192
              )
              
              (37,000
              )Proceeds
                  from short-term loan, interest bearing
              
              
              -
              
              
              37,000Payments
                  on short-term loan, non-interest bearing
              
              
              (64,014
              )
              
              -Proceeds
                  from government subsidies
              
              
              -
              
              
              124,980Proceeds
                  from interest bearing loan from third party
              
              
              -
              
              
              259,958Proceeds
                  from convertible debentures, net of debenture expenses
              
              
              3,737,250
              
              
              -Principal
                  payment on convertible debenture
              
              
              (777,512
              )
              
              -Net
                  cash provided by financing activities
              
              
              2,889,219
              
              
              890,737EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              1,994
              
              
              707INCREASE
                  (DECREASE) IN CASH
              
              
              70,196
              
              
              (6,666
              )CASH,
                  beginning of period
              
              
              192,016
              
              
              38,498CASH,
                  end of period
              
              $
              262,212
              
              $
              31,832SUPPLEMENTAL
                  DISCLOSURE INFORMATIONInterest
                  paid
              
              $
              1,694,154
              
              $
              2,670Income
                  taxes paid
              
              $
              444,205
              
              $
              516,659Non-cash
                  transactionsWarrants
                  issued for services
              
              $
              643,277
              
              $
              -Stocks
                  issued for services
              
              
              115,763
              
              
              1,572,000$
              759,040
              
              $
              -


The
        accompanying notes are an integral part of this consolidated
        statement.
  -7-
 *Table
            of Contents*


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY





NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
      30, 2007


(UNAUDITED)


**Note
      1-** **DESCRIPTION
      OF BUSINESS AND ORGANIZATION**





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





On
      November 7, 2005, the Company completed a stock exchange transaction with the
      stockholders of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Limited
      (“Skystar Cayman”), whereby 48,000,000 shares of the Company’s Series B
      preferred stock was issued to the stockholders of Skystar Cayman in exchange
      for
      100% of the common stock of Skystar Cayman. The 48,000,000 shares of Series
      B
      preferred stock issued to the stockholders of Skystar Cayman shall be
      convertible, in aggregate, into a number of shares of the Company’s common stock
      that would equal 89.5% of the outstanding shares of the Company’s common stock,
      if the shares were to be converted on the closing date of the stock exchange
      transaction which was November 7, 2005. In addition, Skystar Cayman paid
      $120,000 to Cyber, which was used to pay liabilities of Cyber.





Skystar
      Cayman was incorporated under the laws of the Cayman Islands on January 24,
      2005. It has not carried on any substantive operations of its own, except for
      the entering of certain exclusive agreements with Xian Tianxing
      Bio-Pharmaceutical Co., Limited (“Xian Tianxing”). Skystar Cayman through its
      variable interest entity (“VIE”), Xian Tianxing Bio-Pharmaceutical Co., Limited
      engages in research, development, production, marketing and sales of
      bio-pharmaceutical and veterinary products. All current operations of the
      Company are in the People’s Republic of China (“China” or the
“PRC”).





Xian
      Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
      company without shares. On December 31, 2003, Xian Tianxing was restructured
      from a limited liability company without shares to a joint stock limited
      company. According to the PRC law, a “limited liability company” is a company
      whose shareholders shall assume liability towards the company to the extent
      of
      their respective capital contributions, whereas a joint stock limited company
      is
      a company having its total capital divided into equal shares and whose
      shareholders shall assume liability to the extent of their respective
      shareholdings.





The
      paid-in capital of Xian Tianxing was funded by the majority shareholders of
      Skystar Cayman. PRC law currently has limits on foreign ownership of companies.
      To comply with these foreign ownership restrictions, on October 28, 2005,
      Skystar Cayman entered into certain exclusive agreements with Xian Tianxing
      and
      its shareholders. Xian Tianxing holds the licenses and approvals necessary
      to
      operate the bio-pharmaceutical business in China. Pursuant to these agreements,
      Skystar Cayman provides exclusive technology consulting and other general
      business operation services to Xian Tianxing in return for a consulting services
      fee which is equal to Xian Tianxing’s revenue. In addition, Xian Tianxing’s
      shareholders have pledged their equity interests in Xian Tianxing to Skystar
      Cayman, irrevocably granted Skystar Cayman an exclusive option to purchase,
      to
      the extent permitted under PRC law, all or part of the equity interests in
      Xian
      Tianxing and agreed to entrust all the rights to exercise their voting power
      to
      the person(s) appointed by Skystar Cayman. Through these contractual
      arrangements, Skystar Cayman has the ability to substantially influence Xian
      Tianxing’s daily operations and financial affairs, appoint its senior executives
      and approve all matters requiring shareholder approval.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


As
      a
      result of these contractual arrangements, which obligates Skystar Cayman to
      absorb a majority of the risk of loss from Xian Tianxing’s activities and enable
      Skystar Cayman to receive a majority of its expected residual returns, Skystar
      Cayman accounts for Xian Tianxing as a variable interest entity (“VIE”) under
      FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
      Entities, an Interpretation of ARB No. 51”. Accordingly, Skystar Cayman
      consolidates Xian Tianxing’s results, assets and liabilities.





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 from the
      Company.





On
      August
      21, 2007, Xian Tianxing invested $66,700 (RMB 500,000) to establish Shanghai
      Siqiang Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang
      was established in Putuo District, City of Shanghai, People’s Republic of China
      (“PRC”) with a registered capital of $66,700 (RMB 500,000) and Xian Tianxing is
      the 100% shareholder. Shanghai Siqiang was established to become a research
      and
      development center for Xian Tianxing and engages in research, development,
      production and sales of veterinary products, feed additives, and veterinary
      disease diagnosis equipments.





**Note
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Basis
      of presentation and consolidation





The
      unaudited consolidated financial statements have been prepared by the Company,
      pursuant to the rules and regulations of the Securities and Exchange Commission.
      The information furnished herein reflects all adjustments (consisting of normal
      recurring accruals and adjustments) which are, in the opinion of management,
      necessary to fairly present the operating results for the respective periods.
      Certain information and footnote disclosures normally present in annual
      consolidated financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been omitted
      pursuant to such rules and regulations. These consolidated financial statements
      should be read in conjunction with the audited financial statements and
      footnotes for the period ended December 31, 2006 included in the Company's
      Current Report on 10KSB filed with the Securities and Exchange Commission on
      May
      18, 2007. The results for the nine months ended September 30, 2007 are not
      necessarily indicative of expected results for the full year ending December
      31,
      2007.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      accompanying consolidated financial statements are prepared in accordance with
      accounting principles generally accepted in the United States of
      America.





The
      consolidated financial statements include the financial statements of the
      Company, its wholly-owned subsidiary, Skystar Cayman, and its variable interest
      entities, Xian Tianxing and Shanghai Siqiang. All significant inter-company
      transactions and balances between the Company, its subsidiary and VIEs 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. For example, the Company estimates its allowance for doubtful
      accounts and useful lives of fixed assets. 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, accounts payable, accruals, other payables, short-term
      related party borrowings and debentures payable. As of the balance sheet dates,
      the estimated fair values of the financial instruments were not materially
      different from their carrying values as presented due to the short term
      maturities of these instruments and that the interest rates on the borrowings
      approximate those that would have been available for loans of similar remaining
      maturity and risk profile at respective period ends.





Revenue
      recognition





Revenues
      of the Company include sales of bio-pharmaceutical and veterinary products
      in
      China. Sales are recognized when the following four revenue criteria are met:
      persuasive evidence of an arrangement exists, delivery has occurred, the selling
      price is fixed or determinable, and collectability is reasonably assured. Sales
      are presented net of value added tax (VAT). No return allowance is made as
      product returns are insignificant based on historical experience.


a.
              *Credit
                  sales:*Revenue
                  is recognized when the products have been delivered to the
                  customers.


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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


b.
            *Full
                payment before delivering*:
                Revenue is recognized when the products have been delivered to
                customers.





Shipping
      and handling costs related to costs of goods sold are included in selling,
      general and administrative costs which totaled $ 128,775
      and $58,454 for the nine months ended September 30, 2007 and 2006, and $53,434
      and $36,225 for the three months ended September 30, 2007 and 2006,
      respectively.





Cash





Cash
      includes cash on hand, demand deposits with banks and liquid investments with
      an
      original maturity of three months or less.





Restricted
      cash





The
      Company had restricted cash of $72,946 as of September 30, 2007. The restricted
      cash was received from the PRC government subsidies and set aside for the
      specific usages (see Note 9). The restricted funds are kept as bank deposits.
      Restricted cash is classified as current assets as of September 30, 2007 based
      on the expected period when the funds will be put into their specific
      usages.





Accounts
      and other receivables





Accounts
      and other receivables are recorded at net realizable value consisting of the
      carrying amount less an allowance for uncollectible accounts, as needed. The
      Company uses the aging method to estimate the valuation allowance for
      anticipated uncollectible receivable balances. Under the aging method, bad
      debt
      percentages determined by management based on historical experience as well
      as
      current economic climate are applied to customers’ balances categorized by the
      number of months the underlying invoices have remained outstanding. The
      valuation allowance balance is adjusted to the amount computed as a result
      of
      the aging method. When facts subsequently become available to indicate that
      the
      allowance provided requires an adjustment, then the adjustment will be
      classified as a change in estimate.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Inventories





Inventories
      are stated at the lower of cost, as determined on moving weighted average basis,
      or market. Costs of inventories include purchases and related costs incurred
      in
      bringing the products to their present location and condition.





Plant
      and equipment





Plant
      and
      equipment are stated at cost less accumulated depreciation. Depreciation is
      computed using the straight-line method over the estimated useful lives of
      the
      assets. Estimated useful lives of the assets are as follows:





Estimated
                Useful LifeBuildings
            20-40
                yearsMachinery
                and equipment
            10
                yearsComputer,
                office equipment and furniture
            5
                yearsAutomobiles
            5-10
                years





The
      carrying value of plant and equipment is assessed periodically and when factors
      indicating impairment is present, the carrying value of the fixed assets is
      reduced by the amount of the impairment. The Company determines the existence
      of
      such impairment by measuring the expected future cash flows (undiscounted and
      without interest charges) and comparing such amount to the net asset carrying
      value. An impairment loss, if exists, is measured as the amount by which the
      carrying amount of the asset exceeds the fair value of the asset.





Construction
      in progress





Construction
      in progress includes direct costs of construction of a factory building.
      Interest incurred during the period of construction, if material, is
      capitalized. Construction in progress is not depreciated until such time as
      the
      assets are completed and put into service.





Intangibles





Land
      use
      rights - Land use rights represent 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 land use rights are
      amortized on the straight-line method over the 50 year term of the land use
      rights.





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.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Impairment
      of intangibles - The Company periodically evaluates the carrying value of
      intangibles in accordance with the provisions of SFAS No. 144, “Accounting for
      the Impairment or Disposal of Long-Lived Assets”, which addresses financial
      accounting and reporting for the impairment or disposal of intangible assets.
      SFAS No. 144 requires impairment losses to be recorded in operations when
      indicators of impairment are present and the undiscounted cash flows estimated
      to be generated by those assets are less than the assets’ carrying amounts. In
      that event, a loss is recognized based on the amount by which the carrying
      amount exceeds the fair market value of the long-lived assets. Loss on
      long-lived assets to be disposed of is determined in a similar manner, except
      that fair market values are reduced for the cost of disposal. Based on its
      review, the Company believes that, as of September 30, 2007, there were no
      significant impairments of its intangible assets.





Comprehensive
      income





SFAS
      No.
      130, “Reporting Comprehensive Income”, requires disclosure of all components of
      comprehensive income and loss on an annual and interim basis. Comprehensive
      income and loss is defined as the change in equity of a business enterprise
      during a period from transactions and other events and circumstances from
      non-owner sources. Accumulated other comprehensive income arose from the changes
      in foreign currency exchange rates.





Research
      and development costs





Research
      and development costs are expensed to operations as incurred and include
      salaries, professional fees and technical support fees.





Income
      taxes





The
      Company has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
      requires the recognition of deferred income tax liabilities and assets for
      the
      expected future tax consequences of temporary differences between income tax
      basis and financial reporting basis of assets and liabilities. Provision for
      income taxes consists of taxes currently due plus deferred taxes. The Company
      adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit
      only if it is “more likely than not” that the tax position would be sustained in
      a tax examination, with a tax examination being presumed to occur. The amount
      recognized is the largest amount of tax benefit that is greater than 50% likely
      of being realized on examination. For tax positions not meeting the “more likely
      than not” test, no tax benefit is recorded. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosures, and transition. The adoption had no affect on the
      Company’s financial statements. There are no deferred tax amounts at September
      30, 2007.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      charge for taxation is based on the results for the year as adjusted for items,
      which are non-assessable or disallowed. It is calculated using tax rates that
      have been enacted or substantively enacted by the balance sheet date.





Deferred
      tax is accounted for using the balance sheet liability method in respect of
      temporary differences arising from differences between the carrying amount
      of
      assets and liabilities in the financial statements and the corresponding tax
      basis used in the computation of assessable tax profit. In principle, deferred
      tax liabilities are recognized for all taxable temporary differences, and
      deferred tax assets are recognized to the extent that it is probable that
      taxable profit will be available against which deductible temporary differences
      can be utilized.





Deferred
      tax is calculated at the tax rates that are expected to apply to the period
      when
      the asset is realized or the liability is settled. Deferred tax is charged
      or
      credited in the income statement, except when related items are credited or
      charged directly to equity, in which case the deferred tax is also dealt with
      in
      equity.





Deferred
      tax assets and liabilities are offset when they relate to income taxes levied
      by
      the same taxation authority and the Company intends to settle its current tax
      assets and liabilities on a net basis.





Stock
      based compensation





The
      Company 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.




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Foreign
      currency translation





The
      Company uses the United States dollar (“U.S. dollars”) for financial reporting
      purposes. The Company’s subsidiary and VIEs maintain their books and records in
      their functional currency, being the primary currency of the economic
      environment in which their operations are conducted.





In
      general, for consolidation purposes, the Company translates the subsidiary’s and
      VIEs’ assets and liabilities into U.S. dollars using the applicable exchange
      rates prevailing at the balance sheet date, and the statement of income and
      cash
      flows are translated at average exchange rates during the reporting period.
      As a
      result, amounts related to assets and liabilities reported on the statement
      of
      cash flows will not necessarily agree with changes in the corresponding balances
      on the balance sheet. Equity accounts are translated at historical rates.
      Adjustments resulting from the translation of the subsidiary’s and VIEs’
financial statements are recorded as accumulated other comprehensive income.





This
      quotation of the exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the People's Bank of China or other banks authorized to
      buy
      and sell foreign currencies at the exchange rate quoted by the People's Bank
      of
      China. The rate of exchange quoted by the People’s Bank of China on September
      30, 2007 was US$1.00 = RMB7.52. The weighted average translation rate of US$1.00
      = RMB7.66 and RMB8.00 was applied to the nine months income statement accounts
      in 2007 and 2006, respectively.





Approval
      of foreign currency payments by the Bank of China or other institutions requires
      submitting a payment application form together with invoices, shipping documents
      and signed contracts. Transaction gains and losses that arise from exchange
      rate
      fluctuations on transactions denominated in a currency other than the functional
      currency are included in the results of operations as incurred.





Recently
      issued accounting pronouncements




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced
      guidance for using fair value to measure assets and liabilities. This standard
      also responds to investors’ requests for expanded information about the extent
      to which companies measure assets and liabilities at fair value, the information
      used to measure fair value, and the effect of fair value measurements on
      earnings. The standard applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 12,
      2007, and interim periods within those fiscal years. Early adoption is
      permitted. We are currently evaluating whether the adoption of SFAS157 will
      have
      a material effect on our consolidated results of operations and financial
      condition.




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          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


In
      June
      2007, the
      FASB
      issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
      Payments for Goods or Services Received for use in Future Research and
      Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
      advance payments for goods or services that used or rendered for research and
      development activities should be expensed when the advance payment is made
      or
      when the research and development activity has been performed. FSP EITF 07-3
      will be effective for an entity’s financial statements issued for fiscal years
      beginning after December 15, 2007. Management is currently evaluating the effect
      of this pronouncement on financial statements.





**Note
      3 -**  **CONCENTRATIONS
      AND CREDIT RISK**





Certain
      f inancial
      instruments, which subject the Company to concentration of credit risk, consist
      of cash. The Company maintains balances at financial institutions which, from
      time to time, may exceed Federal Deposit Insurance Corporation insured limits
      for the banks located in the Unites States. Balances at financial institutions
      or state owned banks within the PRC are not covered by insurance.





As
      of September
      30, 2007 ,
      the
      Company had deposits in excess of federally insured limits (including restricted
      cash) of $189,698 . The
      Company has not experienced any losses in such accounts and believes it is
      not
      exposed to any significant risks on its cash in bank accounts.





For
      the
      nine months ended September 30, 2007 and 2006, all of the Company’s sales arose
      in the PRC. In addition, all accounts receivable as of September 30, 2007 also
      arose in the PRC.





The
      Company’s four largest vendors accounted for approximately 58% of the Company’s
      total purchases for the nine months ended September 30, 2007, while the
      Company’s three largest vendors accounted for 72.89% of the Company’s total
      purchases for the nine months ended September 30, 2006.





No
      major
      product accounted for more than 10% of the Company’s total revenues for the nine
      months ended September 30, 2007. The Company’s two major products accounted for
      approximately 25.39% of the Company’s total revenues for the nine months ended
      September 30, 2006.





The
      Company’s operations are all carried out in the PRC. Accordingly, the Company’s
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, and by the general state
      of the PRC’s economy. The Company’s operations in the PRC are subject to
      specific considerations and significant risks not typically associated with
      companies in the North America and Western Europe. These include risks
      associated with, among others, the political, economic and legal environments
      and foreign currency exchange. The Company’s results may be adversely affected
      by changes in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates
      and methods of taxation, among other things.




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          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


**Note
      4 - RESTRICTED CASH**





Restricted
      cash consists of the following:





September
                30, 2007(Unaudited)Funds
                received from PRC government
            
            $
            72,946subsidies
                (See Note 9)





**Note
      5 - INVENTORIES**





Inventories
      consist of the following:





September
                30, 2007(Unaudited)Raw
                material
            
            $
            1,625,617Packing
                materials
            
            
            339,419Work
                in process
            
            
            6,269Finished
                goods
            
            
            689,393Low
                value consumables
            
            
            13,394Total
            
            $
            2,674,092





**Note
      6 - LOANS RECEIVABLE**





Loans
      receivable consists of the following:





September
                30, 2007(Unaudited)Shanxi
                Suoang Biotechnological Company, due October 30, 2007, annual interest
                at
                7.0%, secured by unrelated company Shanxi New Resource Co.
            
            $
            66,700Xi’an
                Tiantai Investment Company, due July 31, 2008 (or upon demand), minimum
                annualinterest
                at 7.2%, unsecured.
            
            
            493,580Xi’an
                Meicheng Biotechnological Co. Ltd, due upon demand, non-interest
                bearing
                and unsecured.
            
            
            13,340Total
            
            $
            573,620




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
  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. Total
        interest received from these short term loans for the nine months and three
        months ended September 30, 2007 amounted to $764.





**Note
      7 - PLANT AND EQUIPMENT**





Plant
      and
      equipment consists of the following:





September
                30, 2007(Unaudited)Building
                and improvements
            
            $
            3,495,565Plant
                and machinery
            
            
            2,745,673Office
                equipment
            
            
            160,799Vehicles
            
            
            283,115Construction
                in progress
            
            
            5,368,595Total
            
            
            12,053,747Less:
                accumulated depreciation
            
            
            (502,307
            )Plant
                and equipment , net
            
            $
            11,551,440





Construction
      in progress included above was the construction of a production base which
      operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
      The construction work commenced in late 2004 and the major operation facility
      is
      expected to be completed in the beginning of year 2008. The new factory will
      be
      focused on production of micro-organism related drugs and veterinary vaccination
      products. The Company anticipates strong market demand for the Company products
      that the new factory will produce and believes that the new factory can generate
      sufficient cash flows and therefore management has concluded there is no
      impairment loss on the construction in progress.





Depreciation
      expense for the nine months ended September 30, 2007 and 2006 amounted
      to $179,797
      and $62,457, and for the three months ended September
      30, 2007 and 2006
      amounted to $99,493 and $19,093.





**Note
      8 - INTANGIBLES**





Intangibles
      consist of the following:





September
                30, 2007(Unaudited)Land
                use rights
            
            $
            344,506Technological
                know-how
            
            
            133,400Total
            
            
            477,906Less:
                accumulated amortization
            
            
            (152,568
            )Intangible
                assets, net
            
            $
            325,338




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SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Amortization
      expense for intangibles was $ 24,657
      and $18,747 for the nine months ended September
      30, 2007 and
      2006, respectively. For the three months ended September
      30, 2007 and
      2006, amortization expense amounted to $9,930 and $5,455,
      respectively.





**Note
      9 - DEFERRED GOVERNMENT GRANT**





The
      amounts represent subsidies for GMP projects granted by the PRC government.
      A
      subsidy in the amount of $641,000 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, $516,500 was received by the
      Company and the remaining $124,500 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.





Also
      in
      2003, another subsidy of $256,400 was received for financing the Company’s
      research and development activities. In 2006, the Company applied and utilized
      $186,644 in paying for the construction of the new plant facility. In 2005,
      another subsidy of $64,100 was received for the Company’s research and
      development activities. This amount was put into use during the period. As
      of
      September 30, 2007, the Company has not reached a final agreement with the
      PRC
      government related to the treatment of these two subsidies as either a loan
      or
      capital contribution and the Company does not expect that the final agreement
      will be completed within the year of 2007; therefore, these amounts are carried
      as liabilities in the accompanying financial statements.





**Note
      10 - CAPITAL TRANSACTIONS**





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 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.




-19-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Per
      the
      conversion rights set forth in the certificate of designation for the series
“B”
convertible preferred stock, at the same time that the amendment to the
      Company’s articles of incorporation was filed that created sufficient authorized
      shares of common stock to permit full conversion of all 48,000,000 series “B”
preferred shares, all of the series “B” preferred shares automatically were
      converted into 10,745,548 shares of common stock that equaled to 89.5% of the
      total issued and outstanding shares.





In
      March
      2006, the Company issued a total of 600,000 shares of the Company’s common stock
      to consultants, as more fully described in Note 13.





In
      November 2006, the Company issued a total of 139,350 shares of the Company’s
      common stock to consultants and non-executive director, as more fully described
      in Note 13.





In
      November 2006, the Company issued another 50,000 shares of the Company’s common
      stock to a consultant whereas the shares were fully transferred in January
      2007
      as more fully described in Note 13.





In
      July
      2007, the Company issued 78,750 shares of common stock to consultants and
      non-executive director, as more fully described in Note 13.





**Note
      11 - CONVERTIBLE DEBENTURES**





On
      February 27, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Agreement”), with several institutional and accredited investors (the
“Purchasers”) pursuant to which the Company sold to the Purchasers $4.075
      million 8% convertible debentures due February 28, 2009 (the “Debentures”), and
      warrants to purchase 4,075,000 shares of the common stock of the Company (the
      “Warrants”), (collectively referred to as the “Transaction”). The initial
      conversion price of the debentures is $1.00 per share. The initial exercise
      price of the warrants is $1.20 per share with a life of three years. The
      conversion price and warrant exercise price are subject to downward
      adjustments should
      the Company issue more shares of common stock or securities convertible into
      common stock for capital raising activities for less than the conversion price
      or exercise price .
      Additional interest of 15% begins in June 2007 and continues through February
      2008 after which the additional interest increases to 25% through the maturity
      date of the note.





The
      transaction closed on February 27, 2007. Gross proceeds from the sale to the
      Company were $4.075 million, of which $285,250 was paid to Pacific Ridge Capital
      who served as placement agent for the transaction and $52,500 was paid to
      consultants for the Purchaser in connection with the transaction. The Company
      also issued to the Placement Agent a warrant to purchase an aggregate of 570,500
      shares with an exercise price of $1.00 per share with a life of five years.
      The
      value of the warrants issued to the placement agent was calculated as $643,277
      using the Binomial Model. The total amount of the cash payments and the fair
      value of the warrants amounted to $981,027, which was recorded as deferred
      debenture expenses. These costs will be amortized to interest expense over
      the
      two year life of the convertibles debentures. For the nine months and three
      months ended September 30, 2007, $286,132 and $122,628 was amortized to interest
      expense.




-20-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


The
      Company determined the value of the warrants using a binomial Model with a
      volatility of approximately 75%, which is calculated by using the historical
      closing prices of the Company’s common stock. According to APB No. 14,
      Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
      EITF-98-5, and EITF-00-27, the Company allocated the proceeds using relative
      fair value method and determined that the convertible debentures were issued
      with a beneficial conversion feature. As a result, on February 27, 2007, the
      allocated value of the warrants amounted to $1,944,425 and the beneficial
      conversion feature amounted to $2,130,575. The allocated value of the warrants
      and beneficial conversion feature totaling $4,075,000, was recorded as discount
      (or reduction in the carrying amount) of convertible debentures and additional
      paid-in capital and will be amortized over the two year life of the convertible
      debentures using the effective interest method. For the nine and three months
      ended September 30, 2007, $1,176,618 and $584,598 were amortized as interest
      expense. As of September 30, 2007, the carrying value of the convertible
      debentures was $399,106 accordingly.





Pursuant
      to the Agreement, starting in June 2007, The Company shall pay on a monthly
      basis, 4.77% of the principal of the Debenture (“Principal Repayment Amount”),
      and all accrued interest. At the Company's option, payment shall be in cash
      or
      shares of common stock with certain equity conditions are met, which include,
      among other things, the effectiveness of the Registration Statement. The
      following is the repayment
      schedule of the principal of the debt:





Principal
                repayment Amount2007
            
            $
            1,360,6462008
            
            
            2,332,5362009
            
            
            381,818Thereafter
            
            
            -$
            4,075,000





In
      connection to the issuance of the debentures, the Company entered into a
      Registration Rights Agreement, in which a registration statement registering
      the
      resale of the common stock into which the Debentures are convertible and for
      which the Warrants are exercisable, as well as certain other shares of the
      Company's common stock is required to be filed with the Securities and Exchange
      Commission not later than April 13, 2007 and be declared effective by the SEC
      not later than May 28, 2007 if there is no SEC review of the Registration
      Statement, and June 27, 2007 if there is an SEC review. Failure to meet these
      deadlines will result in liquidated damages of 2% of the aggregate purchase
      price of the Debentures and Warrants per month, pro rated for partial periods.
      The Company filed the registration statement on June 1, 2007, however the
      Registration Statement did not become effective until September 25, 2007. The
      Company accrued liquidated damages totaling $ 345,017
      at September 30, 2007.




-21-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Following
      is a summary of the status of warrants outstanding at September 30, 2007:





Outstanding
                Warrants
            
            Exercisable
                WarrantsExercise
                Price
            
            Number
            
            Average
                Remaining Contractual Life
            
            Average
                Exercise Price
            
            Number$1.20
            
            
            4,075,000
            
            
            4.41
                years
            
            $
            1.20
            
            
            4,075,000$1.00
            
            
            570,000
            
            
            4.41
                years
            
            $
            1.00
            
            
            570,000Total
            
            
            4,645,000
            
            
            
            
            
            
            
            
            4,645,000





Following
      is a summary of the warrant activity:





Outstanding
                as of December 31, 2006
            
            
            -Granted
            
            
            4,645,500Forfeited
            
            
            -Exercised
            
            
            -Outstanding
                as of September 30, 2007
            
            
            4,645,500





**Note
      12 - STATUTORY RESERVES**





Statutory
      reserves represent restricted retained earnings. Based on the legal formation
      of
      the entities, Tianxing is required to set aside 10% of its net income as
      reported in its statutory accounts on an annual basis to the Statutory Surplus
      Reserve Fund. Once the total Statutory Surplus Reserve reaches 50% of the
      registered capital of the respective subsidiaries, further appropriations are
      discretionary. The Statutory Surplus Reserve can be used to increase the
      registered capital and eliminate future losses of the respective companies
      under
      PRC GAAP. The Company’s Statutory Surplus Reserve is not distributable to
      shareholders except in the event of liquidation.





Before
      January 1, 2006, Tianxing is also required on an annual basis to set aside
      at least 5% of after-tax profit, calculated in accordance with PRC accounting
      standards and regulations, to the Statutory Surplus Welfare Fund, which can
      be
      used for staff welfare of the Company. Effective from January 1, 2006, the
      appropriation to the Statutory Surplus Welfare Fund is no longer required.
      If
      the PRC subsidiaries provided the Statutory Surplus Welfare Fund, such amount
      shall be determined at the discretion of its board of directors.





The
      Reserve Fund can be used to increase the registered capital upon approval by
      relevant government authorities and eliminate future losses of the respective
      companies upon a resolution by the board of directors.




-22-
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          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


Appropriations
      to the above statutory reserves are accounted for as a transfer from retained
      earnings to statutory reserves. During the nine months ended September 30,
      2007,
      and 2006, the Company made total appropriations to these statutory reserves
      of
      $410,961, and $0, respectively.





There
      are
      no legal requirements in the PRC to fund these statutory reserves by transfer
      of
      cash to any restricted accounts, and the Company does not do so. These reserves
      are not distributable as cash dividends.





**Note
      13 - 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 year ended December 31, 2006, a total of 789,350 shares were issued
      pursuant to the Plan.





On
      March
      14, 2006, the Company entered into two-year consulting agreement with an
      independent consultant. The services to be rendered include consultation and
      advisory services relating to marketing of the Company as mutually agreed upon
      between the parties. As consideration for the services to be rendered, the
      Company issued 240,000 shares of common stock to the consultant on March 31,
      2006. These shares were issued pursuant to the 2006 consultant stock plan.
      The
      fair market value of the Company's common stock as of March 14, 2006 was $2.65
      per share.





On
      March
      27, 2006, the Company entered into a one-year consulting agreement with another
      independent consultant. The services to be rendered include consultation and
      advisory services relating to financing and restructuring of the Company as
      mutually agreed upon between the parties. As consideration for the services
      to
      be rendered, the Company issued 360,000 shares of common stock to the consultant
      on March 31, 2006. These shares were issued pursuant to the 2006 consultant
      stock plan. The fair market value of the Company's common stock as of March
      27,
      2006 was $2.60 per share.





On
      October 24, 2006, the Company entered into three-month consulting agreement
      with
      another independent consultant. The services to be rendered include consultation
      and advisory services relating to investor relationship of the Company as
      mutually agreed upon between the parties. As consideration for the services
      to
      be rendered, the Company issued 28,750 shares of common stock to the consultant
      on October 24, 2006. These shares were issued pursuant to the 2006 consultant
      stock plan. The fair market value of the Company's common stock as of October
      24, 2006 was $1.75 per share.





On
      October 27, 2006, the Company entered into three-month consulting agreement
      with
      another independent consultant. The services to be rendered include financial
      and business consultation of the Company as mutually agreed upon between the
      parties. As consideration for the services to be rendered, the Company issued
      15,600 shares of common stock to the consultant on October 27, 2006. These
      shares were issued pursuant to the 2006 consultant stock plan. The fair market
      value of the Company's common stock as of October 27, 2006 was $1.75 per
      share.




-23-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


On
      November 15, 2006, the Company entered into three-month consulting agreement
      with another independent consultant. The services to be rendered include
      marketing of the Company as mutually agreed upon between the parties. As
      consideration for the services to be rendered, the Company issued 25,000 shares
      of common stock to the consultant on November 15, 2006. These shares were issued
      pursuant to the 2006 consultant stock plan. The fair market value of the
      Company's common stock as of November 15, 2006 was $1.8 per share.





On
      November 15, 2006, the Company passed a resolution to issue 70,000 shares of
      common stock as salary to a non-executive director. These shares were issued
      pursuant to the 2006 consultant stock plan. The fair market value of the
      Company's common stock as of November 15, 2006 was $1.8 per share.





On
      December 11, 2006, the Company entered into one-year consulting agreement with
      another independent consultant. The service to be rendered includes equity
      research of the Company as mutually agreed upon between the parties. As
      consideration for the services to be rendered, the Company issued 50,000 shares
      of common stock to the consultant on December 11, 2006. These shares were issued
      pursuant to the 2006 consultant stock plan. The fair market value of the
      Company's common stock as of December 11, 2006 was $1.75 per share.





On
      July
      10, 2007, the Company passed a resolution to issue 40,000 shares of common
      stock
      as salary to a non-executive director. These shares were issued pursuant to
      the
      2006 consultant stock plan. On the same date, the Company also passed another
      resolution to issue 38,750 shares of common stock to an independent consultant
      plan pursuant to the 2006 consultant stock plan. The fair market value of the
      Company's common stock as of July 10, 2007 was $1.47 per share and expense
      of
      $115,763 related to these two stock issuances was charged to general and
      administrative expense.





In
      accordance with SFAS 123R 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
      nine months ended September 30, 2007, the Company charged $ 563,619 to expense
      associated with consulting agreements and recorded deferred consulting fees
      of
      $142,258 at September 30, 2007.





The
      deferred consulting fees will be charged to expense as follows:





Years
                ending December 31Amount2007
            
            $
            79,5292008
            
            
            62,729Total
            
            $
            142,258




-24-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


**Note
      14 - TAXES**




The
      Company is registered in the State of Nevada whereas its subsidiary, Skystar
      is
      a tax exempt company incorporated in the Cayman Islands and conducts all of
      its
      business through its PRC VIE, Xian Tianxing.





Xian
      Tianxing is subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income
      Tax Laws, Enterprise Income Taxes is generally imposed at a statutory rate
      of
      33%, which comprises 30% national income tax and 3% local income tax. However,
      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%.





For
      the
      nine months ended September 30, 2007 and 2006, the provision for taxes on
      earnings consisted of:





September
                30, 2007
            
            September
                30, 2006(Unaudited)
            
            (Unaudited)Current
                PRC Income tax expenseEnterprise
                income tax
            
            $
            715,845
            
            $
            391,929





The
      following table reconciles the U.S. statutory rates to the Company's effective
      tax rate as of September 30, 2007:




September
                30, 2007
            
            September
                30, 2006(Unaudited)
            
            (Unaudited)U.S.
                Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
                income not recognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
                income taxes
            
            
            33.0
            
            
            33.0China
                income tax exemption
            
            
            (18.0
            )
            
            (18.0
            )Total
                provision for income taxes
            
            
            15.0
            %
            
            15.0
            %





The
      estimated tax savings due to the reduced tax rate for the nine months ended
      September 30, 2007 and 2006 amounted to $640,326 and $305,728, respectively.
      The
      net effect on earnings per share if the income tax had been applied would
      decrease the basic earnings per share for nine months ended September 30, 2007
      and 2006 from $0.07 to $0.02 and from $0.14 to $0.11 respectively.





The
      estimated tax savings due to the reduced tax rate for the three months ended
      September 30, 2007 and 2006 amounted to $241,644 and $174,314, respectively.
      The
      net effect on earnings per share if the income tax had been applied would
      decrease basic earnings per share for three months ended September 30, 2007
      and
      2006 from $0.08 to $0.06 and from $0.06 to $0.05, respectively.




Skystar
      Bio-Pharmaceutical Company was incorporated in the United States and has
      incurred net operating loss for income tax purpose for 2007. The net operating
      loss carry forwards for United States income tax purposes amounted to $4,879,973
      which may be available to reduce future years’ taxable income. These carry
      forwards will expire, if not utilized, through 2026. Management believes that
      the realization of the benefits arising from this loss appears to be uncertain
      due to Company’s limited operating history and continuing losses for United
      States income tax purposes. Accordingly, the Company has provided a 100%
      valuation allowance atSeptember
      30, 2007. The valuation allowance at September 30, 2007 was $1,659,191.
      Management will review this valuation allowance periodically and will make
      adjustments as warranted.




-25-
 *Table
          of Contents*





SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
      30, 2007


(UNAUDITED)





**Note
      15 - EARNINGS PER SHARE**





Basic
      earnings per share (EPS) for the periods ended September 30, 2007 and 2006
      were
      determined by dividing net income for the years by the weighted average number
      of common shares outstanding. Diluted earnings per share for the periods ended
      September 30, 2006 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 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
      10. 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 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)
      and
      the one for ten (1:10) reverse stock split effective on February 15, 2006 had
      occurred as of the beginning of the earliest period presented.





The
      following demonstrates the calculation for earnings per share:





Three
                months ended
              September
                30,
            
            Nine
                months ended
              September
                30,2007
            
            2006
            
            2007
            
            2006(Unaudited)Net
                income for basic earnings per share
            
            $
            1,071,922
            
            $
            799,657
            
            $
            849,513
            
            $
            1,436,892Add:
                Interest expense for convertible note
            
            
            71,434
            
            
            -
            
            
            182,425
            
            
            -Minus:
                Discount on convertible debenture
            
            
            (4,075,000
            )
            
            -
            
            
            (4,075,000
            )
            
            -Net
                income for diluted earnings per share
            
            $
            (2,931,644
            )
            $
            799,657
            
            $
            (3,043,062
            )
            $
            1,436,892Weighted
                average shares used in basic computation
            
            
            12,865,739
            
            
            12,606,199
            
            
            12,819,290
            
            
            10,617,132Diluted
                effect of convertible debentures (as if)
            
            
            4,075,000
            
            
            -
            
            
            3,221,048
            
            
            -Diluted
                effect of warrants (treasury method)
            
            
            242,132
            
            
            -
            
            
            263,051
            
            
            -Diluted
                effect of warrants to placement agent
            
            
            123,332
            
            
            -
            
            
            105,847
            
            
            -Weighted
                average shares used in diluted computation
            
            
            17,306,203
            
            
            12,606,199
            
            
            16,409,236
            
            
            10,617,132Earnings
                per shareBasic
            
            $
            0.08
            
            $
            0.06
            
            $
            0.07
            
            $
            0.14Diluted
            
            $
            (0.17
            )
            $
            0.06
            
            $
            (0.19
            )
            $
            0.14




-26-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)


**Note
      16 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS**





*Related
      party receivables and payables*




Amounts
      receivable from and payable to related parties are summarized as
      follows:





September
                30, 2007(Unaudited)Amounts
                due from related parties:Mr.
                Wucai Ji (1)
            
            $
            53,360Mr.
                Weibing Lu (1)
            
            
            215,254Mr.
                Wei Wen (1)
            
            
            20,190Fortunate
                Time International - owned by a director (3)
            
            
            1,332,008Total
            
            $
            1,620,812Amount
                due to related parties:Ms.
                Aixia Wang (1)
            
            $
            1,267TianXing
                Digital - owned by a director (2)
            
            
            16,675Shanxi
                Xingji Electronics Co. - owned by a director's wife (2)
            
            
            31,270Total
            
            $
            49,212





(1)
            The
                related individuals Wucai Ji, Weibing Lu, Wei Wen, and Aixia Wang
                are all
                directors of the Company. The amounts due from and to these individuals
                were cash advances to facilitate Company operations or expenses paid
                by
                these individuals on behalf of the Company. These balances are
                non-interest bearing, unsecured, due on demand, and the ultimate
                manner of
                settlement is in cash.





(2)
            Shanxi
                Xinji Electronics Company is owned by the Company’s director Weibing Lu’s
                wife and Tianxing Digital is a company owned by the Company’s director
                Weibing Lu. The amount due to Shanxi Xinji Electronics Co. and Tianxing
                Digital are short term cash transfers for business operations,
                non-interest bearing, unsecured, and payable upon demand. The ultimate
                manner of settlement is in cash.




-27-
 *Table
          of Contents*


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)




(3)
            Fortunate
                Time International Company is Hong Kong company owned 100% by the
                Company’s non-executive director Russell Scott Cramer. The amount due from
                Fortunate Time was a short term cash transfer that the Company planned
                to
                transfer to its Chinese VIE Tianxing through Fortunate Time’s 100% Chinese
                subsidiary Sida Biotechnological Company Limited (“Sida”). Chinese
                regulations make international cash transfers difficult, therefore,
                Sida
                transferred funds to Tianxing. Since not all funds transferred from
                the
                Cayman to Fortunate Time were transferred to Tianxing, the remaining
                balance is recorded as a due from related party. The amount due from
                Fortunate Time is non interest bearing, unsecured, and payable upon
                demand. The Company acquired 100% of the ownership in Fortunate Time
                in
                October 2007 to ensure its interest in the funds transferred to Fortunate
                Time.





**Note
      17 - COMMITMENTS AND CONTINGENCIES**





(a)  *Lease
      commitments*





The
      Company recognizes lease expense on a straight line basis over the term of
      the
      lease in accordance to SFAS. 13, “Accounting for leases.” The Company 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
      $11,062, 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:





PeriodThree
                months ended 2007
            
            $
            2,995Year
                ended 2008
            
            
            11,216Year
                ended 2009
            
            
            12,247Year
                ended 2010
            
            
            12,247Year
                ended 2011
            
            
            12,247Thereafter
            
            
            36,126$
            87,078





Rent
      expense for the nine months ended September 30, 2007 and 2006 amounted to $8,525
      and $8,464, and for the three months ended September 30, 2007 and 2006 amounted
      to $2,995 and $2,975, respectively.





(b)  *Legal
      proceedings*




In
      March
      2006, 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.




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SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
      30, 2007


(UNAUDITED)




On
          or
          around May 2007, Andrew Chien (“Plaintiff”) filed suit against the Company, R.
          Scott Cramer, Steve Lowe, David Wassung, and Weibing Lu (“Defendants”) in United
          States District Court for the District of Connecticut, alleging causes
          of action
          for violation of Sections 10(b) and 20(a) of the Securities Exchange Act
          of
          1934. Service has been consented to on behalf of all Defendants except
          Weibing Lu, a resident of China.  The Defendants deny all claims and
          intend to vigorously defend against them.
  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.


*(c)*
            *Ownership
                of leasehold property*





In
      2005,
      one of the shareholders contributed a leasehold office building as additional
      capital of Xian Tianxing. However, the title of the leasehold property has
      not
      passed to the Company. Management believes, there should be no legal barriers
      for the shareholder to transfer the ownership to the Company.





However,
      in the event that the Company fails to obtain the ownership certificate for
      the
      leasehold building, there is the risk that the buildings need to be vacated
      as
      illegitimate ownership. Management believes that this possibility while present
      is very remote. As a result, no provision has been made in the financial
      statements for this potential occurrence.





**Note
      18 - SUBSEQUENT EVENTS**





On
      October 16, 2007, the board of directors of the Company approved the acquisition
      of all of the issued and outstanding shares of Fortunate Time International
      Limited, a Hong Kong company owned 100% by the Company’s non-executive director
      Russell Scott Cramer, in the consideration of $129 (HKD1,000). This company
      has
      no operations and is not material to the Company .




-29-
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          of Contents*




**ITEM
      2.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**


*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
        bounds
        of our knowledge of our business, our actual results could differ materially
        from those discussed in these statements. Factors that could contribute to
        such
        differences include, but are not limited to, those discussed in the “Risk
        Factors” section of this Quarterly Report on Form 10-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 U.S. dollars and in accordance with
        accounting principles generally accepted in the United States. See “Exchange
        Rates” below for information concerning the exchanges rates at which Renminbi
        were translated into U.S. dollars at various pertinent dates and for pertinent
        periods.*
 
 **Overview**
 
 Skystar
        Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
        Cyber Group Network Corporation (“Cyber”), was incorporated in Nevada under the
        name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
        2000, we changed our name to “The Cyber Group Network Corporation”. On February
        15, 2006, we further changed our name to “Skystar Bio-Pharmaceutical Company” to
        reflect our current business operations.
 
 On
        November 7, 2005, we 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 our 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
        include
        the historical assets and liabilities of Skystar Cayman in the capital structure
        of Cyber. Please see Note 1 to our unaudited consolidated financial statements
        included in this report for further details of this stock exchange transaction.
 
 On
        August
        21, 2007, Xian Tianxing invested $66,700 (RMB 500,000) to establish Shanghai
        Siqiang Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang
        was established in Putuo District, City of Shanghai, People’s Republic of China
        (“PRC”) with a registered capital of $66,700 (RMB 500,000), and Xian Tianxing is
        the 100% shareholder of Shanghai Siqiang. Shanghai Siqiang was established
        as a
        research and development center for Xian Tianxing and engages in research,
        development, production, and sales of veterinary products, feed additives,
        and
        veterinary disease diagnosis equipments.
 
 Having
        no
        substantive operation of its own, Skystar Cayman, through its VIE’s, Xian
        Tianxing and Shanghai Siqiang, 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”).
 
 **Recent
        Developments**
 
 On
        February 27, 2007, we entered into a Securities Purchase Agreement (the
“Agreement”) with several institutional and accredited investors (collectively
        the “Purchasers”) pursuant to which we sold to the Purchasers $4.075 million in
        aggregate principal amount of 8% convertible debentures due February 28,
        2009
        (the “Debentures”), and warrants to purchase 4,075,000 shares of our common
        stock (the “Warrants”), in a private placement pursuant to Regulation D under
        the Securities Act of 1993 (the “Transaction”).
  -30-
 *Table
            of Contents*
  Pursuant
        to the Agreement, starting in June 2007, we will pay, on a monthly basis,
        4.77%
        of the principal of the Debenture (“Principal Repayment Amount”), and all
        accrued interest. At our option, payment will be in cash or shares of common
        stock. If we pay in cash, we must also pay a 15% premium to the Principal
        Repayment Amount during the first 12 months of the Debenture, and a 25% premium
        thereafter. We may pay this mandatory prepayment amount with common stock
        if
        certain equity conditions are met, including, among other things, the
        effectiveness of a registration statement. If we elect to pay interest and
        principal with common stock, it will be based on the lower of (i) a 30% discount
        to the volume weighted average price for the immediately preceding five
        consecutive trading days and (ii) the fixed conversion price in effect on
        such
        principal payment date.
 
 In
        connection with the issuance of the Debentures, we entered into a Registration
        Rights Agreement, in which a registration statement registering the resale
        of
        the common stock into which the Debentures are convertible and for which
        the
        Warrants are exercisable, as well as certain other shares of our common stock
        (“Registration Statement”), was required to be filed with the Securities and
        Exchange Commission (“SEC”) no later than April 13, 2007 and be declared
        effective by the SEC no later than May 28, 2007 if there is no SEC review
        of the
        Registration Statement, and June 27, 2007 if there is an SEC review. Failure
        to
        meet these deadlines was to result in liquidated damages of 2% of the aggregate
        purchase price of the Debentures and Warrants per month, pro rated for partial
        periods. We filed the Registration Statement on June 1, 2007, but the
        Registration Statement did not become effective until September 25, 2007.
        The
        accrual amount of liquidated damages was $345,017 at September 30,
        2007.
 
 **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, vary from the related actual results. We consider the following
        to
        be the most critical accounting policies:
  §
              Revenue
                  recognition: Our revenues 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.
 
 (a)
              *Credit
                  sales:*Revenue
                  is recognized when the products have been delivered to the
                  customers.
  (b)
              *Full
                  payment before delivering:*Revenue
                  is recognized when the products have been delivered to
                  customers.
  §
              Accounts
                  receivable: We perform ongoing credit evaluations of our customers
                  and
                  adjust credit limits based upon payment history and the customers’ current
                  credit worthiness, as determined by a review of their current credit
                  information. We continuously monitor collections and payments from
                  our
                  customers and maintain a provision for estimated credit losses
                  based upon
                  historical experience and any specific customer collection issues
                  that
                  have been identified. While such credit losses have historically
                  been
                  within our expectations and the provisions established, we cannot
                  guarantee that we will continue to experience the same credit loss
                  rates
                  that have been experienced in the past.§
              The
                  Debentures and the Warrants: We have adopted APB No. 14, Accounting
                  for
                  Convertible Debt and Debt Issued with Stock Purchase Warrants,
                  FAS 133,
                  EITF-98-5, and EITF-00-27, for valuation and accounting treatment
                  of the
                  Debentures and Warrants.§
              Liquidated
                  damages: We have adopted FAS 5 and EITF 00-19-2 in connection with
                  the
                  liquidated damages we are accruing pursuant to the terms of the
                  Registration Rights Agreement.
 
 **Results
        of Operations - Three month period ended September 30, 2007 as compared to
        three
        month period ended September 30, 2006**
 
 REVENUES.
        All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
        products in
  -31-
 *Table
            of Contents*
  the
        PRC.
        During the three months ended September
        30 ,
        2007,
        we had revenues of $5,448,561
        as compared to revenues of $3,558,344 during the three months ended September
        30 ,
        2006,
        an increase of approximately 53.12%. Our
        customers tend to use more and more products that are used in livestock and
        poultry breeding for the promotion of growth and the prevention of diseases.
        The
        demand for our products for livestock and poultry feeding and immunization
        has
        soared in the recent quarter. In particular, among other products, our sales
        of
“multi-enzymeamine” series, which are used in livestock and poultry breeding for
        the promotion of growth and prevention of disease, increased by 204% to $218,100
        for the three months ended September
        30 ,
        2007,
        from $71,659 for the three months ended September
        30 ,
        2006.
        Meanwhile, our marketing strategy is to continue to develop and launch more
        new
        products into the market. During the third quarter, more than 20 new products
        were put into the market. In particular, among these new products, new
        veterinary medicine products account for revenue of $1,463,128 to our Company.
        We expect that our sales will continue to grow as we continue to strengthen
        our
        sales force and bring more new products to the market.
 
 GROSS
        PROFIT. Cost of goods sold, which consists of raw materials, direct labor,
        and
        manufacturing overhead ,
        was
        $2,268,344 for the three months ended September
        30 ,
        2007 as
        compared to $1,928,606 for the three months ended September
        30 ,
        2006.
        Gross profit was $3,180,217 for the three months ended September
        30 ,
        2007 as
        compared to $1,629,738 for the three months ended September
        30 ,
        2006,
        representing gross profit margins of approximately 58.37% and 45.80%,
        respectively. The increase in our gross profit margins is attributable to
        (a)
        the introduction of new high demand products that have higher gross profit
        margins, and (b) the improvement in manufacturing techniques and the adaption
        of
        new technologies that cause equipment and machinery to operate more efficiently.
        These improvements also allowed us to use raw materials more efficiently
        thereby
        reducing waste, and we subsequently experienced a significant decrease in
        raw
        material costs.
 
 SELLING
        EXPENSES. Selling expenses, which consist of commissions, advertising and
        promotion expenses, freight charges, and salaries totaled $176,438 for the
        three
        months ended September
        30 ,
        2007 as
        compared to $125,793 for the three months ended September
        30 ,
        2006,
        an increase of approximately 40.26%. This increase is primarily attributable
        to
        our expanding sales team and activities, which is, in turn,
        reflected in our
        increased sales. We believe that our selling expenses will continue to increase
        as our sales continue to grow.
 
 GENERAL
        AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
        $286,571 for the three months ended September
        30 ,
        2007,
        as compared to $167,306 for the
        three months ended September
        30 ,
        2006,
        an increase of approximately 71.29%. This increase is primarily attributable
        to
        the additional legal, accounting, and other professional services that were
        needed to stay compliant as a U.S. public company. Our subsidiary in Xi’an,
        China had no significant increase in administrative expenses due to good
        management controls.
 
 RESEARCH
        AND DEVELOPMENT COSTS. Research and development costs, which consist of
        salaries, professional fees, and technical support fees, totaled $117,605
        for
        the three months ended September
        30 ,
        2007,
        as compared to $19,372 for the three months ended September
        30 ,
        2006,
        an increase of approximately 507.08%. This significant increase is primarily
        attributable to our agreements with certain experts who provide professional
        technical services and support for research and development of our existing
        and
        new products.
 
 AMORTIZATION
        OF DEFERRED COMPENSATION. Amortization of deferred compensation expense totaled
        $101,345 for the three months ended September
        30 ,
        2007,
        as compared to $316,077 for the
        three months ended September
        30 ,
        2006.
        This expense was incurred as a result of our Company’s 2006 Consultant Stock
        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
        growth and success of the future growth of our Company.
 
 INCOME
        FROM OPERATIONS. We recorded income of $2,498,258 from operations for the
        three
        months ended September
        30 ,
        2007 as
        compared to income of $1,001,190 for the same period in 2006, representing
        an
        increase of approximately 149.53%. The increase is mainly due to an increase
        in
        sales of our products, including our products with higher gross profit margins.
 
 NET
        INCOME. We had net income of $1,071,922 for the three months ended September
        30,
        2007 as compared to net income of $799,657 for the three months ended September
        30, 2006, an increase of approximately 34.05%. The increase in net income
        is
        largely attributable to (a) the decrease in amortization of deferred
        compensation, and (b) an increase in sales. For the three months ended September
        30, 2007, the total interest
  -32-
 *Table
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  expense
        was $827,639. Our management believes that net income will increase as our
        sales
        increase in the coming quarters.
 
 **Results
        of Operations - Nine month period ended September 30, 2007 as compared to
        nine
        month period ended Septembe** r **30, 2006**
 
 REVENUES.
        All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
        products in the PRC. During the nine months ended September
        30 ,
        2007,
        we had revenues of $10,190,830 as compared to revenues of $7,315,779 during
        the
        nine months ended September
        30 ,
        2006,
        an increase of approximately 39.30%. This
        increase is mainly attributable to the increase in the number of promotional
        activities we carried out during the first nine months of 2007. Our
        customers tend to use more and more products that are used in livestock and
        poultry breeding for the promotion of growth and the prevention of diseases.
        The
        demand for our products for livestock and poultry feeding and immunization
        has
        soared in the recent quarter. In particular, sales of our “multi-enzymeamine”
series, which are used in livestock and poultry breeding for the promotion
        of
        growth and prevention of disease, increased by 271.44% to $584,241 for the
        nine
        months ended September
        30 ,
        2007
        from $157,292 for the nine months ended September
        30 ,
        2006.
        Meanwhile, our marketing strategy is to continue to develop and launch more
        new
        products into the market. During the second and third quarter of 2007, 38
        new
        products entered the market, including veterinary medicines and feed additives.
        All of these new products account for revenue of $4,954,468 to our company.
        We
        believe that our sales will continue to grow because we are strengthening
        our
        sales force and plan on launching more new products.
 
 GROSS
        PROFIT. Cost of goods sold, which consists of raw materials, direct labor,
        and
        manufacturing overhead, was $4,376,670 for the nine months ended September
        30 ,
        2007 as
        compared to $3,955,340 for the nine months ended September
        30 ,
        2006.
        Gross profit was $5,814,160 for the nine months ended September
        30 ,
        2007 as
        compared to $3,360,439 for the nine months ended September
        30 ,
        2006,
        representing gross profit margins of approximately 57.05% and 45.93%,
        respectively. The increase in our gross profit margins is attributable to
        (a)
        the introduction of new high demand products that have higher gross profit
        margins, and (b) the improvement in manufacturing techniques and the adoption
        of
        new technologies that cause equipment and machinery to operate more efficiently.
        These improvements also allowed us to use raw materials more efficiently
        thereby
        reducing waste. and we subsequently experienced a significant decrease in
        raw
        material costs.
 
 SELLING
        EXPENSES. Selling expenses, which consist of commission, advertising and
        promotion expenses, freight charges, and salaries totaled $434,005 for the
        nine
        months ended September
        30 ,
        2007 as
        compared to $269,275 for the nine months ended September
        30 ,
        2006,
        an increase of approximately 61.18%. This increase is primarily attributable
        to
        our expanding sales team and activities, which is, in turn, reflected in
        our
        increased sales. We believe that our selling expenses will continue to increase
        as our sales continue to grow.
  GENERAL
        AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
        $1,008,193 for the nine months ended September 30, 2007, as compared to $478,378
        for the nine months ended September 30, 2006, an increase of approximately
        110.75%. This increase is primarily attributable to legal and accounting
        fees
        incurred as a U.S. public company and other consulting fees relating to
        financing activities and sales and marketing activities to promote the public
        recognition of our products. Our subsidiary in Xi’an, China had no significant
        increase in administrative expenses due to good management
        controls.
 
 RESEARCH
        AND DEVELOPMENT COSTS. Research and development costs, which consist of
        salaries, professional fees, and technical support fees, totaled $224,486
        for
        the nine months ended September
        30 ,
        2007,
        as compared to $124,458 for the nine months ended September
        30 ,
        2006,
        an increase of approximately 80.37%. This increase is primarily attributable
        to
        our agreements with certain experts who provide professional technical services
        and support for research and development of our existing and new
        products.
 
 AMORTIZATION
        OF DEFERRED COMPENSATION. Amortization of deferred compensation expense totaled
        $563,619 for the nine months ended September
        30 ,
        2007,
        as compared to $657,222 for the
        nine months ended September
        30 ,
        2006.
        This expense was incurred as a result of our Company’s 2006 Consultant Stock
        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
        growth and success of the future growth of our Company.
  -33-
 *Table
            of Contents*
  INCOME
        FROM OPERATIONS. We recorded income of $3,583,857 from operations for the
        nine
        months ended September
        30 ,
        2007 as
        compared to income of $1,831,106 for the same period in 2006, representing
        an
        increase of approximately 95.72%. The increase is mainly due to increase
        sales
        with higher gross profit margin.
 
 NET
        INCOME. We had net income of $849,513 for the nine months ended September
        30,
        2007 as compared to net income of $1,436,892 for the nine months ended September
        30, 2006, a decrease of approximately 40.88%. The decrease in net income
        is
        largely attributable to (a) the amortization of the expenses relating to
        the
        convertible debentures, warrants, interest, and financing costs pursuant
        to the
        Securities Purchase Agreement, and (b) additional professional services required
        as a U.S. public company. The total interest expense was $1,694,154 for the
        nine
        months ended September 30, 2007. Our management believes that net income
        will
        increase as our sales increase in the coming quarters.
 
 **Liquidity**
 
 For
        the
        nine months ended September 30, 2007, cash used in operating activities was
        $1,894,357 as compared to $264,703 cash generated from operating activities
        for
        the nine months ended September, 2006. The decrease is primarily attributable
        to
        (a) a bulk purchase of raw materials, which was used for the production in
        the
        second and third quarter, (b) an increased prepayment to suppliers to ensure
        low
        purchase price of certain raw materials, (c) the increase in other receivables
        from related parties incurred as a result of our international fund transfer
        activities further described in detail in Note 16 of the accompanying footnotes
        to the consolidated financial statements.
 
 We
        used
        $926,660 for the nine months ended September 30, 2007, as compared to
        $1,162,813, in investing activities for the nine months ended September 30,
        2006. The expenditure in investing activities for 2007 consisted of, among
        other
        things, payment of $373,629 for the purchase of equipment as the construction
        of
        one of our new plant had been in full swing and was completed at the end
        of
        second quarter of 2007. We also extended interest bearing loans in the aggregate
        amount of $553,031 to unrelated third parties to secure good business
        relationships.
 
 From
        financing activities, we generated $2,889,219 for the nine months ended
        September 30, 2007 as compared to $890,737 generated from the nine months
        ended
        September 30, 2006. The increase in cash generated from financing activities
        is
        mainly attributable to the issuance of convertible debentures and warrants
        from the Securities Purchase Agreement further discussed in detail in Note
        11 of
        the accompanying footnotes to the consolidated financial statements.
 
 As
        of
        September 30, 2007, we had cash of $262,212. Our total current assets were
        $7,685,398, and our total current liabilities were $2,022,737, which resulted
        in
        a net working capital of $5,662,661. This indicates that we have the ability
        to
        meet cash requirements for our operations in order to continue as a going
        concern.
 
 Management
        believes that our ability to continue as a going concern is dependent upon
        our
        ability to maintain profitable operations and to obtain additional financing
        or
        refinancing as may be required. Management also believes that we will generate
        sufficient cash flows to meet our obligations on a timely basis in the
        foreseeable future.
 
 **Capital
        Resources**
 
 We
        received gross proceeds in the amount of $4.075 million from the above mentioned
        Securities Purchase Agreement on March 9, 2007. Of the capital raised, we
        estimate that $2,000,000 will be spent on the construction of a new plant,
        $1,000,000 will be spent on research and development of new products, and
        any
        remaining balance will be used to expand our sales network and as a reserve
        for
        our working capital needs.
 
 One
        of
        our manufacturing plants obtained a Good Manufacturing Practice (“GMP”)
        certificate and was fully operational at the end of second quarter of 2007.
        We
        have obtained product serial permit numbers for 60 products, which resulted
        in
        higher sales revenue and profit margins for us in the third quarter of
        2007.
  -34-
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  **Plan
        of Operations**
 
 Over
        the
        next 12 months, we plan to continue to market and sell our current products
        and
        to develop new products.
 
 In
        2003,
        we received approval from the State Council of China to expand our production
        facilities and construct a new GMP standard plant. The entire expansion project
        will cost approximately RMB69,410,000 ($8,500,000). Our 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 we completed
        one manufacturing plant during the second quarter of 2007, which began
        operations in full capacity in May 2007. The remaining plant in the construction
        project is expected to be completed in early 2008. We anticipate that the
        new
        factory will generate sufficient cash flows; thus, management has concluded
        that
        there is no impairment loss on the construction in progress.
 
 **Product
        Research and Development**
 
 We
        believe that Xian Tianxing will continue developing new products including
        bio-pharmaceutical products for animal immunization, non-pathogenic
        micro-organisms for the cure and prevention of livestock disease, complex
        enzyme
        preparations as animal feed additives, and other veterinary medicine products
        within the next 12 months.
  **Off-Balance
        Sheet Arrangements**
 
 As
        of the
        date of this report, we do not have any outstanding financial guarantees
        or commitments to guarantee the payment obligations of any third parties.
        We have not entered into any derivative contracts that are indexed to our
        shares
        and classified as shareholders’ 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, we translate
        Xian
        Tianxing’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 Xian Tianxing’s financial statements are
        recorded as accumulated other comprehensive income.
 
 Until
        July 21, 2005, the RMB had been pegged to the U.S. dollar 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 the U.S. dollar 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 the U.S. dollar traded against the 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 trading against the RMB on
        the
        following working day. The daily trading price of the U.S. dollar against
        the
        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 require submitting a payment application form together with
        invoices, shipping documents, and signed contracts.
 
 The
        exchange rates used to translate amounts in RMB into U.S. dollars for the
        purposes of preparing the consolidated financial statements or otherwise
        stated
        in this management discussion and analysis were as follows:
  -35-
 *Table
            of Contents*
  ·
              Assets
                  and liabilities at September 30, 2007 were translated at a rate
                  of RMB1 to
                  USD0.1334.
 
 ·
              Statements
                  of operations and cash flows for the nine months ended September
                  30, 2007
                  were translated at a rate of RMB1 to USD0.13064 and at a rate of
                  RMB1 to
                  USD0.12498 for the nine months ended September 30,
                  2006.
 
 No
        representation is made that RMB amounts have been, or would be, converted
        into
        U.S. dollars 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**
  ***Our
        Limited Operating History Makes it Difficult to Evaluate our Future Prospects
        and Results of Operations***
  We
        have a
        limited operating history. Xian Tianxing commenced operations in 1997 and
        first
        achieved profitability in the quarter ended 1999. Accordingly, you should
        consider our future prospects in light of the risks and uncertainties
        experienced by early stage companies in evolving industries such as the
        bio-pharmaceutical industry in China. Some of these risks and uncertainties
        relate to our ability to:
  §
              maintain
                  our position as one of the market leaders in
                  China;
 
 §
              offer
                  new and innovative products to attract and retain a larger customer
                  base;
  §
              attract
                  additional customers and increase spending per
                  customer;
  §
              increase
                  awareness of our brand and continue to develop user and customer
                  loyalty;
 
 §
              respond
                  to competitive market conditions;
  §
              respond
                  to changes in our regulatory
                  environment;
 
 §
              manage
                  risks associated with intellectual property
                  rights;
  §
              maintain
                  effective control of our costs and
                  expenses;
 
 §
              raise
                  sufficient capital to sustain and expand our
                  business;
  §
              attract,
                  retain, and motivate qualified personnel;
                  and
  §
              upgrade
                  our technology to support additional research and development of
                  new
                  products.
  If
        we are
        unsuccessful in addressing any of these risks and uncertainties, our business
        may be materially and adversely affected.
 
 ***We
        May Need to 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. Despite our recent financing, we may need
        additional funds to complete our new production facilities; pursue further
        research and development; obtain regulatory approvals; file, prosecute, defend,
        and enforce our intellectual property rights; and market our
        products. Should such need arise, we will seek additional funds through
        public or private equity or debt
  -36-
 *Table
            of Contents*
  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 could
        have a material adverse effect on our business, financial condition, and
        results
        of operations.
  ***Our
        Success Depends On Collaborative Partners, Licensees and Other Third Parties
        Over Whom We Have Limited Control***
  Due
        to
        the complexity of the process of developing bio-pharmaceuticals, our core
        business depends on arrangements with bio-pharmaceutical institutes, corporate
        and academic collaborators, licensors, licensees, and others for the research,
        development, clinical testing, technology rights, manufacturing, marketing,
        and
        commercialization of our products. We have various research collaborations
        and
        outsource other business functions. Our license agreements could obligate
        us to
        diligently bring potential products to market, make milestone payments and
        royalties that, in some instances, could be substantial, and incur the costs
        of
        filing and prosecuting patent applications. There are no assurances that we
        will be able to establish or maintain collaborations that are important to
        our
        business on favorable terms, or at all.
  A
        number
        of risks arise from our dependence on collaborative agreements with third
        parties. Product development and commercialization efforts could be
        adversely affected if any collaborative partner:
  §
              terminates
                  or suspends its agreement with us;
  §
              causes
                  delays;
  §
              fails
                  to timely develop or manufacture in adequate quantities a substance
                  needed
                  in order to conduct clinical
                  trials;
  §
              fails
                  to adequately perform clinical
                  trials;
  §
              determines
                  not to develop, manufacture or commercialize a product to which
                  it has
                  rights; or
  §
              otherwise
                  fails to meet its contractual
                  obligations.
  Our
        collaborative partners could pursue other technologies or develop alternative
        products that could compete with the products we are developing.
  ***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.
  -37-
 *Table
            of Contents*
   Other
        companies may independently develop similar products and design around any
        patented products we develop. We cannot assure you that:
  §
              any
                  of our patent applications will result in the issuance of
                  patents;
  §
              we
                  will develop additional patentable
                  products;
  §
              the
                  patents we have been issued will provide us with any competitive
                  advantages;
  §
              the
                  patents of others will not impede our ability to do business;
                  or
  §
              third
                  parties will not be able to circumvent our
                  patents.
  A
        number
        of pharmaceutical, biotechnology, research and academic companies, and
        institutions have developed technologies, filed patent applications, or received
        patents on technologies that may relate to our business. If these technologies,
        applications, or patents conflict with ours, the scope of our current or
        future
        patents could be limited or our patent applications could be denied. Our
        business may be adversely affected if competitors independently develop
        competing technologies, especially if we do not obtain, or obtain only narrow,
        patent protection. If patents that cover our activities are issued to other
        companies, we may not be able to obtain licenses at a reasonable cost, or
        at
        all, develop our technology, or introduce, manufacture, or sell the products
        we
        have planned.
  Patent
        litigation is becoming widespread in the biotechnology industry. Such litigation
        may affect our efforts to form collaborations, to conduct research or
        development, to conduct clinical testing, or to manufacture or market any
        products under development. There are no assurances that our patents would
        be held valid or enforceable by a court or that a competitor’s technology or
        product would be found to infringe our patents in the event of patent
        litigation. Our business could be materially affected by an adverse outcome
        to
        such litigation. Similarly, we may need to participate in interference
        proceedings declared by the U.S. Patent and Trademark Office or equivalent
        international authorities to determine priority of invention. We could
        incur substantial costs and devote significant management resources to defend
        our patent position or to seek a declaration that another company’s patents are
        invalid.
  Much
        of
        our know-how and technology may not be patentable, though it may constitute
        trade secrets. There are no assurances that we will be able to meaningfully
        protect our trade secrets. We cannot assure you that any of our existing
        confidentiality agreements with employees, consultants, advisors, or
        collaborators will provide meaningful protection for our trade secrets,
        know-how, or other proprietary information in the event of any unauthorized
        use
        or disclosure. Collaborators, advisors, or consultants may dispute the
        ownership of proprietary rights to our technology, for example by asserting that
        they developed the technology independently.
  ***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
        May 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
  -38-
 *Table
            of Contents*
  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
        timeliness of our product releases. Such delays could reduce investor
        confidence in our ability to develop products, which may cause our share
        price
        to decrease.
  ***We
        May Be Unable to Obtain the Regulatory Approvals or Clearances 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 product. Addressing these
        criteria requires considerable data collection, verification, and
        analysis. We may spend time and money preparing regulatory submissions or
        applications without assurances as to whether they will be approved on a
        timely
        basis or at all.
  Our
        product candidates, some of which are currently in the early stages of
        development, will require significant additional development and pre-clinical
        and clinical testing prior to their commercialization. These steps and the
        process of obtaining required approvals and clearances can be costly and
        time-consuming. If our potential products are not successfully developed,
        cannot be proven to be safe and effective through clinical trials, or do
        not
        receive applicable regulatory approvals and clearances, or if there are delays
        in the process:
  §
              the
                  commercialization of our products could be adversely
                  affected;
 
 §
              any
                  competitive advantages of the products could be diminished;
                  and
 
 §
              revenues
                  or collaborative milestones from the products could be reduced
                  or
                  delayed.
  Governmental
        and regulatory authorities may approve a product candidate for fewer indications
        or narrower circumstances than requested or may condition approval on the
        performance of post-marketing studies for a product candidate. Even if a
        product
        receives regulatory approval and clearance, it may later exhibit adverse
        side
        effects that limit or prevent its widespread use or that force us to withdraw
        the product from the market.
  Any
        marketed product and its manufacturer 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
  -39-
 *Table
            of Contents*
  financial,
        scientific, marketing, and human resources than we do. Technological
        competition from biopharmaceutical companies and biotechnology companies
        is
        intense and is expected to increase. Other companies have developed technologies
        that could be the basis for competitive products. Some of these products
        have an
        entirely different approach or means of accomplishing the desired curative
        effect than products we are developing. Alternative products may be
        developed that are more effective, work faster, and are less costly than
        our
        products. Competitors may succeed in developing products earlier than us,
        obtaining approvals and clearances for such products more rapidly than us,
        or
        developing products that are more effective than ours.  In addition, other
        forms of treatment may be competitive with our products. Over time, our
        technology or products may become obsolete or uncompetitive.
 
 ***Our
        Products May Not Gain Market Acceptance***
  Our
        products may not gain market acceptance in the agricultural community. The
        degree of market acceptance of any product depends on a number of factors,
        including establishment and demonstration of clinical efficacy and safety,
        cost-effectiveness, clinical advantages over alternative products, and marketing
        and distribution support for the products. Limited information regarding
        these factors is available in connection with our products or products that
        may
        compete with ours.
  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 that 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 insuring us 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
  -40-
 *Table
            of Contents*
  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.
  **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.
   -41-
 *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 will 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 be assured that 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.
  **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
  -42-
 *Table
            of Contents*
  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.
  ***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’s
        attention.
  ***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.
  **Other
        Risks Associated with the Company**
 ***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, 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. Management may conclude that our internal controls
          over financial reporting are ineffective. Moreover, even if management
          concludes
          that our internal controls over financial reporting are effective, our
          independent registered public accounting firm may still decline to attest
          to
          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.
 
 -43-
 *Table
              of Contents*
  **ITEM
        3.****CONTROLS
        AND PROCEDURES**
 
 **Disclosure
        Controls and Procedures**
 
 Our
        chief
        executive officer (principal executive officer) and chief financial officer
        (principal financial officer) have assessed the effectiveness of the design
        and
        operation of our disclosure controls and procedures pursuant to Securities
        Exchange Act of 1934 Rule 13a-15(e) as of the end of the period covered by
        this
        report. Based on such assessment, they have concluded that our internal control
        over financial reporting was effective as of September
        30 ,
        2007.
 
 **Changes
        in internal control over financial reporting.**
 
 There
        were no changes in our internal control over financial reporting (as defined
        in
        Rule 13a-15(f) of the Securities Exchange Act of 1934) during the fiscal
        quarter
        ended September 30, 2007 that have materially affected, or are reasonably
        likely
        to materially affect, our internal control over financial reporting.
   -44-
 *Table
            of Contents*
  **PART
        II. OTHER INFORMATION**
 **ITEM
          1. LEGAL PROCEEDINGS**
 
 Gregory
          Evans v. The Cyber Group Network Corp., et al. (District Court, Clark County, State of Nevada, Case No. A513378).  On or
          about November 18, 2005, 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 County, Nevada, alleging causes of action
          for
“Refusing to Call Vote of Shareholders” and “Conversion.” We have not been
          served with a summons or complaint in the matter. We deny the Plaintiff’s claims
          and intend to vigorously defend against them if such complaint is properly
          served on us.
 
 Andrew
          Chien v. Skystar Bio-Pharmaceutical Company, et. al. (US.
          District Court, District of Connecticut, Case No. 3:2007cv00781). On or
          around May 2007, Andrew Chien (“Plaintiff”) filed suit against the Company, R.
          Scott Cramer, Steve Lowe, David Wassung, and Weibing Lu (“Defendants”) in United
          States District Court for the District of Connecticut, alleging causes
          of action
          for violation of Sections 10(b) and 20(a) of the Securities Exchange Act
          of
          1934. Service has been consented to on behalf of all Defendants except
          Weibing Lu, a resident of China.  The Defendants deny all claims and
          intend to vigorously defend against them.
 
 Other
          than the legal proceeding described above, we are 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.
  **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
          SECURITYHOLDERS**
  None.
  -45-
  **ITEM
        5. OTHER INFORMATION**
 
 None.
  **ITEM
        6. EXHIBITS**
 
 **Exhibit
                  No.**
              
              **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 (5)3.3
              
              Company
                  Bylaws (6)10.1
              
              Form
                  of Securities Purchase Agreement, dated as of February 26, 2007
                  by and
                  among the Company and the Purchasers (7)10.2
              
              Form
                  of Class A Convertible Debenture (7)10.3
              
              Form
                  of Class B Convertible Debenture (7)10.4
              
              Form
                  of Class A Warrant (7)10.5
              
              Form
                  of Class B Warrant (7)10.6
              
              Form
                  of Registration Rights Agreement, dated as of February 26, 2007
                  by and
                  among the Company and the Purchasers (7)10.7
              
              Form
                  of Company Principal Lockup Agreement (7)31.1
              
              Certifications
                  pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                  Act
                  of 1934, as amended, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002 (8)31.2
              
              Certifications
                  pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                  Act
                  of 1934, as amended, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002 (8)32.1
              
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002 (8)32.2
              
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002 (8)
 
 (1)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  June 1, 2000.
 (2)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K/A filed on
                  January 12, 2001.
 (3)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  September 26, 2005.
 (4)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  November 14, 2005.
 (5)
              Incorporated
                  by reference from the Registrant’s Annual Report on Form 10-KSB filed on
                  April 17, 2006.
 (6)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K on December
                  21, 2005.
 (7)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K filed on
                  March 5, 2007.
 (8)
              Filed
                  herewith.
  -46-
 *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)November
                  14, 2007By:
              /s/
                  Weibing LuWeibing
                  Lu
                Chief
                  Executive Officer
                (Principal
                  Executive Officer)November
                  14, 2007By:
              /s/
                  Erna GaoErna
                  Gao
                Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)
 
  -47-