**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**




þ
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the quarterly period ended**June
                30, 2008**




o
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934





For
                the transition period fromto.





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)**Room
                10601, Jiezuo Plaza, No.4, Fenghui Road South,**
              **Gaoxin
                District, Xian Province, P.R. China**
              (Address
                of principal executive offices and zip code)
              **(8629)
                8819-3188**
              (Registrant’s
                telephone number, including area
                code)




Securities
      registered pursuant to Section 12(b) of the Act: **None**




Securities
      registered pursuant to Section 12(g) of the Act: **Common
      Stock, par value $0.001 per share**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
oNo
þ





Indicate
      by check mark whether the registrant is required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
þNo
o





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
þNo
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained to the best
      of
      the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





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




Large
                Accelerated Filer o
            
            Accelerated
                Filer oNon-accelerated
                filer o
            
            Smaller
                reporting company þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
oNo
þ





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





As
      of
      July 31, 2008, the Registrant had 18,639,103 shares of
      Common Stock outstanding.








**SKYSTAR
      BIO-PHARMACEUTICAL COMPANY**


**FORM 10-Q**




**INDEX**




Page
              Number**SPECIAL
                NOTE REGARDING FORWARD-LOOKING STATEMENTS**
            3**PART
                I. FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements (unaudited)
            4Consolidated
                Balance Sheet as of June 30, 2008 and December 31, 2007
            4Consolidated
                Statements of Operations and Other Comprehensive Income (Loss) for
                the
                Three Months and Six Months Ended June 30, 2008 and 2007
            5Consolidated
                Statements of Shareholders’ Equity
            6Consolidated
                Statements of Cash Flows for the Six Months Ended June 30, 2008 and
                2007
            7Notes
                to the Consolidated Financial Statements as of June 30,
                2008
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            33Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            43Item
                4.
            Controls
                and Procedures
            43**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            44Item
                1A.
            Risk
                Factors
            45Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            59Item
                3.
            Defaults
                Upon Senior Securities
            59Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            59Item
                5.
            Other
                Information
            60Item
                6.
            Exhibits
            60**SIGNATURES**
            63





2




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains forward-looking statements. All forward-looking statements
      are
      inherently uncertain as they are based on current expectations and assumptions
      concerning future events or future performance of the Company. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      are only predictions and speak only as of the date hereof. Forward-looking
      statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
      risks and uncertainties. In evaluating such statements, prospective investors
      should carefully review various risks and uncertainties identified in this
      Report, including the matters set forth under the captions “Risk Factors” and in
      the Company’s other SEC filings. These risks and uncertainties could cause the
      Company’s actual results to differ materially from those indicated in the
      forward-looking statements. The Company undertakes no obligation to update
      or
      publicly announce revisions to any forward-looking statements to reflect future
      events or developments.




Although
      forward-looking statements in this Quarterly Report on Form 10-Q reflect the
      good faith judgment of our management, such statements can only be based on
      facts and factors currently known by us. Consequently, forward-looking
      statements are inherently subject to risks and uncertainties, and actual results
      and outcomes may differ materially from the results and outcomes discussed
      in or
      anticipated by the forward-looking statements. Factors that could cause or
      contribute to such differences in results and outcomes include, without
      limitation, those specifically addressed under the heading “Risks Relating to
      Our Business” below, as well as those discussed elsewhere in this Quarterly
      Report. Readers are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this Quarterly Report. We file
      reports with the SEC. You can read and copy any materials we file with the
      SEC
      at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549 on
      official business days during the hours of 10 a.m. to 3 p.m. You can obtain
      additional information about the operation of the Public Reference Room by
      calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
      site (www.sec.gov) that contains reports, proxy and information statements,
      and
      other information regarding issuers that file electronically with the SEC,
      including the Company.




*We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      Quarterly Report. Readers are urged to carefully review and consider the various
      disclosures made throughout the entirety of this annual report, which attempt
      to
      advise interested parties of the risks and factors that may affect our business,
      financial condition, results of operations and prospects.*





3


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS.**





SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                BALANCE SHEETSAS
                OF JUNE 30, 2008 AND DECEMBER 31,
                2007




June
                30,2008
            
            December
                31,2007(Unaudited)ASSETSCURRENT
                ASSETS:Cash
            
            $
            183,443
            
            $
            771,492Restricted
                cash
            
            
            80,296
            
            
            74,969Accounts
                receivable, net of allowance for doubtful accounts of $ 212,453and
                $199,639 as of June 30, 2008 and December 31, 2007,
                respectively.
            
            
            2,889,003
            
            
            1,356,094Inventories
            
            
            4,647,393
            
            
            2,242,611Deposits
                and prepaid expenses
            
            
            3,078,617
            
            
            806,657Loans
                receivable
            
            
            330,719
            
            
            968,852Other
                receivables
            
            
            90,754
            
            
            43,800Other
                receivables-shareholder
            
            
            -
            
            
            59,462Total
                current assets
            
            
            11,300,225
            
            
            6,323,937PLANT
                AND EQUIPMENT, net
            
            
            12,406,353
            
            
            11,793,967OTHER
                ASSETS:Long
                term prepayment
            
            
            1,298,510
            
            
            1,220,190Deferred
                financing costs
            
            
            -
            
            
            101,815Intangible,
                net
            
            
            999,426
            
            
            1,011,236Total
                other assets
            
            
            2,297,936
            
            
            2,333,241Total
                assets
            
            $
            26,004,514
            
            $
            20,451,145LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            314,226
            
            $
            126,754Accrued
                expenses
            
            
            773,841
            
            
            502,871Deposits
                from customers
            
            
            158,949
            
            
            61,706Taxes
                payable
            
            
            1,982,850
            
            
            568,797Other
                payables
            
            
            82,109
            
            
            81,221Amount
                due to related companies
            
            
            4,349
            
            
            49,954Amount
                due to shareholders and directors
            
            
            338,094
            
            
            31,616Total
                current liabilities
            
            
            3,654,418
            
            
            1,422,919OTHER
                LIABILITIES:Deferred
                government grant
            
            
            1,094,250
            
            
            1,028,250Convertible
                debenture, net of $398,171 discount as of December 31,
                2007
            
            
            -
            
            
            84,752Total
                other liabilities
            
            
            1,094,250
            
            
            1,113,002Total
                liabilities
            
            
            4,748,668
            
            
            2,535,921CONTINGENT
                LIABILITIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock, $0.001 par value, 50,000,000 shares authorized,
                2,000,000series"
                A" shares issued and outstanding as of June 30, 2008 and December31,
                2007, respectively; Nil series"B" shares issued and outstandingas
                of June 30, 2008 and December 31,2007, respectively.
            
            
            2,000
            
            
            2,000Common
                stock, $0.001 par value, 50,000,000 shares authorized;
                18,639,103and
                17,111,200 shares issued and outstanding as of June 30, 2008
                andDecember
                31, 2007, respectively.
            
            
            18,639
            
            
            17,111Paid-in-capital
            
            
            16,300,348
            
            
            14,741,278Deferred
                compensation
            
            
            -
            
            
            (62,758
            )Statutory
                reserves
            
            
            1,895,976
            
            
            1,652,720Retained
                earnings
            
            
            369,301
            
            
            122,271Accumulated
                other comprehensive income
            
            
            2,669,582
            
            
            1,442,602Total
                shareholders' equity
            
            
            21,255,846
            
            
            17,915,224Total
                liabilities and shareholders' equity
            
            $
            26,004,514
            
            $
            20,451,145


The
      accompanying notes are an integral part of this statement.




4


SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
                  THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 and 2007(Unaudited)
  Three
                  months ended
              
              Six
                  months endedJune
                  30
              
              June
                  302008
              
              2007
              
              2008
              
              2007REVENUE
              
              $
              4,478,194
              
              $
              3,374,459
              
              $
              7,164,548
              
              $
              4,742,269COST
                  OF SALES
              
              
              2,166,484
              
              
              1,411,291
              
              
              3,463,903
              
              
              2,108,326GROSS
                  PROFIT
              
              
              2,311,710
              
              
              1,963,168
              
              
              3,700,645
              
              
              2,633,943OPERATING
                  EXPENSESResearch
                  and development
              
              
              119,399
              
              
              75,225
              
              
              166,698
              
              
              106,881Selling
                  expenses
              
              
              302,843
              
              
              148,139
              
              
              492,687
              
              
              257,567General
                  and administrative
              
              
              648,591
              
              
              506,446
              
              
              902,326
              
              
              1,183,896Total
                  operating expenses
              
              
              1,070,833
              
              
              729,810
              
              
              1,561,711
              
              
              1,548,344INCOME
                  FROM OPERATIONS
              
              
              1,240,877
              
              
              1,233,358
              
              
              2,138,934
              
              
              1,085,599OTHER
                  INCOME (EXPENSE)Other
                  income
              
              
              502
              
              
              -
              
              
              502
              
              
              -Other
                  expense
              
              
              (493,397
              )
              
              (141,226
              )
              
              (493,760
              )
              
              (141,226
              )Interest
                  income
              
              
              21,268
              
              
              130
              
              
              32,584
              
              
              130Interest
                  expense
              
              
              (376,307
              )
              
              (710,308
              )
              
              (515,759
              )
              
              (866,645
              )Inducement
                  cost for debentures converted
              
              
              (257,775
              )
              
              -
              
              
              (257,775
              )
              
              -Total
                  other income (expense)
              
              
              (1,105,709
              )
              
              (851,404
              )
              
              (1,234,208
              )
              
              (1,007,741
              )INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              135,168
              
              
              381,954
              
              
              904,726
              
              
              77,858PROVISION
                  FOR INCOME TAXES
              
              
              261,233
              
              
              233,643
              
              
              414,440
              
              
              300,267NET
                  INCOME (LOSS)
              
              
              (126,065
              )
              
              148,311
              
              
              490,286
              
              
              (222,409
              )OTHER
                  COMPREHENSIVE INCOME :Foreign
                  currency translation adjustment
              
              
              456,967
              
              
              180,517
              
              
              1,226,980
              
              
              283,676COMPREHENSIVE
                  INCOME
              
              $
              330,902
              
              $
              328,828
              
              $
              1,717,266
              
              $
              61,267EARNINGS
                  PER SHAREBasic
              
              $
              (0.01
              )
              $
              0.01
              
              $
              0.03
              
              $
              (0.02
              )Diluted
              
              $
              (0.01
              )
              $
              0.01
              
              $
              0.03
              
              $
              (0.02
              )WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARESBasic
              
              
              18,369,322
              
              
              12,795,549
              
              
              17,801,485
              
              
              12,795,549Diluted
              
              
              18,369,322
              
              
              13,383,724
              
              
              17,870,316
              
              
              12,795,549




The accompanying notes are an integral part of this
      statement.




5


SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS'
                  EQUITY


AccumulatedPreferred
                  stock
              
              Common
                  stock
              
              
              
              
              
              Retained
                  earnings
              
              otherPaid-in
              
              Deferred
              
              Statutory
              
              
              
              comprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              Compensation
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2006
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              6,246,325
              
              $
              (705,877
              )
              $
              779,624
              
              $
              2,952,343
              
              $
              460,020
              
              $
              9,747,230Shares
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Beneficial
                  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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              462,274
              
              
              
              
              
              
              
              
              
              
              
              462,274Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              283,676
              
              
              283,676Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (222,409
              )
              
              
              
              
              (222,409
              )Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              175,931
              
              
              (175,931
              )
              
              
              
              
              --BALANCE,
                  June 30, 2007, (Unaudited)
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              10,964,602
              
              $
              (243,603
              )
              $
              955,555
              
              $
              2,554,003
              
              $
              743,696
              
              $
              14,989,048Shares
                  issued for services
              
              
              
              
              
              
              
              
              78,750
              
              
              79
              
              
              115,684
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              115,763Inducement
                  cost for debentures converted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450Inducement
                  cost for warrants exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547Debentures
                  converted to common stock
              
              
              
              
              
              
              
              
              3,278,720
              
              
              3,279
              
              
              2,747,953
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,751,232Cashless
                  exercise of warrants
              
              
              
              
              
              
              
              
              958,181
              
              
              958
              
              
              (958
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              180,845
              
              
              
              
              
              
              
              
              
              
              
              180,845Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              698,906
              
              
              698,906Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,734,567
              )
              
              
              
              
              (1,734,567
              )Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              697,165
              
              
              (697,165
              )
              
              
              
              
              -BALANCE,
                  December 31, 2007
              
              
              2,000,000
              
              $
              2,000
              
              
              17,111,200
              
              $
              17,111
              
              $
              14,741,278
              
              $
              (62,758
              )
              $
              1,652,720
              
              $
              122,271
              
              $
              1,442,602
              
              $
              17,915,224Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,758
              
              
              
              
              
              
              
              
              
              
              
              62,758Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,226,980
              
              
              1,226,980Shares
                  issued for services
              
              
              
              
              
              
              
              
              90,000
              
              
              90
              
              
              99,810
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              99,900Shares
                  issued for debt settlement
              
              
              
              
              
              
              
              
              210,400
              
              
              210
              
              
              220,710
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              220,920Inducement
                  cost for debentures converted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              257,775
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              257,775Debentures
                  converted to common stock
              
              
              
              
              
              
              
              
              1,227,503
              
              
              1,228
              
              
              980,775
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              982,003Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              490,286
              
              
              
              
              
              490,286Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              243,256
              
              
              (243,256
              )
              
              
              
              
              -BALANCE,
                  June 30, 2008, (Unaudited)
              
              
              2,000,000
              
              $
              2,000
              
              
              18,639,103
              
              $
              18,639
              
              $
              16,300,348
              
              $
              -
              
              $
              1,895,976
              
              $
              369,301
              
              $
              2,669,582
              
              $
              21,255,846
  The
          accompanying notes are an integral part of this statement.
  6
  SKYSTAR
                  BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWSFOR
                  THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007(Unaudited)
  Six
                  months endedJune
                  302008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income (loss)
              
              $
              490,286
              
              $
              (222,409
              )Adjustments
                  to reconcile net income (loss) to cashused
                  in operating activities:Depreciation
              
              
              217,378
              
              
              79,597Amortization
              
              
              74,583
              
              
              10,811Amortization
                  of deferred financing costs
              
              
              101,815
              
              
              163,504Amortization
                  of discount on debentures
              
              
              406,538
              
              
              592,020Amortization
                  of deferred compensation
              
              
              62,758
              
              
              462,274Inducement
                  cost for debentures converted
              
              
              257,775
              
              
              -Default
                  premium on debentures
              
              
              490,713
              
              
              -Issuance
                  of common stock for services
              
              
              99,900
              
              
              -Inducement
                  cost for debt settlement
              
              
              42,081
              
              
              -Change
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              (1,405,631
              )
              
              (174,979
              )Inventories
              
              
              (2,197,924
              )
              
              (426,349
              )Deposits
                  and prepaid expenses
              
              
              (2,163,863
              )
              
              (511,768
              )Other
                  receivables
              
              
              (33,447
              )
              
              26,339Accounts
                  payable
              
              
              174,345
              
              
              (216,460
              )Accrued
                  expenses
              
              
              436,050
              
              
              198,368Deposits
                  from customers
              
              
              90,686
              
              
              -Taxes
                  payables
              
              
              1,339,210
              
              
              (385,801
              )Other
                  payables
              
              
              (4,206
              )
              
              -Liquidated
                  damage payable
              
              
              -
              
              
              141,267Net
                  cash used in operating activities
              
              
              (1,520,953
              )
              
              (263,586
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Increase
                  in loans receivable from third parties
              
              
              -
              
              
              (389,130
              )Proceeds
                  from loans receivable
              
              
              671,364
              
              
              -Purchase
                  of plant and equipment
              
              
              (76,775
              )
              
              (311,207
              )Net
                  cash provided by (used in) investing activities
              
              
              594,589
              
              
              (700,337
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Increase
                  in restricted cash
              
              
              (500
              )
              
              (357
              )Repayments
                  to shareholders and directors
              
              
              (425,911
              )
              
              -Proceeds
                  from shareholders and directors
              
              
              487,428
              
              
              -Repay
                  amounts due to related companies
              
              
              (47,453
              )
              
              (63,715
              )Proceeds
                  from shareholders loans
              
              
              297,864
              
              
              -Principle
                  payment on convertible debenture
              
              
              -
              
              
              (194,378
              )Repayments
                  of non-interest bearing loan from third parties
              
              
              -
              
              
              (63,558
              )Proceeds
                  from convertible debentures, net of debenture expenses
              
              
              -
              
              
              3,737,250Net
                  cash provided by financing activities
              
              
              311,428
              
              
              3,415,242EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              26,887
              
              
              184,964(DECREASE)
                  INCREASE IN CASH
              
              
              (588,049
              )
              
              2,636,283CASH,
                  beginning of period
              
              
              771,492
              
              
              192,016CASH,
                  end of period
              
              $
              183,443
              
              $
              2,828,299SUPPLEMENTAL
                  DISCLOSURE INFORMATIONInterest
                  paid
              
              $
              2,645
              
              $
              83,027Income
                  taxes paid
              
              $
              -
              
              $
              210,628Non-cash
                  investing and financing transactionsWarrants
                  issued for financing services
              
              $
              -
              
              $
              643,277Issuance
                  of common stock for debt settlement
              
              $
              178,839
              
              $
              -Debentures
                  converted to common stock
              
              $
              982,003
              
              $
              -
 The
          accompanying notes are an integral part of this statement.
  7




SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)
  **Note
        1- DESCRIPTION OF BUSINESS AND ORGANIZATION**
 
 Skystar
        Bio-Pharmaceutical Company (“Skystar” or the “Company”), was incorporated in
        Nevada. The Company 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”), a joint stock company in the
        People’s Republic of China (“China” or “PRC”), through the Company’s wholly
        owned subsidiary, Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Limited
        (“Skystar Cayman”), a Cayman Islands company which the Company acquired on
        November 7, 2005. Skystar Cayman, through its variable interest entity (“VIE”),
        Xian Tianxing, engages in research, development, production, marketing and
        sales
        of veterinary healthcare and medical care products. All current operations
        of
        the Company are in China.
 
 On
        August
        21, 2007, Xian Tianxing invested $66,700 to establish Shanghai Siqiang
        Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang was
        established in Putuo District, City of Shanghai, China with a registered
        capital
        of $66,700 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.
 
 On
        October 16, 2007, the board of directors of the Company approved the purchase
        of
        all of the issued and outstanding shares of Fortunate Time International
        Limited
        (“Fortunate Time”), a Hong Kong company owned 100% by the Company’s
        non-executive director Russell Scott Cramer, for $129 (HKD 1,000).
 
 On
        July
        10, 2007, Fortunate Time established Sida Biotechnology (Xian) Co., Ltd.
        (“Sida”) with registered capital of $5,000,000. Fortunate Time invested
        $2,000,000 into Sida on July 20, 2007, which amount is payable to Skystar
        Cayman. Pursuant to the Xian High Technology District approval notice, Fortunate
        Times is required to contribute the remaining $3,000,000 of registered capital
        by July 09, 2009. Except
        for the $2,000,000 investment in Sida Biotechnology Co., Ltd. and payables
        to Skystar Cayman for the same amount, Fortunate Time did not have any
        assets or liabilities. Sida
        was
        established in a high technology district in Xian, China. Sida’s principal
        business is to perform veterinary bio-pharmaceutical research, production
        and
        selling activities. Sida also provides technology consultation services to
        Xian
        Tianxing.
 
 On
        March
        10, 2008, the Company entered into a series of agreements (collectively the
        “Transfer Agreements”) transferring the contractual arrangements governing the
        relationship among Skystar Cayman, Xian Tianxing, and the majority shareholders
        of Xian Tianxing. Pursuant to the Transfer Agreements, all of the rights
        and
        obligations of Skystar Cayman under the contractual arrangements were
        transferred to Sida. In effect, Skystar Cayman assigned the contractual rights
        it had with Xian Tianxing to Sida.
 
 As
        a
        result of these contractual arrangements, which obligates Sida to absorb
        all of
        the risk of loss from Xian Tianxing’s activities and enable Sida to receive all
        of its expected residual returns, Sida 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, Sida consolidates Xian Tianxing’s results, assets and
        liabilities.
  8
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 **Note
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Basis
        of presentation and consolidation
 
 The
        accompanying consolidated financial statements are prepared in accordance
        with
        accounting principles generally accepted in the United States of America.
        The
        consolidated financial statements include the financial statements of the
        Company, its wholly-owned subsidiaries and its variable interest entities.
        All
        significant inter-company transactions and balances between the Company,
        its
        subsidiaries and VIEs are eliminated upon consolidation.
 
 In
        the
        opinion of management, the unaudited consolidated financial statements furnished
        herein include all adjustments, all of which are of a normal recurring nature,
        necessary for a fair statement of the results for the interim period presented.
        Operating results for the period ended June 30, 2008 are not necessarily
        indicative of the results that may be expected for the year ending December
        31,
        2008.
 
 Consolidation
        of variable interest entity
 
 In
        accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
        Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
        that lack sufficient equity to finance their activities without additional
        financial support from other parties or whose equity holders lack adequate
        decision making ability. All VIEs with which the Company is involved must
        be
        evaluated to determine the primary beneficiary of the risks and rewards of
        the
        VIE. The primary beneficiary is required to consolidate the VIE for financial
        reporting purposes.
 
 The
        Company has concluded that Xian Tianxing is a VIE and that the Company’s wholly
        owned subsidiaries, Skystar Cayman (prior March 10, 2008) and Sida (March
        10,
        2008 and thereafter), absorb a majority of the risk of loss from Xian Tianxing’s
        activities and enable the Company to receive a majority of its expected residual
        returns, the Company accounts for Xian Tianxing as a variable interest entity
        (“VIE”).
 
 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 plant and equipment. Because of the use of
        estimates inherent in the financial reporting process, actual results could
        differ from those estimates.
 
 Fair
        values of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157 which defines fair value,
        establishes a three-level valuation hierarchy for disclosures of fair value
        measurement and enhances disclosures requirements for fair value measures.
        The
        carrying amounts reported in the balance sheets for current receivables,
        payables and short term loans qualify as financial instruments and are a
        reasonable estimate of fair value because of the short period of time between
        the origination of such instruments and their expected realization and their
        current market rate of interest. The three levels are defined as
        follow:
 
 ·
              Level
                  1 inputs to the valuation methodology are quoted prices (unadjusted)
                  for
                  identical assets or liabilities in active markets
  9
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  ·
              Level
                  2 inputs to the valuation methodology include quoted prices for
                  similar
                  assets and liabilities in active markets, and inputs that are observable
                  for the assets or liability, either directly or indirectly, for
                  substantially the full term of the financial
                  instruments.
  ·
              Level
                  3 inputs to the valuation methodology are unobservable and significant
                  to
                  the fair value.
 
 The
        Company did not identify any assets and liabilities that are required to
        be
        presented on the balance sheet at fair value in accordance with SFAS No.
        157.
 
 The
        Company analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” During 2007, the Company issued 8% convertible debentures
        in a face amount of $4.075 million which are due February 28, 2009. During
        2007
        and the second quarter of 2008, the entire amount of $4.075 million of
        debentures were converted into common stock. As fixed prices are set for
        the
        conversion prices of such convertible debentures and the attached warrants,
        the
        Company is in a position to be sure it had adequate authorized shares for
        the
        future conversion of convertible debentures and warrants. Therefore, the
        embedded derivatives and warrants were recorded as equity and are not required
        to be recorded at fair value and marked-to-market at each reporting
        period.
 
 Revenue
        recognition
 
 Revenues
        of the Company include sales of veterinary healthcare and medical care products
        in China. Sales are recognized when the following four revenue criteria are
        met:
        persuasive evidence of an arrangement exists, delivery has occurred, the
        selling
        price is fixed or determinable, and collectability is reasonably assured.
        Sales
        are presented net of value added tax (VAT). No 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.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs, which totaled $85,084
        and $51,370 for the three months ended June 30, 2008 and 2007,
        respectively, and $123,888
        and $ 75,341 for
        the
        six months ended June 30, 2008 and
        2007, respectively.
  10
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 The
        Company’s revenue and cost of sales by product line were as follows during the
        three and six months ended June 30, 2008 and 2007:
 
 June
                  30, 2008
              
              June
                  30, 2007
              
              June
                  30, 2008
              
              June
                  30, 2007(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)RevenuesMicro-organism
              
              $
              1,151,600
              
              $
              1,314,080
              
              $
              1,941,255
              
              $
              2,033,353Veterinary
                  Medications
              
              
              2,934,247
              
              
              1,518,259
              
              
              4,604,001
              
              
              1,891,259Feed
                  Additives
              
              
              176,627
              
              
              375,260
              
              
              270,181
              
              
              546,156Vaccines
              
              
              215,720
              
              
              166,860
              
              
              349,111
              
              
              271,501Total
                  Revenues
              
              
              4,478,194
              
              
              3,374,459
              
              
              7,164,548
              
              
              4,742,269Cost
                  of SalesMicro-organism
              
              
              349,299
              
              
              460,310
              
              
              585,126
              
              
              785,451Veterinary
                  Medications
              
              
              1,713,460
              
              
              698,430
              
              
              2,712,944
              
              
              945,208Feed
                  Additives
              
              
              79,927
              
              
              232,902
              
              
              126,640
              
              
              346,477Vaccines
              
              
              23,798
              
              
              19,649
              
              
              39,193
              
              
              31,190Total
                  Cost of Sales
              
              
              2,166,484
              
              
              1,411,291
              
              
              3,463,903
              
              
              2,108,326Gross
                  Profit
              
              $
              2,311,710
              
              $
              1,963,168
              
              $
              3,700,645
              
              $
              2,633,943
 
 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
        $80,296 and $74,969 as of June
        30,
        2008 and December 31, 2007, respectively. The restricted cash was received
        from
        the PRC government subsidies and set aside for the specific usages (see Note
        10). The restricted funds are kept as bank deposits. Restricted cash is
        classified as current assets as of June 30, 2008 and December 31, 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.
  11
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (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
 
 Management
        assesses the carrying value of plant and equipment annually, or more often
        when
        factors indicating impairment are present, and reduces the carrying value
        of the
        fixed assets by the amount of the impairment. The Company determines the
        existence of such impairment by measuring the expected future cash flows
        (undiscounted and without interest charges) and comparing such amount to
        the net
        asset carrying value. An impairment loss, if exists, is measured as the amount
        by which the carrying amount of the asset exceeds the fair value of the asset.
        Based on its review, management believes that, as of June 30, 2008, there
        was no
        impairment of its plant and equipment.
 
 Construction
        in progress
 
 Construction
        in progress includes direct costs of construction of a factory building.
        Interest incurred during the period of construction, if 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.
  12
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  Impairment
        of intangibles - The Company evaluates the carrying value of intangibles
        annually, or more often when factors indicating impairment are present, 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 June 30, 2008, 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 records income tax pursuant to 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 June 30, 2008 and December 31,
        2007.
  The
        Company’s operations are subject to income and transaction taxes in the United
        States and in the PRC jurisdictions. Significant estimates and judgments
        are
        required in determining the Company’s worldwide provision for income taxes. Some
        of these estimates are based on interpretations of existing tax laws or
        regulations. The ultimate amount of tax liability may be uncertain as a
        result.
 
 The
        Company does not anticipate any events which could cause change to these
        uncertainties.
  13
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (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 123R”), 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.
        S FAS
        123R
        allow the “simplified” method to determine the term when other information is
        not available. Because the Company does not have a history of employee stock
        options, the Company used the “simplified” method to estimates the life of the
        options.
 
 Earnings
        per share
 
 Basic
        earnings per share (“EPS”) is computed by dividing income available to common
        shareholders by the weighted average number of common shares outstanding
        for the
        period. Diluted EPS includes the effect of the common share equivalents of
        the
        Company’s convertible preferred stock outstanding. The Company accounts for a
        stock dividend or split in accordance with SFAS No. 128, “Earnings Per Share”,
        which requires that a stock dividend or split be accounted for retrospectively
        if the stock dividend or split occurs during the period, or retroactively
        if the
        stock dividend or split occurs after the end of the period but before the
        release of the financial statements, by considering it outstanding for the
        entirety of each period presented.
  Foreign
        currency translation
 
 The
        Company uses the United States dollar (“U.S. dollars”) for financial reporting
        purposes. The Company’s subsidiary and VIEs maintain their books and records in
        their functional currency, being the primary currency of the economic
        environment in which their operations are conducted.
  14
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 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 June
        30,
        2008 and December 31, 2007 was US$1.00 to RMB6.85 and RMB 7.29, respectively.
        The weighted average translation rate of US$1.00 to RMB7.05 and RMB7.71 was
        applied to the income statement accounts in June 30, 2008 and 2007,
        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.
 
 Related
        parties
 
 Parties
        are considered to be related to the Company if the parties that, directly
        or
        indirectly, through one or more intermediaries, control, are controlled by,
        or
        are under common control with the Company. Related parties also include
        principal owners of the Company, its management, members of the immediate
        families of principal owners of the Company and its management and other
        parties
        with which the Company may deal if one party controls or can significantly
        influence the management or operating policies of the other to an extent
        that
        one of the transacting parties might be prevented from fully pursuing its
        own
        separate interests. A party which can significantly influence the management
        or
        operating policies of the transacting parties or if it has an ownership interest
        in one of the transacting parties and can significantly influence the other
        to
        an extent that one or more of the transacting parties might be prevented
        from
        fully pursuing its own separate interests is also a related party.
 
 Recently
        issued accounting pronouncements
  In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that  are
        not
        currently required to be measured at fair value. The objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities. The Company
        adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
        option to measure the fair value of eligible financial assets and
        liabilities.
  15
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (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. The Company
        adopted FSP EITF 07-3 and expensed the research and development as
        incurred.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
 
 In
        March
        2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
        Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS
        161”). Effective on January 1, 2009, SFAS 161 seeks to improve financial
        reporting for derivative instruments and hedging activities by requiring
        enhanced disclosures regarding the impact on financial position, financial
        performance, and cash flows. To achieve this increased transparency, SFAS
        161
        requires (1) the disclosure of the fair value of derivative instruments and
        gains and losses in a tabular format; (2) the disclosure of derivative
        features that are credit risk-related; and (3) cross-referencing within the
        footnotes. The Company is in the process of evaluating the new disclosure
        requirements under SFAS 161.
  16
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 In
        May
        2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
        Accounting Principles" ("SFAS 162"). FAS 162 is intended to improve financial
        reporting by identifying a consistent framework, or hierarchy, for selecting
        accounting principles to be used in preparing financial statements that are
        presented in conformity with U.S. GAAP for nongovernmental entities. SFAS
        162 is
        effective 60 days following the SEC's approval of the Public Company Accounting
        Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly
        in
        Conformity with Generally Accepted Accounting Principles." The Company is
        in the
        process of evaluating the impact of adoption of this statement on the results
        of
        operations, financial position or cash flows.
 
 In
        June
        2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
        an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
        No. 07-5”). This Issue is effective for financial statements issued for fiscal
        years beginning after December 15, 2008, and interim periods within those
        fiscal
        years. Early application is not permitted. Paragraph 11(a) of SFAS No 133
        “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that
        a contract that would otherwise meet the definition of a derivative but is
        both
        (a) indexed to the Company’s own stock and (b) classified in
        stockholders’ equity in the statement of financial position would not be
        considered a derivative financial instrument. EITF No.07-5 provides a new
        two-step model to be applied in determining whether a financial instrument
        or an
        embedded feature is indexed to an issuer’s own stock and thus able to qualify
        for the SFAS 133 paragraph 11(a) scope exception. This standard triggers
        liability accounting on all options and warrants exercisable at strike prices
        denominated in any currency other than the functional currency of the operating
        entity in China (Renminbi). The Company is currently evaluating the impact
        of
        adoption of EITF No. 07-5 on the Company’s consolidated financial
        statements.
 
 In
        June
        2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
        Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
        is to provide transition guidance for conforming changes made to EITF No.
        98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features
        or
        Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
        150, “Accounting for Certain Financial Instruments with Characteristics of both
        Liabilities and Equity”. This Issue is effective for financial statements issued
        for fiscal years ending after December 15, 2008. Early application is permitted.
         Management is currently evaluating the impact of adoption of EITF No. 08-4
        on the accounting for the consolidated financial statements.
  **Note
        3 -CONCENTRATIONS AND CREDIT RISK**
 
 The
        Company’s operations are all carried out in the PRC. Accordingly, the Company’s
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environments in the PRC, and by the general
        state
        of the PRC’s economy. The Company’s operations in the PRC are subject to
        specific considerations and significant risks not typically associated with
        companies in 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.
  17
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 Certain
        financial instruments, which subject the Company to concentration of credit
        risk, consist of cash. The Company maintains balances at financial institutions
        which, from time to time, may exceed Federal Deposit Insurance Corporation
        insured limits for the banks located in the United States. Balances at financial
        institutions or state owned banks within the PRC are not covered by insurance.
 
 As
        of
        June 30, 2008 and December 31, 2007, the Company had deposits in excess of
        federally insured limits (including restricted cash) of $178,717 and $844,773,
        respectively. 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
        period ended June 30, 2008 and year ended December 31, 2007, all of the
        Company’s sales arose in the PRC. In addition, all accounts receivable as at
        June 30, 2008 and December 31, 2007 also arose in the PRC. No major customers
        accounted for more than 10% of the Company’s total revenues and total accounts
        receivable as of and for the six months ended June 30, 2008 and 2007,
        respectively.
 
 The
        Company’s three largest vendors collectively accounted for approximately 51.57%
        and 44.20% of the Company’s total purchases for the three months ended June 30,
        2008 and 2007, respectively.
 
 The
        Company’s three largest vendors collectively accounted for approximately
        55.90% and 40.76% of the Company’s total purchases for the six months ended June
        30, 2008 and 2007, respectively.
 
 No
        major
        products accounted for more than 10% of the Company’s total revenues for the
        three months ended June 30, 2008, while the Company’s two major products
        collectively accounted for approximately 22.49% of the Company’s total revenues
        for the three months ended June 30, 2007.
 
 One major
        product of the Company accounted for approximately 10.04% of the Company’s total
        revenues for the six months ended June 30, 2008, while two major products
        of the
        Company collectively accounted for 23.74% of the Company’s total revenues for
        the six months ended June 30, 2007.
 
 **Note
        4 - RESTRICTED CASH**
 
 Restricted
        cash consists of the following:
 
 June
                  30, 2008
              
              December
                  31,2007(Unaudited)Funds
                  received from PRC government
              
              $
              80,296
              
              $
              74,969(See
                  Note 10)
 
 18
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  **Note
        5 - INVENTORIES**
 
 Inventories
        consist of the following :
  June
                  30, 2008
              
              December
                  31,2007(Unaudited)Raw
                  materials
              
              $
              2,394,983
              
              $
              1,761,145Packing
                  materials
              
              
              214,074
              
              
              110,020Work
                  in process
              
              
              7,630
              
              
              2,639Finished
                  goods
              
              
              2,011,242
              
              
              355,041Low
                  value consumables
              
              
              19,464
              
              
              13,766Total
              
              $
              4,647,393
              
              $
              2,242,611
 
 **Note
        6 - LOANS RECEIVABLE**
 
 Loans
        receivable consists of the following:
  June
                  30,2008
              
              December
                  31,2007(Unaudited)Others,
                  due on demand, non-interest bearing, unsecured
              
              $
              9,739
              
              $
              9,152Shanxi
                  Suoang Biotechnological Company, due October 30, 2007, extended
                  to March
                  31, 2008, annual interest at 7.0%, secured by unrelated company
                  Shanxi New
                  Resource Co.
              
              
              -
              
              
              27,420Xi’an
                  Tiantai Investment Company, due July 31, 2008 (or upon demand),
                  minimum
                  annual interest at 7.2%, unsecured
              
              
              320,980
              
              
              383,880Xi’an
                  SilverRiver Automatic Equipment Company, due on March 23, 2008
                  and
                  extended to April 2008, annual interest rate 8.4%, unsecured, balance
                  was
                  repaid in April 2008
              
              
              -
              
              
              411,300Shanxi
                  Hongye Housing Company, due on demand, non-interest
                  bearing.
              
              
              -
              
              
              137,100Total
                  loans receivable
              
              $
              330,719
              
              $
              968,852
 
 **Note
        7 - PLANT AND EQUIPMENT**
 
 Plant
        and
        equipment consists of the following :
 
 June
                  30, 2008
              
              December
                  31, 2007(Unaudited)Building
                  and improvements
              
              $
              3,823,111
              
              $
              3,592,519Plant
                  and machinery
              
              
              3,011,651
              
              
              2,827,591Office
                  equipment
              
              
              185,231
              
              
              167,617Vehicles
              
              
              327,351
              
              
              295,995Construction
                  in progress
              
              
              5,943,461
              
              
              5,531,236Total
              
              
              13,290,805
              
              
              12,414,958Less:
                  accumulated depreciation
              
              
              (884,452
              )
              
              (620,991
              )Plant
                  and equipment , net
              
              $
              12,406,353
              
              $
              11,793,967
 
 19
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  Construction
        in progress is related to a production facility which will meet the Good
        Manufacturing Practices Standard (“GMP Standard”); construction commenced in
        2005 and is expected to be completed at the end of 2008. No
        depreciation is provided for construction in progress until such time as
        the
        assets are completed and placed into service. Maintenance, repairs and minor
        renewals are charged directly to expenses as incurred. Major additions and
        betterment to property and equipment are capitalized.
 
 Depreciation
        expense was $110,496 and $52,529 for the three months ended June 30, 2008
        and
        2007, respectively. Depreciation expense was $217,378 and $79,597
        for the six
        months ended June 30, 2008 and 2007, respectively.
 
 **Note
        8 - LONG TERM PREPAYMENT**
 
 Long
        term
        prepayment consists of the following as of June 30, 2008 and December
        31,2007:
 
 June
                  30, 2008
              
              December 31,
                  2007(Unaudited)Equipment
                  deposit
              
              $
              437,700
              
              $
              411,300Construction
                  deposit
              
              
              291,800
              
              
              274,200Refundable
                  deposit for the potential acquisition of a veterinary
                  company
              
              
              569,010
              
              
              534,690Total
              
              $
              1,298,510
              
              $
              1,220,190
 
 **Note
        9 - INTANGIBLES**
 
 Intangibles
        consist of the following:
 
 June
                  30,2008
              
              December
                  31,2007(Unaudited)Land
                  use rights
              
              $
              376,787
              
              $
              354,061Technological
                  know-how
              
              
              875,400
              
              
              822,600Total
              
              
              1,252,187
              
              
              1,176,661Less:
                  accumulated amortization
              
              
              (252,761
              )
              
              (165,425
              )Intangible
                  assets, net
              
              $
              999,426
              
              $
              1,011,236
 
 Amortization
        expense for intangibles was $37,836 and $4,360 for the three months ended
        June
        30, 2008 and 2007, respectively. Amortization expense for intangibles was
        $74,583 and $10,811 for the six months ended June 30, 2008 and 2007,
        respectively. During 2007, the Company paid $694,500 for exclusive rights
        to a
        strain of micro-bio organism from November 1, 2007 through October 31, 2012;
        the
        Company began using the strain in its veterinary medicines in 2008.
  20
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2008
 (UNAUDITED)
  **Note
          10 - 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 2005. As of June
        30,
        2008, the Company has not reached a final agreement with the PRC government
        regarding 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 2008; therefore, these amounts are carried as
        liabilities in the accompanying financial statements.
 
 **Note
        11 - CAPITAL TRANSACTIONS**
 
 On
        July
        10, 2007, the Company issued 40,000 shares of common stock as salary to a
        non-executive director. On the same date, the Company issued 38,750 shares
        of
        common stock to an independent consultant. The trading value of the Company's
        common stock as of July 10, 2007 was $1.47 per share and expense of $115,763
        was
        charged to general and administrative expense.
 
 In
        the
        fourth quarter of 2007, certain of the Company’s convertible note holders
        converted their debentures into 3,278,720 shares of common stock as more
        fully
        described in Note 12.
 
 In
        the
        fourth quarter of 2007, certain of the Company’s warrant holder exercised
        3,100,000 warrants into 958,181 shares of common stock, in a cashless
        exercise.
 
 On
        February 12, 2008, the Company issued 90,000 shares of common stock as salary
        to a
        non-executive director. The trading value of the Company's common stock on
        February 12, 2008 was $1.11 per share and expense of $99,900 was charged
        to
        general and administrative expense.
 
 On
        February 29, 2008, the Company issued 210,400 shares of common stock to its
        legal counsel as partial payment for services rendered. The
        trading value of the Company's common stock on February 29, 2008 was $1.05
        per
        share and additional inducement cost of $42,081 between the fair value of
        the
        shares at $220,920 and the partial payment of $178,839 was charged to general
        and administrative expense.
  21
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2008
 (UNAUDITED)
 On
        April
        21, 2008, two of the Company’s convertible note holders converted $982,003 of
        debentures into 1,227,503 shares of common stock as more fully described
        in Note
        12.
 
 On
        May 5,
        2008, the Company issued 52,173 shares of common stock, to its new chief
        financial officer. The shares vest in four equal installments of 13,043 shares
        each quarter. The
        trading value of the common stock on May 5, 2008 was $1.17 per share and
        total fair value of $61,042. The compensation expense will be recognized
        on a
        straight-line basis over the vesting period. Compensation e xpense
        of
        $9,365 was charged to general and administrative expense for the three months
        and six months ended June 30, 2008.
  **Note
        12 - 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% would begin in June 2007
        and
        would continue through February 2008, after which the additional interest
        woould
        increase 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 Purchasers in connection with the transaction. The Company
        also issued to the placement agent a warrant to purchase an aggregate of
        570,500
        shares of common stock 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 Debentures. For the three
        months
        ended June 30, 2008 and 2007, $0 and $122,628 was amortized to interest expense,
        respectively. For the six months ended June 30, 2008 and 2007, $21,817 and
        $163,504 was amortized to interest expense, respectively.
  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 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 the Debentures and additional paid-in
        capital and will be amortized over the two year life of the Debentures using
        the
        effective interest method. For the three months ended June 30, 2008 and 2007,
        $0
        and $500,102 was amortized as interest expense, respectively. For the six
        months
        ended June 30, 2008 and 2007, $114,990 and $592,020 was amortized as interest
        expense, respectively.
  22
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2008
 (UNAUDITED)
  On
          or
          about December 6, 2007, the Company entered into an Amendment, Exchange
          and
          Waiver Agreement (“Amended Agreement”), dated as of November 9, 2007, with
          certain of the purchasers (“Participating Purchasers”). Below are highlights of
          the Amended Agreement:
 
 ·
              The
                  Amended Agreement amends the terms of the Debentures held by the
                  Participating Purchasers by: (a) changing the conversion price
                  from $1.00
                  per share to $0.85 per share; (b) deleting the trading conditions
                  for
                  mandatory conversion; (c) granting the Company the right to mandatory
                  conversion at any time, and (d) allowing the Company to designate
                  the date
                  for the mandatory conversion.
 ·
              The
                  Amended Agreement amends the terms of the Warrants held by the
                  Participating Purchasers by: (a) changing the exercise price from
                  $1.20
                  per share to $0.95 per share; and (b) granting to the Participating
                  Purchasers the right to exercise their Warrants on a cashless
                  basis
 ·
              The
                  Amended Agreement is deemed to be: (a) the Company’s notice (the
                  “Conversion Notice”) to require conversion of the entire outstanding
                  principal of the Debentures held by the Participating Purchasers
                  and all
                  accrued but unpaid interest thereto; and (b) the Participating
                  Purchasers’
                  notice (the “Exercise Notice”) to the Company to exercise all of their
                  unexercised Warrants on a cashless
                  basis
 ·
              The
                  Amended Agreement amends the Registration Rights Agreement by waiving
                  all
                  outstanding registration damages due to the Purchasers in their
                  entirety.
                  Because the outstanding principal amounts of the Debentures held
                  by the
                  Participating Purchasers, as of the effective date of the Agreement,
                  total
                  more than seventy-five percent (75%) of the aggregate outstanding
                  principal amounts of the outstanding Debentures held by all the
                  Purchasers
                  on that date, the amendment to the Registration Rights Agreement
                  binds all
                  of the Purchasers.
 
 The
        Company has evaluated the cost of the amended terms of the Warrants and the
        Debentures. As the amendment has reduced the exercise price of the Warrants
        and
        the conversion price of the Debentures held by the Participating Purchasers,
        the
        difference between the value of the Warrants and the conversion option at
        the
        old prices and their value at the modified prices are costs for the Company
        and
        are charged to income.
 
 The
        inducement cost for the Debentures converted is $634,450 for the fiscal year
        ended December 31, 2007. The inducement cost for the Debentures converted
        was
        based on the market value of the additional 461,418 shares obtained by the
        Participating Purchasers at $1.375 per shares on November 9, 2007. The
        inducement cost for the Warrants exercised is $279,547 for the fiscal year
        ended
        December 31, 2007. The inducement cost for the Warrants exercised is calculated
        using the Binomial Model by determining the difference between the original
        exercise price of $1.20 shares and the reduced exercise price of $0.95.
 
 3,076,120
        shares of common stock were issued upon conversion of the Debentures with a
        carrying value of $2,548,632 at a reduced conversion price of $0.85. Another
        202,600 shares of common stock were issued upon conversion of Participating
        Purchasers’ Debentures with a carry value of $202,600 at the original
        conversion price of $1.00.
  23
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2008
 (UNAUDITED)
 In
        accordance with paragraph 21 of EITF 00-27, all unamortized discount at the
        time
        of the conversion must be recognized as interest expense. The unamortized
        discount of the above converted Debentures is $2,403,480, which has been
        recorded as interest expenses in the accompanying consolidated statements
        of
        operations. The unamortized deferred financing costs of $540,167 at conversion
        of the Debentures into common stock was also recorded as interest expenses
        in
        the accompanying consolidated statements of operations for the year ended
        December 31, 2007.
 
 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.
        Because the Amended Agreement waived all outstanding r egistration
        damages, t he
        Company reversed the previously accrued liquidated damages totaling $345,017
        at
        December 31, 2007.
 
 The
        Company entered into an Amendment and Waiver Agreement (the “Amendment”) with
        two institutional and accredited investors who acquired the two remaining
        unconverted Debentures in a private transaction from the original holders
        of
        these Debentures effective April 21, 2008. The Amendment is similar to the
        above
        Amendment Agreement with significant differences summarized below :
 
 ·
              The
                  Amendment amends the terms of the Debentures held by these two
                  investors
                  by changing the conversion price from $1.00 per share to $0.80
                  per
                  share
 ·
              The
                  Amendment is deemed to be: (a) the Company’s notice (the “Conversion
                  Notice”) to require conversion of the entireoutstanding
                  principal of the Debentures held by these two investors and all
                  accrued
                  but unpaid interest thereto.
  The
        difference between the value of the conversion option at the old prices and
        their value at the modified prices are costs for the Company and are charged
        to
        income. The inducement cost for the two Debentures converted was $257,775
        for
        the three months and six months ended June 30, 2008. The inducement cost
        for the
        converted Debentures was based on the market value of the additional 245,501
        shares obtained by these two investors at $1.05 per shares on April 21,
        2008.
 
 1,227,503
        shares of common stock were issued upon conversion of the two Debentures
        with a
        carrying value of $982,003 (including $490,713 of default premium) at a reduced
        conversion price of $0.80.
 
 In
        accordance with paragraph 21 of EITF 00-27, any unamortized discount at the
        time
        of the conversion must be recognized as interest expense. The unamortized
        discount of the above converted Debentures is $291,548, which has been recorded
        as interest expenses for the three months and six months ended June 30, 2008.
        The unamortized deferred financing costs of $79,998 at conversion of the
        Debentures was also recorded as interest expenses for the three months and
        six
        months ended June 30, 2008.
  24
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  Following
        is a summary of the status of warrants outstanding at June 30, 2008:
 
 Outstanding
                  Warrants
              
              Exercisable
                  WarrantsExercise
                  Price
              
              Number
              
              Average
                  Remaining Contractual Life
              
              Average
                  Exercise Price
              
              Number$1.20
              
              975,000
              
              1.67
                  years
              
              $1.20
              
              975,000$1.00
              
              570,500
              
              3.67
                  years
              
              $1.00
              
              570,500Total
              
              1,545,500
              
              
              
              
              
              1,545,500
 
 Following
        is a summary of the Warrants activity:
 
 Outstanding
                  as of December 31, 2006
              
              
              -Granted
              
              
              4,645,500Forfeited
              
              
              -Exercised
              
              
              3,100,000Outstanding
                  as of December 31, 2007
              
              
              1,545,500Forfeited
              
              
              -Exercised
              
              
              -Outstanding
                  as of June 30, 2008
              
              
              1,545,500
 
 **Note
        13 - STATUTORY RESERVES**
 
 Statutory
        reserves represent restricted retained earnings. Based on the legal formation
        of
        the entities, all PRC entities are required to set aside 10% of its net income
        as reported in its statutory accounts on an annual basis to the Statutory
        Surplus Reserve Fund. Once the total Statutory Surplus Reserve reaches 50%
        of
        the 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.
 
 The
        Reserve Fund can be used to increase the registered capital upon approval
        by
        relevant government authorities and eliminate future losses of the respective
        companies upon a resolution by the board of directors.
 
 Appropriations
        to the above statutory reserves are accounted for as a transfer from
        unrestricted earnings to statutory reserves. During
        the period ended June 30, 2008 and 2007, the Company made total appropriations
        to these statutory reserves of $243,256, and $175,931,
        respectively.
  25
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  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
        14 - TAXES**
  The
        Company is registered in the State of Nevada whereas its subsidiary, Skystar
        Cayman, is a tax exempt company incorporated in the Cayman Islands and conducts
        all of its business through its subsidiaries, Fortunate Time and Sida, and
        Sida’s PRC VIEs, Xian Tianxing and Shanghai Siqiang
 
 Sida,
        Xian Tianxing, and Shanghai Siqiang are subject to PRC’s Enterprise Income Tax.
        Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes is generally
        imposed at a statutory rate of 25%. The Company has been approved as a new
        technology enterprise and under PRC Income Tax Laws, and is entitled to a
        preferential tax rate of 15%.
 
 For
        the
        three month period ended June 30, 2008 and 2007, the provision for taxes
        on
        earnings consisted of:
 
 2008
              
              2007(Unaudited)
              
              (Unaudited)Current
                  PRC income tax expenseEnterprise
                  income tax
              
              $
              261,233
              
              $
              233,643
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the three months ended June 30:
  2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0China
                  income tax exemption
              
              
              (10.0
              )
              
              (18.0
              )Total
                  provision for income taxes
              
              
              15.0
              %
              
              15.0
              %
 
 The
        estimated tax savings due to the reduced tax rate for the three months ended
        June 30, 2008 and 2007 amounted to $178,122
        and $321,120, 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 June 30, 2008 and 2007 to
        $(0.01) and $(0.01), respectively, and would decrease diluted earnings per
        share
        to $(0.01) and $(0.01), respectively
  26
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  For
        the
        six month period ended June 30, 2008 and 2007, the provision for taxes on
        earnings consisted of:
 
 2008
              
              2007(Unaudited)
              
              (Unaudited)Current
                  PRC income tax expenseEnterprise
                  income tax
              
              $
              414,440
              
              $
              300,267
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the six months ended June 30:
 
 2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0China
                  income tax exemption
              
              
              (10.0
              )
              
              (18.0
              )Total
                  provision for income taxes
              
              
              15.0
              %
              
              15.0
              %
 
 The
        estimated tax savings due to the reduced tax rate for the six months ended
        June
        30, 2008 and 2007 amounted to  $283,126
        and $398,682 ,
        respectively. The
        net
        effect on earnings per share if the income tax had been applied would decrease
        basic earnings per share for the six months ended June 30, 2008 and 2007
        to
        $0.01 and $(0.05), respectively, and would decrease diluted earnings per
        share
        to $0.01 and $(0.05), respectively.
 
 The
        Company was incorporated in the United States and has incurred net operating
        loss for income tax purpose for 2008. The net operating loss carry forwards
        for
        United States income tax purposes amounted to $8,269,373 which may be available
        to reduce future years’ taxable income. These carry forwards will expire, if not
        utilized, beginning in 2006 and continue through 2027. 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 at June 30, 2008. The valuation allowance at June 30,
        2008
        was $3,367,668. Management will review this valuation allowance periodically
        and
        will make adjustments as warranted.
 
 The
        Company accounts for income taxes under the Statement of Financial Accounting
        Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
        Statement 109, deferred tax assets and liabilities are recognized for the
        future
        tax consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. Under Statement 109,
        the
        effect on deferred tax assets and liabilities of a change in tax rates is
        recognized in income in the period that included the enactment
        date.
 
 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. The adoption had no
        effect on the Company’s financial statements.
  27
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (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 probably 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 it related to items 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.
 
 The
        Company’s accounting policy is to accrue interest and penalties, if and when
        required, as a component of income tax expenses or benefits in the income
        statement.
 
 **Note
        15 - EARNINGS PER SHARE**
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, “Earnings per Share.” SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
 
 The
        following demonstrates the calculation for earnings per share for the three
        months and six months ended June 30, 2008 and 2007:
 
 For
                  the three months ended
                June
                  30,
              
              For
                  the six months ended
                June
                  30,2008
              
              2007
              
              2008
              
              2007Net
                  income for earnings per share
              
              $
              (126,065
              )
              $
              148,311
              
              $
              490,286
              
              $
              (222,409
              )Weighted
                  average shares used in basic computation
              
              
              18,369,322
              
              
              12,795,549
              
              
              17,801,485
              
              
              12,795,549Diluted
                  effect of stock options and warrants
              
              
              -
              
              
              588,175
              
              
              68,831
              
              
              -Weighted
                  average shares used in diluted computation
              
              
              18,369,322
              
              
              13,383,724
              
              
              17,870,316
              
              
              12,795,549Earnings
                  per share:
  Basic
              
              $
              (0.01
              )
              $
              0.01
              
              $
              0.03
              
              $
              (0.02
              )Diluted
              
              $
              (0.01
              )
              $
              0.01
              
              $
              0.03
              
              $
              (0.02
              )
 
 28
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  For
        the
        three months ended June 30, 2008, all
        outstanding warrants were excluded from the diluted earnings per share
        calculation as they are anti-dilutive due to the Company’s net loss position.
 
 For
        the
        three months ended June 30, 2007, the average stock price was greater than
        the
        exercise prices of the 4,645,500 outstanding warrants which resulted in
        additional weighted average common stock equivalents of 588,175; all outstanding
        convertible debentures were excluded from the diluted earnings per share
        calculation as they are anti-dilutive.
 
 For
        the
        six months ended June 30, 2008, the average stock price was greater than
        the
        exercise prices of the 570,500 outstanding warrants which resulted in additional
        weighted average common stock equivalents of 68,831; 975,000 outstanding
        warrants were excluded from the diluted earnings per share calculation as
        they
        are anti-dilutive.
 
 For
        the
        six months ended June 30, 2007, all outstanding warrants and convertible
        debentures were excluded from the diluted earnings per share calculation
        as they
        are anti-dilutive due to the Company’s net loss position.
 
 **Note
        16 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS**
 
 *Related
        party receivables and payables*
  Amounts
        receivable from and payable to related parties are summarized as
        follows:
 
 June
                  30,2008
              
              December
                  31,2007(Unaudited)Amounts
                  due from shareholder:Mr.
                  Weibing Lu (1)
              
              $
              -
              
              $
              59,462Amount
                  due to shareholder and director:Ms.
                  Aixia Wang (1)
              
              $
              1,459
              
              $
              1,371Ms.
                  Aixia Wang (2)
              
              
              43,770
              
              
              -Mr.
                  Weibing Lu (2)
              
              
              218,850
              
              
              -Mr.
                  Wei Wen (2)
              
              
              43,770
              
              
              -Mr.
                  Scott Cramer(1)
              
              
              30,245
              
              
              30,245Total
              
              $
              338,094
              
              $
              31,616Amount
                  due to related companies:TianXing
                  Digital - owned by a director (3)
              
              $
              -
              
              $
              17,137Shanxi
                  Xingji Electronics Co. - owned by a director's wife (3)
              
              
              4,349
              
              
              32,817Total
              
              $
              4,349
              
              
              49,954
 
 (1)
              The
                  related individuals, Weibing Lu, Aixia Wang, and Scott Cramer are
                  all
                  shareholders of the Company. Mr. Lu and Mr. Cramer are also the
                  directors
                  of the Company, with Mr. Lu additionally being the chief executive
                  office.The
                  amounts due from Mr. Lu were expense advances for Mr. Lu’s
                  business-related travels on behalf of Xian Tianxing. Mr. Lu was
                  permitted
                  to continue drawing on the expense advancement toward his travels
                  through
                  the second quarter of 2008, at the end of which Mr. Lu returned
                  to Xian
                  Tianxing the then remaining unsubstantiated balance of the advance.
                  Going
                  forward, the Company does not intend to provide Mr. Lu or any other
                  management members with similar type of expense advancement until
                  such
                  time that its board of directors, comprising of a majority of independent
                  directors, shall have determined that such arrangement is appropriate
                  and/or necessary for the Company, and have adopted specific policy
                  and
                  procedure accordingly.The
                  amounts due to Ms. Wang and Mr. Cramer were cash advances to facilitate
                  Xian Tianxing 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.
  29
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
 (2)
              The
                  related individuals, Weibing Lu, Aixia Wang, and Wei Wen are all
                  shareholders of the Company. Mr. Lu and Mr. Wen are also the directors
                  of
                  the Company,with
                  Mr. Lu additionally being the chief executive office. These individuals
                  obtained personal loans from the bank andadvanced
                  the proceeds to facilitate Xian Tianxing operations. The short-term
                  loan
                  with balance of $175,080 and $43,770 from Mr. Lu bears annual interest
                  at
                  7.47% and $8.44%, respectively and due on December 30, 2008 and
                  May 29,
                  2009, respectively. The short-term loan from Ms Wang and Mr. Wen
                  with
                  balance of $43,770 each bears annual interest at 8.44% and due
                  on May 29,
                  2009, respectively.
 
 (3)
              Shanxi
                  Xinji Electronics Company is owned by the wife of Mr. Lu and Tianxing
                  Digital Co. Ltd. is owned by Mr. Lu. The amount due to Shanxi Xinji
                  Electronics Co. Ltd. and Tianxing Digital Co., Ltd are short term
                  cash
                  transfers for business operations, non-interest bearing, unsecured,
                  and
                  payable upon demand. The ultimate manner of settlement is in cash.
 
 **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 December 31, 2014 with an annual rent of $12,198 (or RMB
        86,000), which is subject to a 10% increase every four subsequent years.
  30
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  The
        Company leased additional office space from the
        Company’s CEO, Weibing Lu ,
        for a
        period of five years from January 1, 2007 to December 31, 2011 with an annual
        rent of approximately $23,489 (or RMB 165,600).
 
 The
        Company entered into a tenancy agreement with the Company’s CEO, Weibing Lu, for
        the lease of Shanghai
        Siqiang office
        for a period of ten years from August 1, 2007 to August 1, 2017 with an annual
        rent of $20,425 (or RMB 144,000).
 
 The
        Company’s commitments for minimum rental payments under this lease for the next
        five years and thereafter are as follows:
 
 Six
                  months ending December 31, 2008
              
              $
              28,056Year
                  ending December 31, 2009
              
              
              57,332Year
                  ending December 31, 2010
              
              
              57,332Year
                  ending December 31, 2011
              
              
              57,332Year
                  ending December 31, 2012
              
              
              34,178Thereafter
              
              
              119,444$
              353,674
 
 Rental
        expense for the three months ended June 30, 2008 and 2007 amounted to $20,187
        and $3,050 and for the six months ended June 30, 2008 and 2007 amounted to
        $28,056 and $5,530, and respectively.
 
 (b)  *Legal
        proceedings*
  In
        March
        2006, Gregory Evans filed suit against the Company, R. Scott Cramer, Steve
        Lowe
        and David Wassung 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. On December 1, 2007, the lawsuit was
        dismissed. Prior to the dismissal, the Company was never served with a summons
        or complaint in the matter.
 
 In
        May
        2007, Andrew Chien filed suit against the Company, R. Scott Cramer, Steve
        Lowe,
        David Wassung and Weibing Lu in United States District Court for the District
        of
        Connecticut, alleging causes of action for violation of Sections 10(b) and
        20(a)
        of the Securities Exchange Act of 1934.  In or around November 2007, the
        defendants filed motions to dismiss the complaint for failure to state a
        claim
        and for lack of personal jurisdiction.  Plaintiff agreed to voluntarily
        amend the complaint after the motions were filed, and an amended complaint
        was
        subsequently filed on or around January 4, 2008.  The amended complaint
        dropped Weibing Lu (who is a resident of China and had never been served)
        as a
        defendant.  The remaining defendants contended that the amended complaint
        failed to correct the deficiencies of the original, and filed a renewed motion
        to dismiss for failure to state a claim, also preserving their challenge
        to
        personal jurisdiction.  The defendants denied all claims and moved the
        Court to dismiss the amended complaint in its entirety in their motion to
        dismiss. The motion to dismiss also requested that the Court award sanctions
        against Mr. Chien under the Private Securities Litigation Reform Act and
        other
        authority in the event the defendants' motion to dismiss the amended complaint
        is granted. On July 17, 2008, the Court granted defendants’ motion and dismissed
        the lawsuit.
  31
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)
  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 that 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 will need to be
        vacated
        due to 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- POTENTIAL STOCK SPLIT**
 
 Immediately
        prior to the effectiveness of the Company’s S-1 registration statement that was
        initially filed on May 7, 2008, the Company plans to effect a 5-for-1 reverse
        stock split and corresponding proportionate reduction of the number of shares
        of
        authorized common stock to be effected immediately prior to the effectiveness
        of
        the registration statement. As the number of authorized and outstanding shares
        will be equally impacted by this reverse stock split, except the basic and
        diluted EPS will be increased by five times higher than the current EPS number,
        the Company does not believe that there will be any other material impact
        to its
        financial statements.
 
 32


**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**




*The
      following discussion and analysis of our results of operations and financial
      condition for the quarter ended June 30, 2008 and 2006, should be read in
      conjunction with Selected Consolidated Financial Data and our financial
      statements and the notes to those financial statements that are included
      elsewhere in this prospectus. Our discussion includes forward-looking statements
      based upon current expectations that involve risks and uncertainties, such
      as
      our plans, objectives, expectations and intentions. Actual results and the
      timing of events could differ materially from those anticipated in these
      forward-looking statements as a result of a number of factors, including those
      set forth under the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking
      Statements” and “Description of Business” sections and elsewhere in this
      prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” “predict,” and similar expressions to identify forward-looking
      statements.**Although
      we believe the expectations expressed in these forward-looking statements are
      based on reasonable assumptions within the bound of our knowledge of our
      business, our actual results could differ materially from those discussed in
      these statements. Factors that could contribute to such differences include,
      but
      are not limited to, those discussed in the “Risk Factors” section of this
      Registration Statement. We undertake no obligation to update publicly any
      forward-looking statements for any reason even if new information becomes
      available or other events occur in the future.*





*Our
      financial statements are prepared in US$ 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 (“RMB”) were
      translated into US$ at various pertinent dates and for pertinent
      periods.*





**Overview**





We
      are a
      holding company that, through our indirect wholly-owned subsidiary Sida
      Biotechnology (Xian) Co., Ltd. (“Sida”) and our variable interest entity ("VIE")
      Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”), manufacture and
      distribute medicines, vaccines and other health care and medical care products
      for poultry, livestock and domestic pets in the People’s Republic of China,
      which we will refer to as China. We have four product lines, including a vaccine
      line, a veterinary medicine line, a fodder and feed additives line, and a
      micro-organism line. All four product lines are developed, manufactured and
      distributed by Xian Tianxing, which we operate and control through contractual
      arrangements between Sida and Xian Tianxing. These contractual arrangements
      enable Sida to control and receive the profits of Xian Tianxing. Sida is the
      wholly owned subsidiary of Fortunate Time International Ltd. (“Fortunate Time”),
      which is wholly owned by Skystar Bio-Pharmaceutical (Cayman) Holdings Co.,
      Ltd.
      (“Skystar Cayman”), our wholly owned subsidiary. Xian Tianxing has a wholly
      owned subsidiary, Shanghai Siqiang Biotechnological Co., Ltd. ("Shanghai
      Siqiang"), which we also control. Other than our interests in the contractual
      arrangements with Xian Tianxing, neither we nor our direct and indirect
      subsidiaries have any equity interests in Xian Tianxing.




Currently,
      our four product lines include the following number of products:





·
            
            Our
                vaccine line currently includes 10 products;·
            
            Our
                veterinary medicine line for poultry and livestock currently includes
                128
                products;·
            
            Our
                fodder and feed additives line currently includes 10 products;
                and·
            
            Our
                micro-organism products line currently includes 10
                products.




Among
      our
      prominent products is a vaccine that is designed to prevent the onset of avian
      coccidiosis disease, a parasitic and highly contagious gastrointestinal disease
      affecting chicken and other poultry. We refer to this vaccine as the “DLV
      chicken vaccine.” This disease has a significant economic impact to the poultry
      industry. The U.S. Department of Agriculture estimates that avian coccidiosis
      costs the worldwide poultry industry $3 billion in treatment expenses, bird
      losses and unmarketable birds due to low bird weight. Management believes that
      our DLV chicken vaccine is safe, effective and easy to administer, and may
      save
      costs by as much as 60% as compared to using conventional chemical medicines
      such as sulfaquinoxaline sodium and salinomycin sodium.




33





All
      of
      our revenues are derived from the sales of our animal healthcare and medical
      care products in China. During the three months ended June 30, 2008,
      approximately 5% of our revenues were derived from sales of vaccine products,
      approximately 66% from sales of veterinary medicine products, approximately
      4%
      from sales of feed additive products, and approximately 25% from micro-organism
      products. During the six months ended June 30, 2008, approximately 5%
      of our revenues were derived from sales of vaccine products, approximately
      64%
      from sales of veterinary medicine products, approximately 4% from sales of
      feed
      additive products, and approximately 27% from micro-organism
      products .





We
      sell
      our products through a distribution channel covering 29 provinces in
      China. As of August 11, 2008, we had over 760 distributors and 300 direct
      customers in 29 provinces in China. We intend to establish more representative
      offices and engage additional distribution agents in order to strengthen our
      distribution network.





On
      July
      11, 2008, we filed a Certificate of Amendment to our Articles of Incorporation
      (the “Amendment”) with the Secretary of State of the State of Nevada after
      stockholders approved a proposal at a special meeting of the stockholders held
      on June 30, 2008, to increase the number of authorized shares of Common Stock
      from 50,000,000 to 200,000,000.





**2008
      Outlook**





***Acquisition
      Strategy*** *.* We
      intend to continue exploring acquisitions of Good Manufacturing Practice (“GMP”)
      certified veterinary healthcare and medical care products companies located
      close to our headquarters in Shaanxi province. One of our considerations for
      acquisition is that the potential target has production capacity for different
      dosage forms such as injectibles and powders. We may also consider acquiring
      veterinary healthcare and medical care products companies with similar
      production capacity in regions of China outside Shaanxi province. Our goal
      is to
      be among the top producers and distributors of veterinary health care and
      medical care products in China, and we hope to be able to complete some
      acquisitions by the end of 2008. We are looking at and making inquiries
      regarding potential acquisition targets. However, we have not entered into
      any
      letter of intent or definitive agreement with any potential acquisition targets
      as of the date of the prospectus.





Based
      on
      our own experience, we know that the GMP certification process requires
      considerable amount of resources, which may create cash flow issues for many
      of
      the small to medium-size veterinary healthcare and medical care products
      companies that currently make up a significant portion of our industry in China.
      Accordingly, unless we can accurately and effectively evaluate the financial
      conditions of a potential target company, we may expose our business operations
      to cash flow risks subsequent to an acquisition transaction.





***Brand
      Awareness*** .
      Our
      goal is to associate the “Skystar” brand with reputable, high-quality veterinary
      health care and medical care products. We intend to spend a portion of
      our net proceeds in marketing and advertising efforts to increase the exposure
      of our brand with potential customers. We recognize the importance of branding
      as well as packaging. All of our products bear a uniform brand and we also
      brand and package our products with specialized designs to differentiate the
      different categories of our products.





We
      also
      conduct promotional marketing activities to publicize and enhance our image
      as
      well as to reinforce the recognition of our brand name, including:





·
            
            publishing
                advertisements and articles in national as well as specialized and
                provincial newspapers, magazines, and in other media, including the
                Internet;





·
            
            participating
                in national meetings, seminars, symposiums, exhibitions for veterinary
                healthcare and medical care products and other related
                industries;





·
            
            organizing
                cooperative promotional activities with distributors;
                and·
            
            sending
                direct mail to major farms.





However,
      we may not immediately realize measurable economic benefits from our marketing
      efforts, as brand awareness may require the passage of a significant amount
      of
      time and a continuing commitment of our resources. Moreover, we cannot give
      assurance that our marketing and branding efforts will ultimately be successful.




34




***Manufacturing
      Facility*** *.* Under
      our current planning and if we are able to complete a financing by the end
      of
      the third quarter, the vaccine manufacturing facility at our Huxian Plant is
      expected to be completed by the fourth quarter of 2008 and obtain GMP
      certification in early 2009. Once completed, we believe that this facility
      will
      increase production capacity by 6.0 billion units with a value of $14.0 million
      in projected revenue at a gross margin rate of 60-70%.





However,
      there is no assurance that we will be able to complete the facility as planned,
      which may thereby also delay the projected GMP certification. In addition,
      as
      the GMP certification is conducted by unrelated third party, we cannot give
      assurance that our facility will be GMP certified or when the certification
      can
      be completed.





***Additional
      Products*** *.* We plan
      to commercialize new products in each of the four product lines. We are also
      expending significant amount of resources into our research and development
      in
      order to have additional products in the future. Management believes that such
      products will ultimately increase future revenue to our company. However, due
      to
      the unpredictable natures of many of the afflictions and diseases that our
      products are intended to address and/or prevent, we cannot give assurance as
      to
      the success of any new products, since market acceptance and demands of any
      such
      product may significant shift and adversely affect our profitability.





**Critical
      Accounting Policies and Estimates**





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





·
            Revenue
                recognition: Our revenues are primarily sales of veterinary healthcare
                and
                medical care products in China. Sales are recognized when the following
                four revenue criteria are met: persuasive evidence of an arrangement
                exists, delivery has occurred, the selling price is fixed or determinable,
                and collectibility is reasonably assured. Sales are presented net
                of value
                added tax (VAT) and estimated returns of product from distributors
                and/or
                customers. We allow our distributors and/our customers to return
                product
                only if our product is later determined by us to be ineffective.
                Based on
                our historical experience over the past three years, product returns
                have
                been insignificant throughout all of our product lines: Micro-Organism,
                Veterinary Medications, Feed Additives and Vaccines. Therefore, we
                do not
                estimate deductions for sales returns. Sales returns are taken against
                revenue when products are returned from a distributor and/or
                customers. Sales are presented net of any discounts given to
                customers. We use this recognition policy for both distributors and
                end
                users.




*(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.





·
            Convertible
                debentures and 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 our
                outstanding convertible debentures and warrants.·
            Liquidated
                damages: We have adopted FAS 5 and FSP EITF 00-19-2 in connection
                with the
                liquidated damages we accrued pursuant to the terms of our Registration
                Rights Agreement with certain investors dated February 27,
                2007.





35




**Recent
      Accounting Pronouncements**




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* , *Including an Amendment of FASB Statement No. 115,* ”
under
      which entities will now be permitted to measure many financial instruments
      and
      certain other assets and liabilities at fair value on an
      instrument-by-instrument basis. This Statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS 157. The
      Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect
      the option to measure the fair value of eligible financial assets and
      liabilities




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. The
      Company adopted
      FSP EITF 07-3 and expensed the research and development as
      incurred.




In
      December 2007, the FASB issued SFAS 141(R),“Business Combinations”, which
      replaces SFAS 141. SFAS No. 141(R) establishes principles and requirements
      for
      how an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, any non-controlling
      interest in the acquiree and the goodwill acquired. The Statement also
      establishes disclosure requirements which will enable users to evaluate the
      nature and financial effects of the business combination. SFAS 141(R) is
      effective for fiscal years beginning after December 15, 2008. The adoption
      of
      SFAS 141(R) will have an impact on accounting for business combinations once
      adopted, but the effect is dependent upon acquisitions at that
      time.




In
      December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      has not determined the effect that the application of SFAS 160 will have on
      its
      consolidated financial statements.




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”),
      which changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about (a)
      how
      and why an entity uses derivative instruments, (b) how derivative instruments
      and related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance and cash flows.
      SFAS 161 is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008. The Company has not
      determined the effect of the application of SFAS 161 on its consolidated
      financial statements.




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” This Statement identifies the sources of accounting
      principles and the framework for selecting the principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement will not have and impact
      on the Company’s financial statements.




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
      this Statement is limited to financial guarantee insurance (and reinsurance)
      contracts, as described in this Statement, issued by enterprises included within
      the scope of Statement 60. Accordingly, this Statement does not apply to
      financial guarantee contracts issued by enterprises excluded from the scope
      of
      Statement 60 or to some insurance contracts that seem similar to financial
      guarantee insurance contracts issued by insurance enterprises (such as mortgage
      guaranty insurance or credit insurance on trade receivables). This Statement
      also does not apply to financial guarantee insurance contracts that are
      derivative instruments included within the scope of FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have and impact on the Company’s financial statements.




36





In
      June
      2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
      an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
      No. 07-5”). This Issue is effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of Statement of
      Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
      Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
      definition of a derivative but is both (a) indexed to the Company’s own
      stock and (b) classified in stockholders’ equity in the statement of
      financial position would not be considered a derivative financial instrument.
      EITF No.07-5 provides a new two-step model to be applied in determining whether
      a financial instrument or an embedded feature is indexed to an issuer’s own
      stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
      This
      standard triggers liability accounting on all options and warrants exercisable
      at strike prices denominated in any currency other than the functional currency
      of the operating entity in China (Renminbi). Management is currently
      evaluating the impact of adoption of EITF No. 07-5 on the Company’s consolidated
      financial statements.





In
      June
      2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
      Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
      is to provide transition guidance for conforming changes made to EITF No. 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
      150, “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity”. This Issue is effective for financial statements issued
      for fiscal years ending after December 15, 2008. Early application is
      permitted.





**Results
      of Operations**





**Three-Month
      Periods Ended June 30, 2008 and 2007**





The
      following table summarizes our results of operations as of the three-month
      periods ended June 30, 2008 and 2007. The table and the discussion below should
      be read in conjunction with the unaudited financial statements and the notes
      thereto appearing elsewhere in this report.




Three
                Months Ended June 30,2008
            
            2007(in
                U.S. Dollars, except for percentages)Sales
            
            $
            4,478,194
            
            
            100.00
            %
            $
            3,374,459
            
            
            100.00
            %Gross
                Profit
            
            $
            2,311,710
            
            
            51.62
            %
            $
            1,963,168
            
            
            58.18
            %Operating
                Expense
            
            $
            1,070,833
            
            
            23.91
            %
            $
            729,810
            
            
            21.63
            %Income
                From Operations
            
            $
            1,240,877
            
            
            27.71
            %
            $
            1,233,358
            
            
            36.55
            %Other
                Expenses
            
            $
            1,105,709
            
            
            24.69
            %
            $
            851,404
            
            
            25.23
            %Income
                tax expenses
            
            $
            261,233
            
            
            5.83
            %
            $
            233,643
            
            
            6.92
            %Net
                Income (Loss)
            
            $
            (126,065
            )
            
            (2.82
            )%
            $
            148,311
            
            
            4.40
            %





*Revenues* All of
      our revenue is derived from the sale of veterinary healthcare and medical care
      products in the PRC. During the three months ended June 30, 2008, we had
      revenues of $4,478,194 as
      compared to revenues of $ 3,374,459
      during the three months ended June 30, 2007, an increase of approximately 32.71% .





*Revenues-
      Veterinary Medications.* Revenues
      from sales of our veterinary medications product line increased from $1,518,259
      during the three months ended June 30, 2007 to $2,934,247 during the three
      months ended June 30, 2008 for an increase of $1,415,988 or 93%. This increase
      was responsible for almost all of the growth of overall revenue for the three
      months ended June 30, 2008. The increase in veterinary medication sales was
      primarily attributable to 91 new product offerings, our enhanced marketing
      efforts and our customers’ use of the products for the treatment of livestock
      and poultry diseases that occurred during the three months ended June 30,
      2008.





*Revenues-
      Micro-Organism.* Revenues
      from sales of our micro-organism product line decreased from $1,314,080 during
      the three months ended June 30, 2007 to $1,151,600 during the three months
      ended
      June 30, 2008 or a decrease of $162,480. The decrease of $162,480 was a result
      of the
      demand for some micro-organism products declining during the three months ended
      June 30, 2008.




37





*Revenues-
      Feed Additives.* Revenues
      from sales of our feed additives product line decreased from $375,260 during
      the
      three months ended June 30, 2007 to $176,627 during the three months ended
      June
      30, 2008 or a decrease of $198,633. The decrease of $176,627 was a result of some
      products not being produced during the three months ended June 30, 2008 within
      the feed additive products line due to the significant increase in raw materials
      prices for those products.




*Revenues-
      Vaccines* .
      Revenues from sales of our vaccines product line increased from $166,860 during
      the three months ended June 30, 2007 to $215,720 during the three months ended
      June 30, 2008, or an increase of $48,860. This
      increase occurred primarily due to customer demand for our vaccine products
      during the three months ended June 30, 2008. We are operating at full production
      capacity for our vaccine product line and therefore we do not believe that
      we
      can significantly increase sales until we expand our production
      capabilities.




**Cost
      of Sales**





The
      following table sets forth the components of our cost of sales in absolute
      amount and as a percentage of total net sales for the periods
      indicated.




**Three
                Months Ended June 30,****2008**
            
            **2007**(in
                U.S. dollars, except for percentages)**Total
                Net Sales**
            
            **$**
            4,478,194
            
            
            100.00
            %
            **$**
            3,374,459
            
            
            100.00
            %Raw
                materials
            
            $
            2,036,585
            
            
            45.48
            %
            $
            1,289,329
            
            
            38.21
            %Labor
            
            $
            39,412
            
            
            0.88
            %
            $
            58,681
            
            
            1.74
            %Manufacturing
                Overhead
            
            $
            90,487
            
            
            2.02
            %
            $
            63,281
            
            
            1.87
            %**Total
                Cost of Goods Sold**
            
            **$**
            2,166,484
            
            
            48.38
            %
            **$**
            1,411,291
            
            
            41.82
            %**Gross
                Profit**
            
            **$**
            2,311,710
            
            
            51.62
            %
            **$**
            1,963,168
            
            
            58.18
            %





*Cost
      of Sales.* Cost
      of
      Sales, which consists of raw materials, direct labor, and manufacturing
      overhead, was $2,166,484 for the three months ended June 30, 2008 as compared
      to
      $1,411,291 for the three months ended June 30, 2007. Our cost of sales consists
      of four product lines: veterinary medications, micro-organism, feed additives,
      and vaccines.





*Cost
      of Sales- Veterinary Medications.* Cost of
      sales of our veterinary medications product line increased from $698,430 during
      the three months ended June 30, 2007 to $1,713,460 during the three months
      ended
      June 30, 2008 for an increase of $1,015,030 or approximately 145%. This increase
      was a result of an
      increase in veterinary medications sales. However, the gross margin for
      veterinary medications declined from approximately 54% for the three months
      ended June 30, 2007 to approximately 42% for the three months ended June 30,
      2008 due to higher raw materials prices.




*Cost
      of Sales- Micro-Organism.* Cost of
      sales of our micro-organism product line decreased from $460,310 during the
      three months ended June 30, 2007 to $349,299 during the three months ended
      June
      30, 2008 for a decrease of $111,011 or approximately 24%. The decrease was
      mainly attributable to fewer
      sales of micro-organism products. However, the gross margin for micro organism
      products improved from approximately 65% during the three months ended June
      30,
      2007 to approximately 70% during the three months ended June 30, 2008, as a
      result of product sales with better margins and improved manufacturing
      techniques during the three months ended June 30, 2008.




*Cost
      of Sales- Feed Additives.* Cost of
      sales of our feed additives product line decreased from $232,902 during the
      three months ended June 30, 2007 to $79,927 during the three months ended June
      30, 2008 for a decrease of $152,975. The decrease was mainly attributable to fewer
      sales of feed additive products. However, the gross margin for feed additives
      improved from approximately 38% during the three months ended June 30, 2007
      to
      approximately 55% during the three months ended June 30, 2008, as a result
      of
      product sales with better margins and improved manufacturing techniques during
      the three months ended June 30, 2008.





*Cost
      of Sales- Vaccines.* Cost of
      sales of our vaccines product line increased from $19,649 during the three
      months ended June 30, 2007 to $23,798 during the three months ended June 30,
      2008 for an increase of $4,149. The increase was a result of a slight increase
      in sales of our vaccines product line which is presently running at full
      capacity.




**Selling,
      General and Administrative Expenses**





**For
                the Three Months Ended June 30,****2008**
            
            **2007****$% of Total**
              **Net Sales**
            
            
            
            **$% of Total**
              **Net Sales**(in
                U.S. Dollars, except for percentages)Gross
                Profit
            
            $
            2,311,710
            
            
            51.62
            %
            $
            1,963,168
            
            
            58.18
            %Operating
                Expenses:
            
            $
            1,070,833
            
            
            23.91
            %
            $
            729,810
            
            
            21.63
            %Selling
                Expenses
            
            $
            302,843
            
            
            6.76
            %
            $
            148,139
            
            
            4.39
            %General
                and Administrative Expenses
            
            $
            648,591
            
            
            14.48
            %
            $
            506,446
            
            
            15.01
            %Research
                and Development Costs
            
            $
            119,399
            
            
            2.67
            %
            $
            75,225
            
            
            2.23
            %Income
                from Operations
            
            $
            1,240,877
            
            
            27.71
            %
            $
            1,233,358
            
            
            36.55
            %




38




*Selling
      Expenses* .
      Selling
      expenses, which consist of commissions, advertising and promotion expenses,
      freight charges, and salaries totaled $302,843 for the three months ended June
      30, 2008 as compared to $148,139 for the three months ended June 30, 2007,
      an
      increase of approximately 104%. 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 $648,591 for the three months ended June
      30,
      2008, as compared to $506,446 for the three months ended June 30, 2007, an
      increase of approximately 28%. General and administrative expenses are primarily
      legal accounting and other professional fees that we incurred as a U.S. public
      company. Such professional expenses were higher for the second quarter of 2008
      as a result of increased professional fees. We anticipate that our general
      and
      administrative expenses will increase due to the increasing costs of being
      a
      U.S. public company.





*Research
      and Development Costs* .
      Research and development costs, which consist of salaries, professional fees,
      and technical support fees, totaled $119,399 for the three months ended June
      30,
      2008, as compared to $75,225 for the three months ended June 30, 2007, an
      increase of approximately 59%. This increase is primarily attributable to
      increased research activities with certain outside experts and institutions
      with
      whom we cooperate on research and development of both existing and new products.
      We anticipate that our research and development costs will continue to increase
      as we will continue improve existing products and develop new products.





*Net
      Income (Loss).* We
      had
      net loss of $126,065 for the three months ended June 30, 2008 as compared to
      net
      income of $148,311 for the three months ended June 30, 2007 for a decrease
      of
      approximately 185%. The decrease in net income is attributable non-operating
      expenses relating to our convertible debentures that were converted in April
      2008 and increased operating expenses relating to professional fees that were
      partially offset by an increase in gross profit for the three months ended
      June
      30, 2008.





**Six-Month
      Periods Ended June 30, 2008 and 2007**





The
      following table summarizes our results of operations as of the six-month periods
      ended June 30, 2008 and 2007. The table and the discussion below should be
      read
      in conjunction with the unaudited financial statements and the notes thereto
      appearing elsewhere in this report.




Six
                Months Ended June 30,2008
            
            2007(in
                U.S. Dollars, except for percentages)Sales
            
            $
            7,164,548
            
            
            100.00
            %
            $
            4,742,269
            
            
            100.00
            %Gross
                Profit
            
            $
            3,700,645
            
            
            51.65
            %
            $
            2,633,943
            
            
            55.54
            %Operating
                Expense
            
            $
            1,561,711
            
            
            21.80
            %
            $
            1,548,344
            
            
            32.65
            %Income
                From Operations
            
            $
            2,138,934
            
            
            29.85
            %
            $
            1,085,599
            
            
            22.89
            %Other
                Expenses
            
            $
            1,234,208
            
            
            17.23
            %
            $
            1,007,741
            
            
            21.25
            %Income
                tax expenses
            
            $
            414,440
            
            
            5.78
            %
            $
            300,267
            
            
            6.33
            %Net
                Income (Loss)
            
            $
            490,286
            
            
            6.84
            %
            $
            (222,409
            )
            
            (4.69
            )%





*Revenues* All of
      our revenue is derived from the sale of veterinary healthcare and medical care
      products in the PRC. During the six months ended June 30, 2008, we had revenues
      of $7,164,548 as
      compared to revenues of $ 4,742,269
      during the six months ended June 30, 2007, an increase of approximately
      51%.




39





*Revenues-Veterinary
      Medications.* Revenues
      from sales of our veterinary medications product line increased from $1,891,259
      during the six months ended June 30, 2007 to $4,604,001 during the six months
      ended June 30, 2008 or an increase of $2,712,742 or approximately 143%. This
      increase was responsible for almost all of the growth of overall revenue between
      the six months ended June 30, 2007 and June 30, 2008. The increase in veterinary
      medication sales was primarily attributable to 95 new product offerings, our
      enhanced marketing efforts and our customers’ use of the products for the
      treatment of livestock and poultry diseases that occurred during the six months
      ended June 30, 2008.




*Revenues-Micro-Organism.* Revenues
      from sales of our micro-organism product line decreased from $2,033,353 during
      the six months ended June 30, 2007 to $1,941,255 during the six months ended
      June 30, 2008 or a decrease of $92,098. The decrease of $92,098 was a result
      of
a
      decline in the demand for some micro-organism products during the three months
      ended June 30, 2008 that were offset by a slight increase in demand for some
      micro- organism products during the three months ended March 31,
      2008.





*Revenues-
      Feed Additives.* Revenues
      from sales of our feed additives product line decreased from $546,156 during
      the
      six months ended June 30, 2007 to $270,181 during the six months ended June
      30,
      2008 or a decrease of $275,975. The decrease of $275,975 was a result of some
      products not being produced during the six months ended June 30, 2008 within
      the
      feed additive products line due to the significant increase in raw materials
      prices of certain feed additive products.





*Revenues-
      Vaccines* .
      Revenues from sales of our vaccines product line increased from $271,501 during
      the six months ended June 30, 2007 to $349,111 during the six months ended
      June
      30, 2008 or an increase of $77,610. This
      increase occurred primarily due to customer demand for our vaccine products
      during the six months ended June 30, 2008. We are operating at full production
      capacity for our vaccine product line and therefore cannot significantly
      increase sales until we expand our production capabilities for our vaccine
      product line.




**Cost
      of Sales**





The
      following table sets forth the components of our cost of sales in absolute
      amount and as a percentage of total net sales for the periods
      indicated.




**Six
                Months Ended June 30,****2008**
            
            **2007**(in
                U.S. dollars, except for percentages)**Total
                Net Sales**
            
            **$**
            7,164,548
            
            
            100.00
            %
            **$**
            4,742,269
            
            
            100.00
            %Raw
                materials
            
            $
            3,199,675
            
            
            44.66
            %
            $
            1,899,816
            
            
            40.06
            %Labor
            
            $
            83,730
            
            
            1.17
            %
            $
            120,131
            
            
            2.53
            %Manufacturing
                Overhead
            
            $
            180,498
            
            
            2.52
            %
            $
            88,379
            
            
            1.87
            %**Total
                Cost of Goods Sold**
            
            **$**
            3,463,903
            
            
            48.35
            %
            **$**
            2,108,326
            
            
            44.46
            %**Gross
                Profit**
            
            **$**
            3,700,645
            
            
            51.65
            %
            **$**
            2,633,943
            
            
            55.54
            %





*Cost
      of Sales.* Cost
      of
      Sales, which consists of raw materials, direct labor, and manufacturing
      overhead, was $3,463,903 for the six months ended June 30, 2008 as compared
      to
      $2,108,326 for the six months ended June 30, 2007. Our cost of sales consists
      of
      four product lines: veterinary medications, micro-organism, feed additives,
      and
      vaccines.




*Cost
      of Sales- Veterinary Medications.* Cost of
      sales of our veterinary medications product line increased from $945,208 during
      the six months ended June 30, 2007 to $2,712,944 during the six months ended
      June 30, 2008 for an increase of $1,767,736 or approximately 187%. This increase
      was a result of an
      increase in veterinary medications sales. However, the gross margin for
      veterinary medications declined from approximately 50% for the six months ended
      June 30, 2007 to approximately 41% for the six months ended June 30, 2008 due
      to
      higher raw materials prices for veterinary medications.




*Cost
      of Sales- Micro-Organism.* Cost of
      sales of our micro-organism product line decreased from $785,451 during the
      six
      months ended June 30, 2007 to $585,126 during the six months ended June 30,
      2008
      for a decrease of $200,325 or approximately 26%. The decrease was due
      to
      fewer sales of micro-organism products. However, the gross margin for
      micro-organism products improved from approximately 61% during the three months
      ended June 30, 2007 to approximately 70% during the six months ended June 30,
      2008 as a result of product sales with better margins and improved manufacturing
      techniques during the six months ended June 30, 2008.





*Cost
      of Sales- Feed Additives.* Cost of
      sales of our feed additives product line decreased from $346,477 during the
      six
      months ended June 30, 2007 to $126,640 during the six months ended June 30,
      2008
      for a decrease of $219,836. The decrease was a
      result
      of fewer sales of feed additive products. However, the gross margin for feed
      additives improved from approximately 37% during the three months ended June
      30,
      2007 to approximately 53% during the six months ended June 30, 2008 as a result
      of product sales with better margins and improved manufacturing techniques
      during the six months ended June 30, 2008.




40





*Cost
      of Sales- Vaccines.* Cost of
      sales of our vaccines product line increased from $31,190 during the six months
      ended June 30, 2007 to $39,193 during the six months ended June 30, 2008 for
      an
      increase of $8,002. This
      slight increase was a result of a slight increase in vaccine product sales
      which
      is presently running at full capacity.


**Selling,
      General and Administrative Expenses**





**For
                the Six Months Ended June 30,****2008**
            
            **2007****$% of Total**
              **Net Sales**
            
            
            
            **$% of Total**
              **Net Sales**(in
                U.S. Dollars, except for percentages)Gross
                Profit
            
            $
            3,700,645
            
            
            51.65
            %
            $
            2,633,943
            
            
            55.54
            %Operating
                Expenses:
            
            $
            1,561,711
            
            
            21.80
            %
            $
            1,548,344
            
            
            32.65
            %Selling
                Expenses
            
            $
            492,687
            
            
            6.88
            %
            $
            257,567
            
            
            5.43
            %General
                and Administrative Expenses
            
            $
            902,326
            
            
            12.59
            %
            $
            1,183,896
            
            
            24.97
            %Research
                and Development Costs
            
            $
            166,698
            
            
            2.33
            %
            $
            106,881
            
            
            2.25
            %Income
                (Loss) from Operations
            
            $
            2,138,934
            
            
            29.85
            %
            
            1,085,599
            
            
            22.89
            %





*Selling
      Expenses* .
      Selling
      expenses, which consist of commissions, advertising and promotion expenses,
      freight charges, and salaries totaled $492,687 for the six months ended June
      30,
      2008 as compared to $257,567 for the six months ended June 30, 2007, an increase
      of approximately 91%. 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 $902,326 for the six months ended June
      30,
      2008, as compared to $1,183,896 for the six months ended June 30, 2007, a
      decrease of approximately 24%. General and administrative expenses are primarily
      legal accounting and other professional fees that we incurred as a U.S. public
      company. Such professional expenses were higher for the six months ended June
      30, 2007 as a result of our private financing transaction that closed during
      the
      first quarter of 2007. However, we anticipate that our general and
      administrative expenses will increase due to the increasing costs of being
      a
      U.S. public company.





*Research
      and Development Costs* .
      Research and development costs, which consist of salaries, professional fees,
      and technical support fees, totaled $166,698 for the six months ended June
      30,
      2008, as compared to $106,881 for the six months ended June 30, 2007, an
      increase of approximately 56%. This increase is primarily attributable to
      increased research activities with certain outside experts and institutions
      with
      whom we cooperate on research and development of both existing and new products.
      We anticipate that our research and development costs will continue to increase
      as we will continue improve existing products and develop new products.





*Net
      Income.* We
      had
      net income of $490,286 for the six months ended June 30, 2008 as compared to
      net
      loss of $222,409 for the six months ended June 30, 2007 for an increase of
      320%.
      The increase in net income is primarily attributable to an increase in gross
      margin that was partially offset by an increase in other  non-operating
      expenses relating to our convertible debentures that were converted in April
      2008 for the three months ended June 30, 2008.





**Liquidity**





For
      the
      six months ended June 30, 2008, cash used in operating activities was $1,520,953
      as compared to $263,586 cash used in operating activities for the six months
      ended June 30, 2007. The decrease in cash generated from operating activities
      is
      primarily attributable to (a) bulk purchases of certain raw materials for
      anticipated production of both existing and new products in the third quarter
      of
      fiscal 2008, (b) increased accounts receivable, and (c) increased prepayments
      to
      suppliers to ensure low purchase price of certain raw materials.




41





We
      generated $594,589 from investing activities for the six months ended June
      30,
      2008, as compared to expending $700,337  in
      investing activities for the six months ended June 30, 2007. The increase in
      investing activities for the six months ended June 30, 2008 was a result of
      a
      collection of a loan of $671,364 that was offset by equipment expenditures
      of
      $76,775.





From
      financing activities, we generated $311,428 for the six months ended June 30,
      2008 as compared to $3,415,242 generated
      from the six months ended June 30, 2007. The decrease in cash generated from
      financing activities is mainly attributable to the proceeds from a third
      party loan further discussed in detail in Note 12 of the accompanying footnotes
      to the consolidated financial statements.





As
      of
      June 30, 2008, we had cash of $183,443. Our total current assets were
      $11,330,225, and our total current liabilities were $3,654,418, which resulted
      in a net working capital of $7,675,807. Management believes that we have the
      ability to meet cash requirements for our operations in order to continue as
      a
      going concern, including sufficient cash flows to meet our obligations on a
      timely basis in the foreseeable future, provided that we can continue to
      maintain profitable operations and our net working capital remains liquid.





**Capital
      Resources**





During
      the six months ended June 30, 2008, the Company collected on a loan receivable
      of $671,364, of which approximately $77,000 was used to purchase plant and
      equipment. If we were to acquire another business or further expand our
      operations, we will require additional capital.





On
      March
      9, 2007, we received gross proceeds in the amount of $4.075 million from our
      closing of a Securities Purchase Agreement dated February 27, 2007 with certain
      investors. Of the capital raised, approximately $400,000 have been applied
      toward the construction of our new plant, approximately $270,000 have been
      spent
      on research and development of new products, approximately $680,000 have been
      applied toward the acquisition of proprietary technology, and the remaining
      balance used to expand our sales network and as a reserve for our working
      capital needs.





**Exchange
      Rate**





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





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




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




**June
                30, 2008**
            
            **December 31, 2007**
            
            **June
                30, 2007**Assets
                and liabilities
            
            
            US$0.1459:RMB1
            
            
            US$0.1371:RMB1
            
            
            US$0.1315:RMB1Statements
                of operations and cash flows for the period/year ended
            
            
            US$0.14184:RMB1
            
            
            US$0.13167:RMB1
            
            
            US$0.1297:RMB1




42




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





**Inflation**





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





**Contractual
      Obligations and Off-Balance Sheet Arrangements**





*Contractual
      Obligations*





**Payments due by Period****Contractual Obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More than**
              **5 years**Long-Term
                Debt Obligations
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Operating
                Lease Obligations
            
            
            353,674
            
            
            56,722
            
            
            114,664
            
            
            79,933
            
            
            102,355**Total**
            
            $
            353,674
            
            $
            56,722
            
            $
            114,664
            
            $
            79,933
            
            $
            102,355





*Off-Balance
      Sheet Arrangements*





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





**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Not
      Applicable





**ITEM
      4.**  **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      June 30, 2008, we carried out an evaluation, under the supervision and with
      the
      participation of our management, including our chief executive officer and
      our
      chief financial officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures. Based on the foregoing, our chief executive
      officer and chief financial officer concluded that our disclosure controls
      and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934) were not effective.





**Remediation
      of Material Weaknesses in Internal Control over Financial
      Reporting**





In
      our
      annual report on Form 10-K for the year ended December 31, 2007, we reported
      certain material weaknesses involving control activities, specifically (1)
      accounting and finance personnel weaknesses, (2) lack of internal audit function
      and (3) lack of internal audit system. In light of the foregoing, our management
      has undertaken steps to address these issues, some of which were outlined in
      our
      annual report. Specifically, we have retained Mr. Bennet P. Tchaikovsky as
      our
      chief financial officer, whom our management believes has the requisite
      financial reporting experience, skills and knowledge to complement our existing
      personnel. Additionally,
      our board of directors recently appointed four independent directors, namely,
      Mr. Qiang Fan, Dr. Chengtun Qu, Mr. Winston Yen and Dr. Shouguo Zhao.
      The
      independent directors are tasked to establish certain internal audit functions
      within our company, and we have also established audit and compensation
      committees comprising entirely of independent directors. Mr. Yen, who is a
      licensed certified public accountant, serves on the audit committee of the
      board
      of directors, along with Mr. Fan and Dr. Zhao, and additionally serves as
      committee chairman and its financial expert. Mr. Fan serves on the compensation
      committee, along with Mr. Yen and Dr. Zhao, and additionally serves as committee
      chairman.




43





Management,
      including our chief executive officer and our chief financial officer, does
      not
      expect that our disclosure controls and internal controls will prevent all
      error
      or all fraud, even as the same are improved to address any deficiencies and/or
      weaknesses. A control system, no matter how well conceived and operated, can
      provide only reasonable, not absolute, assurance that the objectives of the
      control system are met. Over time, controls may become inadequate because of
      changes in conditions or deterioration in the degree of compliance with policies
      or procedures. Further, the design of a control system must reflect the fact
      that there are resource constraints, and the benefits of controls must be
      considered relative to their costs. Because of the inherent limitations in
      all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues and instances of fraud, if any, within the Company have
      been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      override of the control.




Our
      financial reporting process includes extensive procedures we undertake in order
      to obtain assurance regarding the reliability of our published financial
      statements, notwithstanding the material weaknesses in internal control. We
      expanded our review of accounting for business combinations to help compensate
      for our material weaknesses in order to provide assurance that the financial
      statements are free of material inaccuracies or omissions of material fact.
      As a
      result, management, to the best of its knowledge, believes that (i) this
      Quarterly Report on Form 10-Q does not contain any untrue statements of a
      material fact or omits any material fact and (ii) the financial statements
      and
      other financial information included in this report have been prepared in
      conformity with GAAP and fairly present in all material aspects our financial
      condition, results of operations, and cash flows.





**Changes
      in Internal Control over Financial Reporting**





Except
      for the remedial actions taken as described above, 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 quarter ended June 30, 2008 that
      have materially affected, or are reasonably likely to materially affect, our
      internal control over financial reporting.





**PART
      II. OTHER INFORMATION**





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





The
      following discussion discusses all known or anticipated material legal
      proceedings commenced by or against us. Occasionally we may be named as a party
      in claims and legal proceedings arising out of the normal course of our
      business. These claims and legal proceedings may relate to contractual rights
      and obligations, employment matters, or to other matters relating to our
      business and operations.





Other
      than the matter discussed below, we are not aware of any material pending legal
      proceedings involving us.





Gregory
      Evans v. The Cyber Group Network Corp, et al. (District Court, Clark County, State of Nevada, Case No. A513378). In March
      2006, Gregory Evans filed suit against us, (under our former name, The Cyber
      Group Network Corp), R. Scott Cramer, Steve Lowe and David Wassung in State
      of
      Nevada District Court in Clark County, Nevada, alleging causes of action for
      “Refusing to Call Vote of Stockholders” and “Conversion” on or about November
      18, 2005. On December 1, 2007, the lawsuit was dismissed following an Order
      to
      Show Cause regarding Dismissal. Prior to the dismissal, the Company was never
      served with a summons or complaint in the matter.





Andrew
      Chien v. Skystar Bio-Pharmaceutical Company, et. al. (US.
      District Court, District of Connecticut, Case No. 3:2007cv00781). Andrew Chien
      filed suit against the Company, R. Scott Cramer, Steve Lowe, David Wassung
      and
      Weibing Lu in United States District Court for the District of Connecticut,
      alleging causes of action for violation of Sections 10(b) and 20(a) of the
      Exchange Act. In or around November 2007, the defendants filed motions to
      dismiss the complaint for failure to state a claim and for lack of personal
      jurisdiction. Mr. Chien agreed to voluntarily amend the complaint after the
      motions were filed, and an amended complaint was subsequently filed on or around
      January 4, 2008. The amended complaint dropped Weibing Lu (who is a resident
      of
      China and was never served) as a defendant. The remaining defendants
      contended that the amended complaint failed to correct the deficiencies of
      the
      original complaint, and filed a renewed motion to dismiss for failure to state
      a
      claim, also preserving their challenge to personal jurisdiction. The
      defendants denied all claims and moved the Court to dismiss the amended
      complaint in its entirety in their motion to dismiss. The motion to dismiss
      also
      requested that the Court award sanctions against Mr. Chien under the Private
      Securities Litigation Reform Act and other authority in the event the
      defendants' motion to dismiss the amended complaint is granted. On July 17,
      2008, the Court granted defendants’ motion and dismissed the lawsuit.




44





**ITEM
      1A.**  **RISK
      FACTORS**





*You
      should carefully consider the risks described below together with all of the
      other information included in this report before making an investment decision
      with regard to our securities. The statements contained in or incorporated
      into
      this offering that are not historic facts are forward-looking statements that
      are subject to risks and uncertainties that could cause actual results to differ
      materially from those set forth in or implied by forward-looking statements.
      If
      any of the following risks actually occurs, our business, financial condition
      or
      results of operations could be harmed. In that case, the trading price of our
      common stock could decline, and you may lose all or part of your
      investment.*





**Risks
      Relating to Our Business**





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




We
      have a
      relatively limited operating history. Xian Tianxing, the variable interest
      entity through which we operate our business, commenced operations in 1997
      and
      first achieved profitability in the quarter ended September 30, 1999.
      Accordingly, you should consider our future prospects in light of the risks
      and
      uncertainties typically experienced by companies such as ours in evolving
      industries such as the veterinary healthcare and medical care products industry
      in China. Some of these risks and uncertainties relate to our ability
      to:




·
            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;·
            raise
                sufficient capital to sustain and expand our business;·
            maintain
                effective control of our costs and expenses;·
            respond
                to changes in our regulatory environment;·
            respond
                to competitive market conditions;·
            manage
                risks associated with intellectual property rights;·
            attract,
                retain and motivate qualified personnel; and·
            upgrade
                our technology to support additional research and development of
                new
                products.




45




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





***If
      we fail to obtain additional financing we will be unable to execute our business
      plan.***




The
      revenues from the production and sale of veterinary healthcare and medical
      care
      products and the projected revenues from these products are not adequate to
      support our expansion and product development programs. Despite our recent
      financing and the financing described in this prospectus, we may need additional
      funds to build our new production facilities; pursue further research and
      development; obtain regulatory approvals; file, prosecute, defend and enforce
      our intellectual property rights; and market our products. Should such needs
      arise, we intend to seek additional funds through public or private equity
      or
      debt financing, strategic transactions and/or from other sources.




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




***Our
      business will be materially and adversely affected if our collaborative
      partners, licensees and other third parties fail to perform as
      expected.***





Due
      to
      the complexity of the process of developing veterinary healthcare and medical
      care products, we may on occasions depend 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
      are
      currently collaborating with Shanghai Poultry Verminosis Institution and Shaanxi
      Microbial Institute to develop products for animal immunization,
      protein technology and enzyme mechanism, non-pathogenic micro-organisms to
      cure
      gastrointestinal tract diseases, and veterinary medicines for pets. However,
      we
      do not have any written agreement with Shanghai Poultry Verminosis Institution
      regarding ongoing collaborations, and under our cooperation agreement with
      Shaanxi Microbial Institute, the Institute is not obligated to us with respect
      to any specific period of time or research projects. There are no assurances
      that we will be able to maintain our present collaborations or establish new
      ones in the future. We could enter into collaborative arrangements for the
      development of particular products that may lead to our relinquishing some
      or
      all rights to the related technology or products. Moreover, product development
      and commercialization efforts could be adversely affected if any collaborative
      partner:




·
            terminates
                or suspends its agreement or arrangement 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;·
            pursue
                other technologies or develop alternative products that compete with
                the
                products we are developing; or·
            otherwise
                fails to meet its contractual
                obligations.




***Our
      products will be adversely affected if we are unable to protect proprietary
      rights or operate without infringing the proprietary rights of
      others.***




The
      profitability of our products will depend in part on our ability to obtain
      and
      maintain protection for our intellectual property rights, such as patents,
      licenses and trade secrets, and the period our intellectual property remains
      exclusive. We must also operate without infringing on the proprietary rights
      of
      third parties and without third parties circumventing our rights. The
      proprietary rights of enterprises such as 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.




46




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




·
            any
                of our applications for patent or exclusivity will result in their
                issuance;·
            we
                will develop additional patentable or proprietary
                products;·
            the
                patents or exclusive rights 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 or proprietary
                rights.




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.





Implementation
      of China’s intellectual property-related laws has historically been lacking,
      primarily because of ambiguities in China’s laws and difficulties in
      enforcement. Accordingly, intellectual property rights and confidentiality
      protections in China may not be as effective as in the United States or other
      countries.




47





***Difficulties
      in manufacturing our products could have a material adverse effect on our
      profitability.***




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 China’s Good Manufacturing Practice (“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.





***Failure
      or delays in obtaining an adequate amount of raw material or other supplies
      would materially and adversely affect our revenue***





While
      our
      current products use raw materials that are readily available presently, we
      cannot give assurance that these raw materials will not become scarce in the
      future. Additionally, we may produce products in the future that 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.




***Our
      ability to generate more revenue would be adversely affected if we need more
      clinical trials or take more time to complete our clinical trials than we have
      planned.***





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




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




***If
      we are unable to obtain the regulatory approvals or clearances that are
      necessary to commercialize our products, we will have less revenue than
      expected.***




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




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





·
            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.




48




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




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




***Competitors
      may develop and market veterinary healthcare and medical care products that
      are
      less expensive, more effective or safer, making our products obsolete or
      uncompetitive.***




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




***Our
      revenue will be materially and adversely affected if our products are unable
      to
      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 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 and thus reduce our earnings or increase
      our losses.***




Our
      research and development processes involve the controlled use of hazardous
      materials. We are subject to national, 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.




49




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




We
      may be
      held liable if any product we develop, or any product which is made using our
      technologies, causes injury or is found unsuitable during product testing,
      manufacturing, marketing, sale or use. These risks are inherent in the
      development of agricultural and bio-pharmaceutical products. We currently do
      not
      have product liability insurance. If we 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, whether or not we are
      successful.





***We
      have no business liability or disruption insurance coverage and therefore we
      are
      susceptible to catastrophic or other events that may disrupt our
      business.***





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.





***We
      will be unsuccessful if we fail to attract and retain qualified
      personnel.***




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




**Risks
      Related to Our Corporate Structure**




***Chinese
      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 Chinese laws and
      regulations may materially and adversely affect our
      business.***




There
      are
      substantial uncertainties regarding the interpretation and application of
      Chinese 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 stockholders. We are considered a foreign person or foreign invested
      enterprise under Chinese law. As a result, we are subject to Chinese 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
      Chinese 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 Chinese 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 Chinese 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 Chinese
      regulation of bio-pharmaceutical business and companies, including limitations
      on our ability to own key assets.***




The
      Chinese 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
      Chinese 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.




50




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




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




The
      Chinese 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 business in China. We have contractual arrangements
      with Xian Tianxing and its stockholders 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 Chinese regulations, and have been advised
      by
      our PRC counsel that in their opinion, the structure for operating our business
      in China (including our corporate structure and contractual arrangements with
      Xian Tianxing) complies with all applicable PRC laws, rules and regulations,
      and
      does not violate, breach, contravene or otherwise conflict with any applicable
      PRC laws, rules or regulations, we cannot assure you that the Chinese government
      would agree that these operating arrangements comply with Chinese licensing,
      registration or other regulatory requirements, with existing policies or with
      requirements or policies that may be adopted in the future. If the Chinese
      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 stockholders may not be
      as
      effective in providing control over these entities as direct
      ownership.***




Since
      Chinese 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
      Chinese law, which may not be effective. In addition, we cannot assure you
      that
      either of Xian Tianxing’s stockholders will act in our best
      interests.





***Because
      we rely on the consulting services agreement with Xian Tianxing for our revenue,
      the termination of this agreement will severely and detrimentally affect our
      continuing business viability under our current corporate structure.***





We
      are a
      holding company and do not have any assets or conduct any business operations
      other than the contractual arrangements between Sida and Xian Tianxing. As
      a
      result, we currently rely entirely for our revenues on dividends payments from
      Sida after it receives payments from Xian Tianxing pursuant to the consulting
      services agreement which forms a part of the contractual arrangements between
      Sida and Xian Tianxing. The consulting services agreement may be terminated
      by
      written notice of Sida or Xian Tianxing in the event that: (a) one party causes
      a material breach of the agreement, provided that if the breach does not relate
      to a financial obligation of the breaching party, that party may attempt to
      remedy the breach within 14 days following the receipt of the written notice;
      (b) one party becomes bankrupt, insolvent, is the subject of proceedings or
      arrangements for liquidation or dissolution, ceases to carry on business, or
      becomes unable to pay its debts as they become due; (c) Sida terminates its
      operations; (d) Xian Tianxing’s business license or any other license or
      approval for its business operations is terminated, cancelled or revoked; or
      (e)
      circumstances arise which would materially and adversely affect the performance
      or the objectives of the agreement. Additionally, Sida may terminate the
      consulting services agreement without cause. Because neither we nor our direct
      and indirect subsidiaries own equity interests of Xian Tianxing, the termination
      of the consulting services agreement would sever our ability to continue
      receiving payments from Xian Tianxing under our current holding company
      structure. While we are currently not aware of any event or reason that may
      cause the consulting services agreement to terminate, we cannot assure you
      that
      such an event or reason will not occur in the future. In the event that the
      consulting services agreement is terminated, this may have a severe and
      detrimental effect on our continuing business viability under our current
      corporate structure, which in turn may affect the value of your investment.




51





***Members
      of Xian Tianxing’s management have potential conflicts of interest with us,
      which may adversely affect our business and your ability for
      recourse.***




Weibing
      Lu, our Chief Executive Officer, is also the Chairman of the Board of Directors
      of Xian Tianxing. Mr. Wei Wen, who is Xian Tianxing’s Vice-General Manager and
      Director, is also a member of Skystar’s board of directors. Conflicts of
      interests between their respective duties to our company and Xian Tianxing
      may
      arise. As our directors and executive officer (in the case of Mr. Lu), they
      have
      a duty of loyalty and care to us under U.S. and Cayman Islands law when there
      are any potential conflicts of interests between our company and Xian Tianxing.
      We cannot assure you, however, that when conflicts of interest arise, every
      one
      of them will act completely in our interests or that conflicts of interests
      will
      be resolved in our favor. For example, they may determine that it is in Xian
      Tianxing’s interests to sever the contractual arrangements with Sida,
      irrespective of the effect such action may have on us. In addition, any one
      of
      them could violate his or her legal duties by diverting business opportunities
      from us to others, thereby affecting the amount of payment Xian Tianxing is
      obligated to remit to us under the consulting services agreement.





After
      our
      recent appointment of four independent directors (including two
      based in the United States), our board of directors is now comprised of a
      majority of independent directors, which we are required to have in order to
      list our securities on AMEX. These independent directors may be in a
      position to deter and counteract the actions of our officers or non-independent
      directors that are against our interests, as the independent directors do not
      have any position with, or interests in, our affiliate entities, and should
      therefore not have any conflicts of interests such as those potentially of
      our
      officers and directors who are management members of Xian Tianxing.
      Additionally, the independent directors have fiduciary duties to act in our
      best
      interests, and failure on their part to do so may subject them to personal
      liabilities for breach of such duties. We cannot, however, give any assurance
      as
      to how the independent directors will act. Further, if we or the independent
      directors cannot resolve any conflicts of interest between us and those of
      our
      officers and directors who are management members of Xian Tianxing, we would
      have to rely on legal proceedings, which could result in the disruption of
      our
      business.




In
      the
      event that you believe that your rights have been infringed under the securities
      laws or otherwise as a result of any one of the circumstances described above,
      it may be difficult or impossible for you to bring an action against Xian
      Tianxing or our officers or directors who are members of its management, all
      of
      whom reside within China. Even if you are successful in bringing an action,
      the
      laws of China may render you unable to enforce a judgment against the assets
      of
      Xian Tianxing and its management, all of which are located in China.




**Risks
      Related to Doing Business in China**




***Adverse
      changes in economic and political policies of the Chinese 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 Chinese 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 Chinese government has implemented various
      measures to encourage economic development and guide the allocation of
      resources. Some of these measures benefit the overall Chinese 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 Chinese 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.




52




***If
      Chinese 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
      Chinese 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 Chinese Income Tax Laws, it is entitled to a preferential
      tax rate of 15%. If the Chinese 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 25%, and we would be unable to obtain business tax refunds
      for our provision of technology consulting services. Loss of these preferential
      tax treatments could have a material and adverse effect on our financial
      condition and results of operations.




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




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




***Uncertainties
      with respect to the Chinese 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 Chinese 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 Chinese legal system is based on written statutes. Prior court
      decisions may be cited for reference but have limited precedential
      value.




Since
      1979, Chinese 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 Chinese legal system is
      based in part on government policies and internal rules (some of which are
      not
      published on a timely basis or at all) that may have a retroactive effect.
      As a
      result, we may not be aware of our violation of these policies and rules until
      some time after the violation. In addition, any litigation in China may be
      protracted and result in substantial costs and diversion of resources and
      management attention.




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




We
      are a
      holding company and do not have any assets or conduct any business operations
      other than the contractual arrangements between Sida and Xian Tianxing. In
      addition, all of Xian Tianxing’s assets are located in, and all of our senior
      executive officers reside within, China. As a result, it may not be possible
      to
      effect service of process within the United States or elsewhere outside China
      upon our senior executive officers and directors not residing in the United
      States, including with respect to matters arising under U.S. federal securities
      laws or applicable state securities laws. Moreover, our Chinese counsel has
      advised us that China does not have treaties with the United States or many
      other countries providing for the reciprocal recognition and enforcement of
      judgment of courts. As a result, our public shareholders may have substantial
      difficulty in protecting their interests through actions against our management
      or directors than would shareholders of a corporation with assets and management
      members located in the United States.




53




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




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





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




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




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




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





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





***The
      full exercise of certain outstanding warrants could result in the substantial
      dilution of the company in terms of a particular percentage ownership in the
      company as well as the book value of the common shares. The sale of a large
      amount of common shares received upon exercise of the warrants on the public
      market to finance the exercise price or to pay associated income taxes, or
      the
      perception that such sales could occur, could substantially depress the
      prevailing market prices for our shares.***





The
      exercise price of certain of our outstanding warrants may be less than the
      current market price for our common shares at $1.10 per share. Specifically,
      there are 570,500 warrants have an exercise price of $1.00 per share and
      975,000 warrants have an exercise price of $1.20 per share for a total
      of 1,545,500 warrants with a weighted average exercise price of $1.13 per
      share. In the event of exercise of these securities, a stockholder could suffer
      substantial dilution of his, her or its investment in terms of the percentage
      ownership in us as well as the book value of the common shares held. Full
      exercise of the warrants would increase the outstanding common shares as of
      July
      31, 2008 by approximately 8% to approximately 20,184,603 shares.




54





***To
      date, we have not paid any cash dividends and no cash dividends are expected
      to
      be paid in the foreseeable future.***





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




***The
      application of the “penny stock” rules could adversely affect the market price
      of our common stock and increase your transaction costs to sell those
      shares.***





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




***Our
      common shares are thinly traded and, you may be unable to sell at or near ask
      prices or at all if you desire to liquidate your
      shares.***





We
      cannot
      predict the extent to which an active public market for its common stock will
      develop or be sustained. We intend to apply for listing on the American Stock
      Exchange, but cannot assure you that this listing or listing on any other
      exchange will ever occur.




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





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




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




55




Stockholders
      should be aware that the market for penny stocks has suffered in recent years
      from patterns of fraud and abuse. Such patterns include (1) control of the
      market for the security by one or a few broker-dealers that are often related
      to
      the promoter or issuer; (2) manipulation of prices through prearranged matching
      of purchases and sales and false and misleading press releases; (3) boiler
      room
      practices involving high-pressure sales tactics and unrealistic price
      projections by inexperienced sales persons; (4) excessive and undisclosed
      bid-ask differential and markups by selling broker-dealers; and (5) the
      wholesale dumping of the same securities by promoters and broker-dealers after
      prices have been manipulated to a desired level, along with the resulting
      inevitable collapse of those prices and with consequent investor losses. Our
      management is aware of the abuses that have occurred historically in the penny
      stock market. Although we do not expect to be in a position to dictate the
      behavior of the market or of broker-dealers who participate in the market,
      management will strive within the confines of practical limitations to prevent
      the described patterns from being established with respect to our securities.
      The occurrence of these patterns or practices could increase the volatility
      of
      our share price.





***Volatility
      in our common share price may subject us to securities
      litigation.***





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




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




As
      of
      July 31, 2008, our principal stockholders and their affiliated entities owned
      approximately 31% of our outstanding common shares, representing approximately
      31% of our voting power. These stockholders, acting individually or as a group,
      could exert substantial influence over matters such as electing directors and
      approving mergers or other business combination transactions. In addition,
      because of the percentage of ownership and voting concentration in these
      principal stockholders and their affiliated entities, elections of our board
      of
      directors will generally be within the control of these stockholders and their
      affiliated entities. While all of our stockholders are entitled to vote on
      matters submitted to our stockholders for approval, the concentration of shares
      and voting control presently lies with these principal stockholders and their
      affiliated entities. As such, it would be difficult for stockholders to propose
      and have approved proposals not supported by management. There can be no
      assurances that matters voted upon by our officers and directors in their
      capacity as stockholders will be viewed favorably by all stockholders of the
      company.




***The
      elimination of monetary liability against our directors, officers and employees
      under Nevada law and the existence of indemnification rights to our directors,
      officers and employees may result in substantial expenditures by our company
      and
      may discourage lawsuits against our directors, officers and
      employees.***





Pursuant
      to our articles of incorporation, we are obligated to indemnify our directors
      and officers for monetary damages to our company and our stockholders to the
      extent provided by Nevada law. We also have contractual indemnification
      obligations under our employment agreements with our chief executive officer
      and
      chief financial officer. The foregoing indemnification obligations could result
      in our company incurring substantial expenditures to cover the cost of
      settlement or damage awards against directors and officers, which we may be
      unable to recoup. These provisions and resultant costs may also discourage
      our
      company from bringing a lawsuit against directors and officers for breaches
      of
      their fiduciary duties, and may similarly discourage the filing of derivative
      litigation by our stockholders against our directors and officers even though
      such actions, if successful, might otherwise benefit our company and
      stockholders.




56




***Legislative
      actions, higher insurance costs and potential new accounting pronouncements
      may
      impact our future financial position and results of
      operations.***





There
      have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
      there may potentially be new accounting pronouncements or additional regulatory
      rulings that will have an impact on our future financial position and results
      of
      operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
      likely to increase general and administrative costs and expenses. While we
      currently do not maintain any insurance policies, we may obtain insurance
      coverage of our business and our directors and officers in the future. Should
      we
      do so we expect that premiums for insurance policies may be considerable in
      light of the high claims rates in recent years. Additionally, there could be
      changes in certain accounting rules. These and other potential changes could
      materially increase the expenses we report under generally accepted accounting
      principles, and adversely affect our operating results.





***Past
      company activities prior to the reverse merger may lead to future liability
      for
      the company.***





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




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




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





·
            actual
                or anticipated fluctuations in our quarterly operating
                results;·
            changes
                in financial estimates by securities research
                analysts;




·
            conditions
                in veterinary healthcare and medical care and agricultural
                markets;·
            changes
                in the economic performance or market valuations of other veterinary
                healthcare and medical care products
                companies;




·
            announcements
                by us or our competitors of new products, acquisitions, strategic
                partnerships, joint ventures or capital commitments;·
            addition
                or departure of key personnel;·
            fluctuations
                of exchange rates between RMB and the U.S. dollar;·
            intellectual
                property litigation; and·
            general
                economic or political conditions in
                China.





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




57




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




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




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




We
      are
      subject to reporting obligations under the U.S. securities laws. The SEC, as
      required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
      requiring every public company to include a management report on such company’s
      internal controls over financial reporting in its annual report, which contains
      management’s assessment of the effectiveness of our internal controls over
      financial reporting. In addition, beginning with our annual report for fiscal
      2008, an independent registered public accounting firm must attest to and report
      on management’s assessment of the effectiveness of our internal controls over
      financial reporting. As reported in our annual report on Form 10-K for the
      year
      ended December 31, 2007, we reported certain material weaknesses involving
      control activities, specifically (1) accounting and finance personnel weaknesses
      in that the current staff in the accounting department is relatively
      inexperienced and requires substantial training; (2) lack of internal audit
      function in that we lack qualified resources to perform the internal audit
      functions properly, and the scope and effectiveness of internal audit function
      are yet been fully developed; and (3) lack of internal audit system in that
      we
      do not have an internal audit department to prevent and detect control lapses
      and errors in the accounting of certain key areas in accordance with the
      appropriate costing method used by us.




In
      light
      of the foregoing, our management began to undertake steps to address these
      issues, including the engagement of a new chief financial officer whom
      management believes has the requisite financial reporting experience, skills
      and
      knowledge to complement our existing personnel. Additionally, we have recently
      appointed four independent directors to our board of directors, including a
      member who is appropriately credentialed as a financial expert. The independent
      directors will be tasked to establish certain internal audit functions within
      our company, and we have also established audit and compensation committees
      comprising entirely of independent directors. However, there is no assurance
      that additional remedial measures will not be necessary, or that after the
      remediation our management will be able to conclude that our internal controls
      over our financial reporting are effective. Moreover, even if our management
      concludes that our internal controls over financial reporting are effective,
      our
      independent registered public accounting firm may still decline to attest to
      our
      management’s assessment or may issue a report that is qualified if it is not
      satisfied with our controls or the level at which our controls are documented,
      designed, operated or reviewed, or if it interprets the relevant requirements
      differently from us.




Our
      reporting obligations as a public company will place a significant strain on
      our
      management, operational and financial resources and systems for the foreseeable
      future. Effective internal controls, particularly those related to revenue
      recognition, are necessary for us to produce reliable financial reports and
      are
      important to help prevent fraud. As a result, our failure to achieve and
      maintain effective internal controls over financial reporting could result
      in
      the loss of investor confidence in the reliability of our financial statements,
      which in turn could harm our business and negatively impact the trading price
      of
      our stock. Furthermore, we anticipate that we will incur considerable costs
      and
      use significant management time and other resources in an effort to comply
      with
      Section 404 and other requirements of the Sarbanes-Oxley Act.




***Shares
      eligible for future sale may adversely affect the
      market.***





From
      time
      to time, certain of our stockholders may be eligible to sell all or some of
      their shares of common stock by means of ordinary brokerage transactions in
      the
      open market pursuant to Rule 144, promulgated under the Securities Act, subject
      to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
      stockholders may sell freely after six months subject only to the current public
      information requirement (which disappears after one year). Affiliates may sell
      after six months subject to the Rule 144 volume, manner of sale (for equity
      securities), current public information and notice requirements. Of the
      approximately 18.64 million shares of our common stock outstanding as of July
      31, 2008, approximately 2.82 million shares are, or will be, freely
      tradable without restriction, unless held by our "affiliates", as
      of July 31, 2008. Any substantial sale of our common stock pursuant to Rule
      144 or pursuant to any resale prospectus may have a material adverse effect
      on
      the market price of our Common Stock.




58





***The
      improper issuance of our series “A” preferred stock may subject us to certain
      claim by the holder of series “A” preferred shares as well as
      indemnification obligations to the directors who authorized the
      issuance.***




In
      2001,
      our then board of directors authorized and caused the issuance of 2,000,000
      shares of series “A” preferred stock to a corporation wholly-owned by our then
      Chief Executive Officer and director, Gregory Evans, for services rendered
      by
      him. The resolutions of the board of directors approving such issuance stated
      that the series “A” preferred shares carries a “super voting power of five”.
      Neither Mr. Evans nor any other member of management at such time filed a
      certificate of designation with the Secretary of State of the State of Nevada.
      Because no certificate of designation was filed with the Nevada Secretary of
      State prior to the issuance of 2,000,000 shares of our series “A” preferred
      stock, these shares do not have terms and are deemed invalidly issued under
      Nevada corporate law. Moreover, such invalidity is not correctable under
      applicable Nevada law by a subsequent filing of a certificate of designation
      should we choose to do so now, which we do not have any intention of doing.
      As
      such, we do not believe that the holder of these series “A” preferred shares can
      successfully assert a right to obtain ownership interest in our Company,
      substantial or otherwise.





Nevertheless,
      the holder of these shares may potentially assert claims against us and the
      directors who authorized the issuance. One such claim may be for breach of
      oral
      or written contract. Since the Nevada statute of limitations is six years for
      breach of a written contract and four years for breach of an oral contract,
      however, any such claim may be time-barred. Even assuming that such claim is
      not
      time-barred, we may have the affirmative defense of laches in that the delay
      of
      prosecution of such claim unfairly and materially prejudices our interests,
      especially considering the changes in control of our Company since the issuance
      of the series “A” preferred shares. Additionally, as Mr. Evans was also a
      principal of the Company at the time of issuance, a claim for breach of contract
      may be defective for inadequate or lack of consideration. Another claim may
      be
      for fraud based on an assertion that Mr. Evans was induced to provide services
      on any purported representation of the then board of directors in exchange
      for
      the series “A” preferred shares, which has a three-year statute of limitations
      in Nevada. Thus, such claim may also be time-barred. Moreover, given Mr. Evan’s
      roles with the Company at the time these shares were issued, the element of
      reliance on his part may be difficult to justify. While we may have colorable
      affirmative defenses against these claims, we cannot assure you that we would
      ultimately prevail in any lawsuit. Should Mr. Evans prevail on any claim, we
      may
      be subject to restitution or other forms of monetary damages, which amount
      is
      difficult to determine but may take into consideration the then and current
      fair
      market value of the series “A” preferred shares. Additionally, although the
      directors who authorized the issuance of the series “A” preferred
      shares are no longer members of our board of directors, we may nevertheless
      be obligated, should such claim arises, to indemnify and defend these directors,
      provided we have no such obligation if the actions of these directors, in
      authorizing the issuance of the series “A” preferred shares, are determined to
      have arisen out of their own gross negligence or willful misconduct.





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





Reference
      is made to our Current Report on Form 8-K filed with the SEC on April 23,
      2008.





On
      February 12, 2008, our Board approved the issuance of  90,000 shares
      of our restricted common stock to R. Scott Cramer, a member of the Company’s
      board of directors which were issued on April 21, 2008. These restricted common
      shares were issued to Mr. Cramer for services unrelated to Mr. Cramer’s duties
      as a director.





Additionally,
      on February 29, 2008, our Board approved the issuance of  210,400
      shares of our restricted common stock to our legal counsel which were issued
      on
      April 21, 2008. These restricted common shares were issued to the legal counsel
      as partial payment for services rendered.





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





None.





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITYHOLDERS**





Reference
      is made to our Definitive Proxy Statement on Schedule 14A filed with the SEC
      on
      June 13, 2008.




59





**ITEM
      5.**  **OTHER
      INFORMATION**





None.





**ITEM
      6.**  **EXHIBITS**





The
      following exhibits are filed herewith:





**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
            
            Certificate
                of Amendment to Increase Number of Authorized Shares of Common Stock
                (16)3.3
            
            Amended
                and Restated Bylaws of Skystar Bio-Pharmaceutical Company
                (17)4.1
            
            Form
                of Common Stock Certificate (15)4.2
            
            Form
                of Class A Convertible Debenture (7)4.3
            
            Form
                of Class B Convertible Debenture (7)4.4
            
            Form
                of Class A Warrant (7)4.5
            
            Form
                of Class B Warrant (7)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 Registration Rights Agreement, dated as of February 26, 2007 by
                and
                among the Company and the Purchasers (7)10.3
            
            Form
                of Company Principal Lockup Agreement (7)10.4
            
            Form
                of the Amendment, Exchange and Waiver Agreement between the Company
                and
                certain accredited investors dated November 9, 2007
                (8)




60




10.5
            
            Form
                of the Amendment and Waiver Agreement between Skystar Bio-Pharmaceutical
                Company and two institutional and accredited investors dated March
                31,
                2008 (13)10.6
            
            Amendment
                to Consulting Services Agreement among Skystar Cayman, Xian Tianxing
                and
                Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
                (11)10.7
            
            Amendment
                to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
                Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
                (11)10.8
            
            Agreement
                to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
                Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
                2008 (11)10.9
            
            Designation
                Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
                Stockholders, Weibing Lu and Sida dated March 10, 2008
                (11)10.10
            
            Agreement
                to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing,
                Xian
                Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10,
                2008
                (11)10.11
            
            Employment
                Agreement with Weibing Lu dated May 5, 2008 (14)10.12
            
            Loanout
                Agreement with Worldwide Officers, Inc. dated May 5, 2008
                (14)10.13
            
            Form
                of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
                (17)10.14
            
            Form
                of Director Offer Letter with Mr. Chengtun Qu and Mr. Shouguo Zhao
                (17)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 (18)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 (18)32.1
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (18)32.2
            
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (18)99.1
            
            Legal
                Opinion from Allbright Law Offices regarding, among other things,
                the
                contractual arrangements Skystar Cayman entered into with Xian Tianxing
                and its stockholders, dated November 3, 2005 (15)99.2
            
            Legal
                Opinion from Allbright Law Offices regarding the transfer of the
                contractual arrangements from Skystar Cayman to Sida, dated April
                29, 2008
                (15)99.3
            
            Lease
                Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
                (12)99.4
            
            Lease
                Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and
                Weibing
                Lu dated June 17, 2007 (15)99.5
            
            Summary
                of Research Arrangement between Shanghai Poultry Verminosis Institute
                and
                Xian Tianxing (15)




61




99.6
            
            Cooperation
                Agreement between Shaanxi Microbial Institute and Xian Tianxing
                (15)





(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)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                December 11, 2007.(9)
            Incorporated
                by reference from the Registrant’s Annual Report on Form 10-K filed on
                April 2, 2008.(10)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K on March 11,
                2008.(11)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                March 11, 2008.(12)
            Incorporated
                by reference from the Registrant’s Annual Report on Form 10-K filed on
                April 2, 2008.(13)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                April 23, 2008.(14)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on May
                7, 2008.(15)
            Incorporated
                by reference from the Registrant’s Registration Statement on Form S-1/A
                filed on June 26, 2008.(16)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                July 14, 2008.(17)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                July 15, 2008.(18)
            Filed
                herewith.





62




**SIGNATURES**





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





August
                14, 2008
            SKYSTAR
                BIO-PHARMACEUTICAL COMPANYBy:
            /s/
                Weibing LuWeibing
                Lu
              Chief
                Executive Officer
              (Principal
                Executive Officer)By:
            /s/
                Bennet P. TchaikovskyBennet
                P. Tchaikovsky
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




63