**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB/A**


**(Amendment
        No. 2)**





x
            Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the fiscal year ended December 31,
                2006.





o
            Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934.




Commission
      File No.: 0-26059





**CHINA
      SKY ONE MEDICAL, INC.**


(Exact
      name of Registrant as specified in its Charter)





Nevada
            
            87-0430322(State
                or other Jurisdiction of Incorporation or Organization)
            
            (IRS
                Employer ID Number)





Room
      1706, No. 30 Di Wang Building, Gan Shui Road,


Nangang
        District, Harbin, People’s Republic of China 150001


(Address
      of Principal Executive Offices) (Zip Code)





No.38
      Dingxin 3 rd Street,
      Nangang District, Harbin,


Heilongjiang
      Province, People’s Republic of China 150001


Former
      name, former address and former fiscal year, if changed since last
      report.





Registrant's
      Telephone Number including Area Code: 86-451-53994073
      (China)





Securities
      Registered Under Section 12(b) of the Exchange Act: None.


Securities
      Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value
      $0.001





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes xNo
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. o





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





State
      issuer’s revenues for its most recent fiscal year. $19,768,960.





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days. (See definition of affiliate in Rule
      12b-2 of the Exchange Act.) On the basis of the last sale price on March 26,
      2007, of $8.00, the aggregate market value of the voting and non-voting common
      equity held by non-affiliates was $45,924,168.





As
      of
      March 30, 2007, the registrant had outstanding 12,036,696 shares of its common
      stock.





Documents
      incorporated by reference: None.





Transitional
      Small Business Disclosure Format: Yes oNo
x










**EXPLANATORY
        NOTE**
 
 As
          previously announced in a Current Report on Form 8-K (the “Form 8-K”) filed by
          China Sky One Medical, Inc. (the “Company”) with the Securities and Exchange
          Commission (the “SEC”) on September 18, 2007 (as amended on September 26, 2007),
          on approximately May 12, 2007, the Company’s management concluded that the
          Company’s previously filed financial statements as of the fiscal year ended
          December 31, 2006, and the interim periods ended March 31, 2006, June 30,
          2006
          and September 30, 2006, should no longer be relied upon due to certain
          significant accounting errors.
 
 This
          Amendment No. 2 to the Annual Report on Form 10-KSB (the “10-KSB/A”), which
          amends and restates certain items identified below with respect to the
          Form
          10-KSB originally filed by the Company with the SEC on April 2, 2007 (the
          “Original Filing”), and as amended by the filing of a Form 10-KSB/A on November
          8, 2007, is being filed to reflect the restatement of the Company’s financial
          statements for the fiscal year ended December 31, 2006. Detailed
          information regarding
          the accounting errors that have been corrected is provided in Note 24 of
          the Notes to the Financial Statements included in this 10-KSB/A. As soon
          as
          practicable, the Company will file amended Form 10-QSBs for the interim
          periods
          ended June 30, 2006 and September 30, 2006. Subsequent
          to the filing of the Form 8-K, the Company determined it is not required
          to file
          an amendment to the Form 10-QSB for the interim period ended March 31,
          2006.
 
 The
        Company has attached to this 10-KSB/A updated certifications executed as
        of the
        date of this Form 10-KSB/A by the Chief Executive Officer and Chief Financial
        Officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of
        2002.
        These updated certifications are attached as Exhibits 31.1, 31.2, 32.1 and
        32.2
        to this 10-KSB/A.
 
 This
            Form
            10-KSB/A only amends and restates information as enumerated
            above. This Form 10-KSB/A continues to describe conditions as of the date
            of the Original Filing, and the disclosures contained herein have not
            been
            updated to reflect events, results or developments that have occurred
            after the
            Original Filing to the extent set forth above, or to modify or update
            those
            disclosures affected by subsequent events. These reports include, without
            limitation, the Company's Annual Report on Form 10-KSB for the year ended
            December 31, 2007 and a Quarterly Report on Form 10-QSB for the quarter
            ended
            March 31, 2008, as well as subsequent reports, each as amended from time
            to
            time, which filings reflect more subsequent current financial. Among
            other
            things, forward-looking statements made in the Original Filing have not
            been
            revised to reflect events, results or developments that
            have
            occurred or facts that have become known to us after the date of the
            Original
            Filing (other than the restatement), and such forward-looking statements
            information should be read in their historical context. This Form 10-KSB/A
            should be read in conjunction with the Company’s filings made with the SEC
            subsequent to the Original Filing, including any amendments to those
            filings.









**TABLE
      OF CONTENTS**





**ITEM
      NUMBER AND CAPTION**




**PART
                  I**
                
                
                
                
                
                **Page
                  No.**Item
                    1.
                
                
                Description
                    of Business
                
                
                2Item
                    2.
                
                
                Description
                    of Property
                
                
                31Item
                    3.
                
                
                Legal
                    Proceedings
                
                
                31Item
                    4.
                
                
                Submission
                    of Matters to a Vote of Security Holders
                
                
                31**PART
                    II**Item
                    5.
                
                
                Market
                    for Common Equity and Related Stockholder Matters
                
                
                31Item
                    6.
                
                
                Management’s
                    Discussion and Analysis or Plan of Operation
                
                
                34Item
                    7.
                
                
                Financial
                    Statements
                
                
                F-1Item
                    8.
                
                
                Restated
                    Changes In and Disagreements With Accountants on Accounting and
                    Financial
                    Disclosure
                
                
                43Item
                    8A.
                
                
                Controls
                    and Procedures
                
                
                43Item
                    8B.
                
                
                Other
                    Information
                
                
                44**PART
                    III**Item
                    9.
                
                
                Directors,
                    Executive Officers, Promoters and Control Persons;Compliance
                    With Section 16(a) of the Exchange Act
                
                
                44Item
                    10.
                
                
                Executive
                    Compensation
                
                
                46Item
                    11.
                
                
                Security
                      Ownership of Certain Beneficial Owners and Management andRelated
                      Stockholder Matters
                
                
                50Item
                    12.
                
                
                Certain
                    Relationships and Related Transactions
                
                
                51Item
                    13.
                
                
                Exhibits
                
                
                52Item
                    14.
                
                
                Principal
                    Accountant Fees and Services
                
                
                54




1




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**




All
      of
      the business of China Sky One Medical, Inc., is conducted through its
      wholly-owned subsidiary, American California Pharmaceutical Group, Inc., a
      California corporation (“ACPG”), which, in turn, conducts its business through
      its wholly-owned subsidiary, Harbin Tian Di Ren Medical Science and Technology
      Company (“TDR”), and TDR’s subsidiaries, described below. All references in this
      Form 10-KSB/A, unless the context otherwise indicates, to “China Sky,” “the
“Company,” “we,” “us,” “our,” and the like, shall mean China Sky One Medical,
      Inc., combined with ACPG, and its subsidiary, TDR, and TDR’s
      subsidiaries.





ACPG
      was
      incorporated on December 16, 2003, in the State of California, under the name
      “QQ Group, Inc.” It changed its name to “American California Pharmaceutical
      Group, Inc.” in anticipation of the stock exchange transaction with China Sky
      (then known as “Comet Technologies, Inc.”), described below. On December 8,
      2005, ACPG completed a stock exchange transaction with TDR and TDR’s
      subsidiaries. Under the terms of the agreement, ACPG exchanged 100% of its
      issued and outstanding common stock for 100% of the capital stock of TDR and
      its
      subsidiaries, described below.





On
      May
      11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
      Agreement”) with the shareholders of the Company (then known as “Comet
      Technologies, Inc.”). The terms of the Exchange Agreement were consummated and
      the transaction was closed on May 30, 2006. As a result of the transaction,
      the
      Company issued a total of 10,193,377 shares of its common voting stock to the
      stockholders of ACPG, in exchange for 100% of the capital stock of ACPG. The
      common shares were issued in reliance on the exemption from registration set
      forth in Section 4(2) of the Securities Act of 1933 as amended and Regulation
      D
      thereunder. As a result of the transaction, ACPG is now a wholly-owned
      subsidiary of the Company, and the Company, which previously had no material
      business operations, is a holding company for the business of ACPG and its
      subsidiaries.





ACPG
      is
      only a holding company, and has no revenues (and relatively nominal expenses),
      except those related to its ownership of TDR and its subsidiaries. TDR, formerly
      known as “Harbin City Tian Di Ren Medical Co.,” was originally formed in 1994
      and maintained its principal executive office in Harbin City of Heilongjiang
      Province, in the People’s Republic of China (the “PRC”). TDR was reorganized and
      incorporated as a limited liability company on December 29, 2000, under the
      “Corporation Laws and Regulations” of the PRC with an authorized capital of
      $l,330,314 (Renminbi (“RMB”) 11.015 million). TDR had two wholly-owned
      subsidiaries, Harbin First Bio-Engineering Company Limited (“First”) and Kangxi
      Medical Care Product Factory (“Kangxi”), until July, 2006, when Kangxi was
      merged into First.




2




**BUSINESS
      OF TDR**





**GENERAL**





We
      are
      engaged, through TDR and subsidiaries, in the development, manufacture,
      marketing and sale of over-the-counter nutritional and medicinal products.
      TDR’s
      principal business is the manufacture and sale of branded nutritional
      supplements and over-the-counter plant and herb based pharmaceutical and
      medicinal products. We have evolved into an integrated manufacturer, marketer
      and distributor of external use Chinese medicine products sold primarily to
      and
      through China domestic pharmaceutical chains. The Company sells both its own
      manufactured products, and medicinal and pharmaceutical products manufactured
      by
      others in the PRC.





Our
      manufacturing facilities are in the City of Harbin, Heilongjiang Province.





Our
      principal products are external use Traditional Chinese Herbal Remedies/
      Medicines (“TCM”). Using various formulas, we produce a number of TCM products
      with several forms of delivery including creams and ointments, powders, sprays,
      various medicated skin patch products, and herbs believed to have complimentary
      effects.





Our
      principal operations are through TDR in the PRC, where TDR has sales
      distribution covering most of China and the Hong Kong Special Administration
      Region. We also export our products to 11 other countries, including Germany,
      Denmark, Switzerland, Hungary, South Korea, Singapore, and the United States.





TDR
      has
      also established several long-term relationships with well-known universities
      and enterprises in the PRC, as described below under “Current Research and
      Development.” Through these relationships, TDR hopes to develop a number of
      additional products it will be able to manufacture and market in the PRC and
      in
      other countries.





The
      State
      Food and Drug Administration of the government of the PRC (“SFDA”) issues the
      licenses and petitions for permission to manufacture and market pharmaceutical
      products in the PRC. TDR has been granted 9 product licenses and permits, which
      have allowed TDR to commercialize a total of 36 products. TDR is undertaking
      efforts to develop a series of 10 new products, and is planning to register
      these products with the SFDA over the next 5 years. TDR has also registered
      7
      patents with the State Intellectual Property Rights Bureau of the PRC, which
      includes packing design patents as well as product ingredients patents. TDR
      plans to continue registering patents resulting from its ongoing product
      research and development.





**Harbin
      First Bio-Engineering Company Limited**





Harbin
      First Bio-Engineering Company Limited (“First”) was formed in Heilongjiang
      Province, in the PRC, on September 26, 2003 with an authorized capital of
      $241,546 (RMB 2 million). First has been a wholly-owned subsidiary of TDR since
      its inception. First focuses on research and development of the use of natural
      medicinal plants and biological technology products, such as Endothelin-1.
      First
      is one of the first companies in Heilongjiang Province conducting
      research and development of high technology biological products. First has
      two
      production lines: an enzyme immunity reagent kit production line, and a colloid
      gold production line. First officially put its facility into production on
      July
      21, 2006.




3




In
      July,
      2006, Kangxi Medical Care Product Factory (“Kangxi”) was merged into First.
      Kangxi was formed on July 20, 2001, in the City of Harbin, Heilongjiang
      Province, in the PRC, with an authorized capital of $60,386 (RMB 500,000).
      Kangxi manufactures and sells branded external use Chinese medicine and other
      natural products under the registered trademark “Kangxi.” Kangxi produces and
      sells its products to TDR for distribution and resale. It has four production
      lines: spray, ointment and cream, powder, and patch.





**PRODUCTS**





We
      manufacture over thirty-seven (37) branded products, which management believes
      enables it to maintain better control over product quality and availability
      while also reducing production costs. We also sell a total of eight (8) products
      manufactured by other firms (See “Other Products,” below). Our manufacturing
      operations are conducted in its facilities located in Harbin City, China. We
      maintain a working relationship with a number of outside manufacturers,
      including softgel manufacturers and packagers, and utilize these outside sources
      from time to time.





We
      sell
      our products under three basic categories: cosmetics (4 items); medical devices
      (4 items); and external use medicinal or pharmaceutical external use products
      (over 22 items). TDR sells a variety of products in different forms, including
      sprays, ointments and creams, powders, and patches.





Set
      forth
      below is a description of the principal products we manufacture.





**Sumei
      Slim Patch**




The
      Sumei
      Slim Patch is marketed and sold in the PRC as a more natural way to lose weight.
      The Sumei Slim Patch uses Saponin to regulate and restrain the excessive
      secretion of certain hormones, while promoting others. The Sumei Slim Patch
      is
      believed to foster weight loss and prevent weight gain.





**Pain
      Killer Patch**





A
      pain
      killer patch applied to the neck, shoulder and waist, this product is a
      treatment to fend off fever, promote well-being and to relieve diarrhea. The
      patch is used for a number of ailments, including fever, headache, dysentery
      of
      a heat type, diarrhea and stiffness and pain in the neck caused by hypertension.





**Anti-Hypertension
      Patch**





The
      anti-hypertension patch is based on five thousand years of Chinese herbal vein
      therapy that has been adapted to a modern trans-dermal therapeutic system (TTS).
      The product utilizes
      a Body-Yong-Guan point technique, which is believed to maximize the
      effectiveness of the medicinal ingredients. The product is believed to stimulate
      blood capillaries, and is believed to be effective in improving circulation
      and
      in reducing blood pressure.




4




**Dysmenorrheal
      Patch**





This
      is a
      soft patch, applied externally, for pain relief from dysmenorrheal (menstrual
      cramps) that combines traditional Chinese point therapy and modern trans-dermal
      technology. This product contains a pure herb formula selected from rare Chinese
      herbs or plants which is refined to extract the effective ingredients. This
      product is believed to be effective in regulating microcirculation, in balancing
      the functions of the human body and in enhancing the immunity response of women.
      It is believed to be effective in treating the dysmenorrheal (cramping) in
      a
      woman’s critical days, and in regulating pain and catamenia (menstruation
      period).





**Yin
      Ke Psoriasis Spray**





Psoriasis
      is a disease that is difficult to treat. TDR’s scientists have focused their
      efforts in finding treatments for this disease. This product contains a Chinese
      herbal that is believed to be effective in killing pathogenic ringworms inside
      or under the skin, causing scale-like skin to fall off, and allowing healthy
      skin to grow.





**Wart
      Removing Spray**





This
      product has been developed to eliminate the virus in a tumor or wart. The
      product is effective in removing warts, through a strong permeation and
      sterilization process. The product is a highly concentrated washing liquid
      that
      is applied to the topical area.





**Chilblain
      Ointment**





This
      product contains Rhizoma Paridis, Rhizoina Bletilae and Camphor, and is refined
      from Chinese herbal materials. It is believed to be effective in improving
      blood
      circulation, and in eliminating various symptoms of Chilblain (a cold injury
      that appears as an inflamed swelling on the extremities), including itching
      and
      swelling.





**Hemorrhoids
      Ointment**





This
      product contains Acetate, Radix notoginseng, and Rhizoma coptidis. The product
      is made in a soft ointment that is effective in sterilizing and relieving
      hemorrhoid symptoms, including itching, distending pain, burning, and bleeding.





**Tinea
      Pedis Spray, Ointment and Powder**





This
      product contains Cortex Pseudolaricis and Cortex Phellodendri, and is a
      treatment for killing various pathogens on the skin surface and subcutaneously,
      such as mycete (a fungus), trichopytic, staphylococcal bacteria aureus, bacillus
      coli, and candida albicans (thrush).




5




**Dermatitis
      Spray**





This
      product is effective in sterilization and in relieving itching in various kinds
      of skin pruritis (intense itching condition) caused by eczema, urticaria
      (hives), seborrheic dermatitis (flaking of skin, dandruff), herpes zoster
      (shingles), neurodermitis and allergic dermatitis.





**Dandruff
      Treatment Herbal Shampoo**





This
      product has been specifically designed to treat dandruff, and is not intended
      for use as an ordinary shampoo. The product is believed to be effective in
      killing fungi and providing nutrition to pallium cells.





**Runze
      Eye Drop**





This
      product is refined from active ingredients extracted from natural herbs or
      plants, and functions as a protection from infection, tiredness of optic nerves
      and myopia.





**Other
      Products**





TDR
      offers a number of additional products made from Chinese herbs and plants,
      including a leukoderma ointment, rheumatism spray, Coryza powder, Hircus
      removing spray, gonorrheal cleaning spray, a snoring retardant, deodorants,
      diet
      tea, cough arresting patch, pharyngitis spray, and others.





The
      Company has historically sold only products it manufacturers itself. However,
      during the 2006 fiscal year, the Company began an initiative to sell medicinal
      products manufactured by other companies under exclusive sales and marketing
      arrangements. Set forth in the table below is information concerning these
      products and the intended treatment applications.





**Product
                Name**
            
            **Treatment
                Applications**
            
            **Main
                Component**Ofloxacin
                Eye Drops
            
            Conjunctivitis,
                keratitis
            
            OfloxacinRibavirin
                Nasal Drops
            
            Influenza
            
            RibavirinEconazole
                Nitrate Suppositories
            
            Colpitis
                (inflammation of the vagina)
            
            Econazole
                NitrateQianliming
                Nasal Drops
            
            Coryza
                (head cold)
            
            Ethyl
                ester hydroxybenzene, etc.Terbinafine
                Hydrochloride Liquor
            
            Tinea
                (scalp ringworm)
            
            Terbinafine
                HydrochlorideCompound
                Camphor Cream
            
            Eczema,
                dermatitis, etc.
            
            Camphor,
                menthol, methyl salicylateTerbinafine
                Hydrochloride Cream
            
            Tinea
                (scalp ringworm)
            
            Terbinafine
                HydrochlorideSulfasalazine
                Suppositories
            
            Colonitis
            
            Sulfasalazine





Total
      sales in 2006 from products manufactured by other companies under exclusive
      sales arrangements totaled approximately $6,382,000, or approximately 32% of
      total sales in the year, as compared to only nominal sales in 2005. The Company
      markets and sells these products
      through its existing distribution channels. The Company expects that its product
      line under sales and manufacturing contracts with third-party manufacturers
      will
      continue to expand, and that sales revenue from current and new pharmaceutical
      and medicinal products manufactured by other companies will continue to grow
      rapidly in 2007 and beyond.




6




The
      following table sets forth our principal product categories and the approximate
      amount and percentage of revenue from each of such product categories, during
      the fiscal year ended December 31, 2006:





**Revenue
                in 2006****Product
                Category**
            
            **Approx.**
              **Amount
                (U.S.$)**
            
            **Approx.**
              **%
                of Revenue**Sprays
            
            $
            5,229,822
            
            
            26.45Patches
            
            
            6,511,635
            
            
            32.94Ointments
            
            
            1,485,797
            
            
            7.52Liquids,
                Creams and Powders
            
            
            936,186
            
            
            4.73Other
                Products (manufactured by others)
            
            
            6,382,737
            
            
            32.29**Less:
                sales allowance**
            
            
            (777,217
            )
            
            (3.93
            )**Total
                Gross Sales**
            
            $
            19,768,960
            
            
            100.00





**RESEARCH
      AND DEVELOPMENT**





We
      currently conduct all of our research and development (“R&D”) activities,
      either directly or through collaborative arrangements with universities and
      research institutions in the PRC. We have our own research, development and
      laboratory facilities located at its principal headquarters in the city of
      Harbin, Heilongjiang Province. TDR’s R&D team currently consists of
      approximately 30 people, of which 18 people are full time researchers and 12
      people are part time technical experts. Many of our team members are professors
      affiliated with universities in the PRC.





We
      have
      established several long-term partnerships with well-known universities and
      enterprises in the PRC. We have built a gene medicine laboratory through a
      collaborative effort with Harbin Medical University; established a cell
      laboratory with North East Agricultural University; and founded a monoclonal
      antibody laboratory with Jilin University. As a result of one of these
      collaborations with Harbin Medical University, a product known as “Endothelin-1”
is currently under development. As of the date of this Form 10-KSB, we have
      completed oxicology and teratogenicity testing, and have established quality
      standards, and further developments are underway to improve product quality.
      At
      such time as development and clinical testing is successfully completed, we
      will
      commence efforts to market Endothelin-1 as a new anti-cancer medicine. There
      can
      be no assurance, of course, that these development efforts, or that any
      subsequent efforts to obtain SFDA approval of the product, will be successful.
      In collaboration with Harbin Medical University, we have completed a laboratory
      experimental study pertaining to Endothelin-1, which is required prior to
      clinical trials, and is currently applying for approval to enter clinical
      experiments. This medicine has been recognized by the PRC as the “Top Category
      in New Medicine.” In order to qualify as the “Top Category in New Medicine,”
      a company must have intellectual property rights, high technology involvement,
      strong innovation, and the medicine must be the first of its kind to be
      introduced to the PRC. TDR has ownership of the intellectual property rights
      pertaining to this technology, and has obtained an invention patent in China.
      Under our partnership arrangements with other universities and research
      institutions, we will generally hold the intellectual property rights to any
      developed technology. We expect that research and development and testing will
      be completed for manufacturing in 2009.




7




**PRODUCTS
      UNDER RESEARCH AND DEVELOPMENT**





At
      present, our ongoing research is divided into five general areas: (1) the
      development of an enzyme linked immune technique to prepare extraneous
      diagnostic kits (see table below); (2) the development of an enzyme linked
      gold
      colloid technique to prepare extraneous rapid diagnostic test strip; (3) the
      development of a gene recombination technique to prepare gene drug; (4) the
      development of a biology protein chip for various tumor diagnostic applications;
      and (5) the development of a cord blood stem cell bank described below.





**Biological
      Products**





We
      currently have ten biological products under development. The development of
      these products will be completed as early as 2006 for some products, and is
      expected to continue through 2009 or beyond for other products. A summary of
      each of these products is set forth in the table below.





**Testing
                Kits Name**
            **Clinical
                Experiment and Status**
            **Application
                Area**
            **Patent
                or**
              **Intellectual
                Property (IP)**Urinate
                Micro Albumin Examination Testing Kit
            Finished
                clinical experiment and approved by the State; production certificate
                granted in 2006; preparing to manufacture.
            Early
                stage diagnosis for primary kidney disease, hypertension,
                diabetes.
            Patented
                in the PRCCardiac
                Arrest Early Examination Kit
            Finished
                clinical experiment; approved by the State; production certificate
                granted
                and preparing to manufacture.
            Early
                stage diagnosis for myocardial infarction
            Applying
                for patentAIDS
                Early Examination Kit
            Completed
                clinical testing; application for manufacturing certificate
                submitted.
            Early
                stage diagnosis for AIDS
            Method
                of Anti-body preparation is our IP.Carcinoma
                Cervix Early Examination Kit
            Research
                completed and application for manufacturing certificate
                submitted.
            Early
                stage diagnosis for Carcinoma Cervix
            Anti-body
                preparation is our IP.Breast
                Cancer Early Examination Kit
            Research
                on product formula completed; and application for production permit
                submitted.
            Early
                stage diagnosis for Breast Cancer.
            Anti-body
                preparation is our IP.Liver
                Cancer Early Examination Kit
            Research
                on product formula completed; clinical experiment in
                process.
            Early
                stage diagnosis for Liver Cancer.
            Anti-body
                preparation is our IP.Rectal
                Cancer Early Examination Kit
            Research
                on product formula completed; clinical experiment in
                process.
            Early
                stage diagnosis for Rectal Cancer.
            Anti-body
                preparation is our IP.Stomach
                Cancer Early Examination Kit
            Product
                research completed; clinical experiment in process.
            Early
                stage diagnosis for Stomach Cancer.
            Anti-body
                preparation is our IP.Multi-tumor
                Marker Protein Chip Assay Kit
            Product
                research in process.
            Early
                stage diagnosis for multiple cancers.
            Anti-body
                preparation is our IP.New
                Endostatin
            Toxicology
                test, teratogenicity test and quality standard completed; product
                research
                in process.
            Early
                stage diagnosis for cancer.
            Anti-body
                preparation is our IP.




8




We
      are
      currently conducting toxicology experiments, quality standard measurement and
      other experimentation for its products under development. It is estimated that
      the experimental time takes about another seven to eight months for each
      product. We cannot predict whether, and when, these efforts will be successful,
      or the likelihood and/or timing of receiving SFDA approval of each
      product.





**Research
      and Development for Cord Blood Stem Cell Bank**





In
      2006,
      the Company began implementing a plan to establish a cord blood stem cell bank
      in the PRC, for the treatment of various diseases such as leukemia, lymphoma
      and
      rebirth anemia. It is expected that these efforts will continue over the next
      two years or more. This project will involve substantial expense and involve
      numerous risks. We plan to expend Company resources in the research and
      development of technology, applications and methodology for the establishment
      of
      a cord blood stem cell bank over the next few years, and the Company has applied
      a portion of the net proceeds from its recently completed private offering
      to
      this project. It is anticipated that our efforts in this area will be in
      partnership with major laboratories with substantial experience and resources
      in
      the area, and the Heilongjiang Provincial Red Cross out-patient department.





Cord
      blood stem cells have been shown to be effective in treating a number of
      diseases, including but not limited to: (a) various forms of blood diseases,
      including Mediterranean anemia, Dresbach’s anemia, hypoplastic anemia, inborn
      cell deficiency, Evan’s syndrome, Fanconi’s anemia, Kostmann’s syndrome, and
      Blackfan-Diamond’s anemia; (b) various malignant diseases, including
      encephaloma, lymphoma, acute and chronic leukemia, Ewing myoma, Neuoblastoma,
      germ cell tumor, and multiple myeloma; (c) metabolism defects, including
      congenital dyskeratosis, Gunter’s disease, and Lesch-Nyhan’s disease; (d)
      immunodeficiency disease, including chronic granuloma disease and
      Wiskott-Aldrich syndrome; and (e) various auto-immune diseases.




There
      are
      numerous advantages of cord blood stem cell banks over traditional marrow
      transplants, including: a high success rate; low rejection rate; rich source
      of
      cord blood; absence of suffering of recipient; simple inspection and quick
      application; and low matching requirements. We have concluded that the market
      for this business in PRC is potentially very large. However, the entry into
      this
      business will require strict examination and approval by PRC and
      local
      governmental agencies, and will require close collaboration with medical
      institutions and academies.




9




The
      Company has recently organized Harbin Tian Qing Biotech Application Company
      (“ Harbin Biotech”) as a wholly-owned subsidiary, to conduct research and development in
      the areas of tissue and stem cell banks.





Research
      in biotechnology areas such as tissue and stem cell banks has historically
      been
      controlled tightly by the government of the PRC.   Recently, however,
      the PRC government has altered its policies to allow one company per each
      geographic area in China to become actively engaged in research in these areas,
      with the result that many companies have
      applied to become engaged in this area of research and development, including
      the Company.





In
      August, 2006, the Company applied with the Ministry of Health of the PRC to
      become engaged in the
      research and development of stem cell and tissue banks and related biotechnology
      areas.   Following an extensive review by the applicable local office
      of the Health Department of Heilongjiang Province, the Company’s application was
      approved on October 16, 2006, granting the Company the exclusive right and
      license to become engaged in tissue and stem cell bank activities in the
      Heilongjiang Province, PRC.  The Company organized Harbin Biotech to
      conduct these business operations, as required by Heilongjiang Province.





Blood
      from umbilical cords — a
      byproduct of normal childbirth — is
      a good
      source of potentially life-saving stem cells, called Hematopoietic progenitor
      cells (HPCs), the type of stem cells also found in bone marrow and mobilized
      peripheral blood that give rise to various kinds of blood
      cells.   Transplants of these stem cells have been effective in
      treating diseases of the blood and immune system, such as anemia and leukemia.
      Consequently, in many parts of the world, cord blood, once seen as a waste
      to be
      discarded after a birth, is now viewed as a valuable resource.





Over
      the
      past decade, several public and private cord blood banks have been established
      in other parts of
      the world to provide for the collection and preservation of these cells.
  The PRC is now making these activities available to a limited number
      of private enterprises in different parts of the PRC, including the Heilongjiang
      Province where the Company conducts its principal operations.   As
      indicated, Harbin Biotech will have the exclusive right and license to establish
      a research and development business in this area in northeast China.





Typically,
      public cord blood banks collect and store umbilical cord blood donated by women
      at the birth of a child.   This blood is preserved and stored and made
      available for a significant fee to anyone who needs it in the future.
  The children of the donor may, in turn, be able to use the
      stored stem cells to fight various diseases, immune deficiencies and genetic
      disorders.   Storing the stem cells will come at a cost to the donor,
      consisting of a sizable initial fee and an annual maintenance fee for each
      year
      of storage.





Through
      Harbin Biotech, we are in the process of implementing a plan to establish a cord stem
      cell and tissue bank at our newly established facility outside Harbin,
      Heilongjiang Province, PRC, which is expected to be completed in 2008 or 2009.
      Management estimates that the total expected
      project costs to complete the project will be US$30 million. We have recently
      completed a private offering of $3,000,000 of our equity securities, resulting
      in net proceeds of approximately $2.715 million. A portion of the proceeds
      of
      the private offering have been or will be utilized to advance this project,
      in
      purchasing necessary cell bank equipment; undertaking research and development
      and purchasing related research equipment; covering marketing and promotional
      costs; and covering initial overhead and project costs.




10




This project is a
      substantial commitment by the Company, and consequently involves a number of
      significant risks, including:





(1)  We
      will
      need to raise substantial additional capital to fund this project over the
      next
      two or more years, through borrowings, the sale of equity or from income from
      operations.   There can be no assurance we will be successful in
      obtaining capital when needed, or on favorable terms.   If we are not
      successful in obtaining capital on a timely basis, the project could be severely
      compromised.





(2)  Our
      ability to enter this area is subject to the laws and requirements of the PRC.
        We have received approval from the government to engage in these
      business operations in northeast China on an exclusive basis.
  However, there can be no assurance the PRC government will not
      restrict or cancel our rights, or allow other competitors to become engaged
      in
      this business in northeast China, which would make it more difficult for us
      to
      compete.





(3)  Stem
      cell
      banking is still in its development stages, and there remain many technical
      and
      development challenges, including issues pertaining to the long-term viability
      of cryogenically frozen cord blood.





(4)  The
      project will be managed by Liu Yan-Qing, the Company’s President.
  The success of the project, therefore, will be dependent to a large
      extent on the health and continuing involvement of Liu Yan-Qing.





While
      we
      do not expect that our research and development in this area will have a
      negative impact on its
      current core business - the manufacture, marketing and sale of nutritional
      and
      medicinal products - the establishment of this business will require substantial
      managerial, technical and financial resources.





During
      the 2006 fiscal year, the Company had capital expenditures of over $1.15 million
      for equipment and construction costs; investment on research and development;
      and related costs in connection with initiating the stem cell bank
      program.





**Sales
      approach of the biotech products**





We
      have
      established a domestic marketing network for our products covering most of
      the
      PRC mainland, and have employed sales agents in these areas. Our target
      customers are chain drug stores and hospitals in all cities. We use distributors
      to sell products in those countries and remote regions where we do not have
      sales agents.




11




We
      have
      established a marketing network through independent agents to develop an
      international market. At present, we have established over 20 international
      agents to sell our products.





**MATERIALS
      AND SUPPLIERS**





We
      employ
      a purchasing staff with extensive knowledge of our products who work with
      marketing, product development, and formulations and quality control personnel
      to source raw materials for products and other items. Raw materials are sourced
      principally in the PRC, and are generally available from a variety of suppliers.
      No one supplier accounts for more than 20% of our total raw material purchases.
      We seek to mitigate the risk of a shortage of raw materials, through
      identification of alternative suppliers for the same or similar raw materials,
      where available. We manufacture bulk branded products to allow more extensive
      vertical integration and to improve the quality and consistency of raw
      materials.





**CUSTOMERS
      AND DISTRIBUTION**





Currently,
      our products are sold primarily in the PRC and, to a lesser extent, in Hong
      Kong
      and in eleven other countries. Approximately 90% of our revenue is from the
      sale
      of products in China and Hong Kong.





Over
      the
      past several years, we have continuously expanded our distribution channels
      for
      our products. As a result, we have established representative sales offices
      in
      22 provinces and 125 municipalities, and deployed sales managers and
      representatives in each of these markets.





Our
      products are sold directly to retail stores, including pharmacies and drug
      store
      chains, and through independent distributors. We currently have approximately
      900 customers, not including branches of retail and drug supply chains. No
      single customer accounts for more than 5% of its total revenue.





As
      a
      means of accelerating our distribution into other countries, we expect that
      we
      will enter into strategic marketing arrangements with firms that have
      distribution channels, brand name recognition or other unique marketing
      strengths. The Company expects that under a typical arrangement it will grant
      limited exclusivity to a sales agent or distributor to certain products in
      a
      specified territory(ies), subject to the agent meeting specified minimum monthly
      or annual sales numbers. Consistent with this approach, in March, 2007, we
      entered into an exclusive strategic agreement with Takasima Industries
      (“Takasima”), under the terms of which Takasima has been engaged as the
      exclusive sales agent of our patch products in Malaysia. Takasima will offer
      our
      Slim Patch products in Malaysia, under Takasima’s name brand. (See Item 6.
      Management’s Discussion and Analysis - Overview).





We
      also
      export a number of its products to 11 countries, including the United States,
      Germany, Denmark, and others, and utilizes agents and independent distributors
      for these marketing and sales efforts.




12




We
      will
      continue efforts to expand our markets into other provinces and larger cities
      in
      the PRC, and to other markets worldwide.




**COMPETITION**





Competition
      in the TCM, pharmaceutical, and over-the-counter nutraceutical business is
      intense in China and throughout the world. We compete with various firms, many
      of which produce and market products similar to our products, and many of which
      have greater resources than us in terms of manufacturing and marketing
      capabilities, management expertise and breadth, and financial
      wherewithal.





Our
      direct competitors are other domestic firms engaged in developing, manufacturing
      and marketing TCM and nutraceutical products. There are many of these companies
      in the PRC, in Heilongjiang Province, and even in the city of Harbin.





We
      expect
      that the competition for medicinal products in the PRC and other world markets
      will become more intense over the next few years. We will also face competition
      from foreign companies who may have established products, a strong proprietary
      pipeline and strong financial resources. Our management believes our company
      has
      certain competitive advantages in introducing new products to market due to
      our
      existing distribution channels, research and development capabilities and our
      relationship with certain universities and other research institutions. However,
      there can be no assurance that we will be able to compete and continue to grow
      in this highly competitive environment.




**PRODUCTION
      AND OTHER FACILITIES**





We
      have
      two separate facilities, headquartered in the city of Harbin, Heilongjiang
      Province. The older facility includes 3,000 square meters of production space,
      and 1,000 square meters of warehouse. The facility also includes an extraction
      workshop (approximately 1,200 square meters) and filling workshop (approximately
      500 square meters) for traditional Chinese medicines; a patches production
      line
      (approximately 500 square meters), packing workshop (approximately 500 square
      meters), testing workshop (approximately 50 square meters), examination
      laboratory (approximately 100 square meters), sample laboratory (approximately
      50 square meters), refining room (approximately 100 square meters), and a
      work-in-process warehouse (approximately 300 square meters); finished product
      warehouse (approximately 200 square meters), materials warehouse (approximately
      100 square meters) and a packing warehouse (approximately 400 square meters).





The
      newer
      facility covers consists of a four floor office building (1,500 square meters
      for office purpose, 1,200 square meters for R&D center, 800 square meters
      for central examination lab, dormitory and eatery 1,000 square meters), total
      4,500 square meters construction area, and a factory of 3,500 square meters.
      The
      facilities also include: an enzyme immunity reagent kit production workshop
      (1,500 square meters) and a colloid gold production workshop (600 square
      meters); a packing workshop (800 square meters); and an examination lab (500
      square meters). The newer facility also includes a research center covering
      approximately 1,200 square meters, for research pertaining to the development
      of
      various products, including traditional Chinese medicinals
      (TCM), biological medicine, gene medicine, immune body research, and vitro
      diagnosis reagent. These facilities also include an electricity room, heating
      and boiler room and garage. Our enzyme immunity examination reagent kit
      production workshop includes antigen and immune body areas, disinfection room,
      aseptic clothes room, cushion room, weighing room, separation room, cleaning
      equipment room, a Wan Ji flow cushion room, and antigen and immune body sign
      room. The enzyme sign processing area has cushion room, cloth cleaning room,
      cleaning equipment room, packing material temporary storage room, raw material
      temporary storage room, equipment storage room, weighing room, seal protection
      room, seal foster room, drying room, packing room, and middle cooler room.
      The
      work fluid separation loading room includes a disinfection clean room, storage
      room, weighting room, loading room, and immune body purification room. The
      colloid gold production workshop has a darkroom, sample room, seal room,
      cementation room, cutting room, and a packing room. The packing workshop
      includes a central equipment room, a cooler room, material relay room, label
      and
      temporary storage room, a packing material temporary storage room, two
      examination cooler rooms, and two finished product cooler rooms.




13




The
      Company also has a sales office in Beijing, which it acquired in December,
      2006,
      when the Company completed the acquisition of the products, dealership and
      marketing network of Heilongjiang Tianlong Pharmaceutical Company (“Tianlong”).
      (See “Item 6. Management’s Discussion and Analysis or Plan of
      Operation—Overview”).





Our
      production facilities are operated in accordance with “good manufacturing
      practices” (“GMP”).





**GOVERNMENT
      REGULATION**





**Regulatory
      Environment**





Our
      principal sales market is in the PRC. We are subject to the Pharmaceutical
      Administrative Law of the PRC, which governs the licensing, manufacturing,
      marketing and distribution of pharmaceutical products in the PRC, and sets
      penalties for violations. In addition, our business is subject to various
      regulations and permit systems of the government of the PRC.





The
      governmental approval process in the PRC for a newly developed health product
      can be lengthy and difficult. A product sample is first sent to a clinical
      testing agent designated by the Ministry of Health, which conducts extensive
      clinical testing and examinations of the product to verify if it has the
      specified functions as stated by the company producing the product. A report
      will then be prepared and issued by the clinical testing agent confirming or
      negating such functions. It generally takes six months to one year for a report
      to be issued by the testing agent, after submittal to the agent. The report
      must
      then be submitted to a provincial Health Management Commission for approval.
      Following this submittal, a letter of approval issued by such commission will
      be
      submitted to the Ministry of Health for the issuance of a certificate that
      authorizes sale and marketing of the product in the PRC.




14




This
      entire process will generally take between eighteen months and two years. The
      approval process will depend to a certain extent on whether a specified product
      is a plant based pharmaceutical (“PBP”) or a plant based nutraceutical (“PBN”).
      PBPs are products composed of herbs, roots and plants that do not use synthetic
      chemicals, with certain medicinal functions for treatment of one or more
      illnesses. PBPs are generally prescription-based but in some cases may be sold
      over-the-counter. PBNs, also frequently known as “dietary supplements” or
“nutritional supplements,” are also composed of herbs, roots and plants, but are
      essentially prophylactic or preventive in nature. All PBNs are available
      over-the-counter without a prescription. In the PRC, PBPs require the approval
      of the SFDA, and PBNs only require the approval of state and local governments
      prior to manufacturing and sale. Obtaining the approval from the SFDA is
      generally more complex and lengthy.





Because
      our company and its subsidiaries are wholly-owned enterprises, we are subject
      to
      the law of foreign investment enterprises in the PRC, and the foreign company
      provisions of the Company Law of China, which governs the conduct of our
      wholly-owned subsidiaries and their officers and directors.





**Compliance
      with Environmental Law**





We
      comply
      with the Environmental Protection Law of the PRC, as well as applicable local
      regulations. In addition to compliance with the PRC law and local regulations,
      we consistently undertake active efforts to ensure the environmental
      sustainability of our operations. Because the manufacturing of herb and
      plant-based products does not generally cause significant damage or pollution
      to
      the environment, the cost of complying with applicable environmental laws is
      not
      material. In the event we fail to comply with applicable laws, we may be subject
      to penalties.





**INTELLECTUAL
      PROPERTY**





We
      regard
      our service marks, trademarks, trade secrets, patents and similar intellectual
      property (“IP”) as critical to our business. We have relied, and will rely, on
      patent, trademark and trade secret law, as well as confidentiality and license
      agreements with certain of our employees, consultants, customers and others,
      to
      protect our proprietary rights.





Under
      the
      PRC State Protection law, certain herbal medicine products which have received
      approval from the SFDA, have automatic protected IP rights for a seven-year
      period from the date of grant of such approval. An application can be submitted
      to extend such protection for up to three consecutive seven-year periods. Once
      this protection period has expired, an applicant may apply for patent protection
      in the PRC. To a large extent, we rely on such State Protection law to protect
      our IP rights with respect to our products. In addition, as of the date of
      this
      filing, we own a total of 7 patents in the PRC, pertaining to our TCMs and
      biotech diagnostic kits and drugs, as follows:





(1)
            Package
                foil bag design patent of Sumei slim
                patch;


(2)
            Package
                box design patent for all TCM
                products;


(3)
            Arts
                and crafts patent of Human Urinary Albumin Elisa
                Kit;




15




(4)
            Arts
                and crafts patent of Sumei slim
                patch;


(5)
            Arts
                and crafts design patent of Sumei slim
                patch;


(6)
            Arts
                and crafts patent of Suning cough removing patch; and


(7)
            Arts
                and crafts patent of Endostatin.





We
      have
      received the following awards from the government of the PRC:





(1)  High
      Technology products certificates by Heilongjiang High Technology Products
      Committee covering the following products:





(a)
            The
                Coryza Spray;


(b)
            Dermatitis
                Spray;


(c)
            Pharyngitis
                Spray;


(d)
            Tinea
                Pedis spray;


(e)
            Gonorrhea
                Cleaning Spray


(f)
            Wart-removing
                liquid;


(g)
            Sumei
                Slim patch;


(h)
            Suning
                Cough removing patch; and


(i)
            Psoriasis
                Spray.





(2)  National
      Class Torch Project (pertaining to the Sumei slim patch);





(3)  Excellence
      Products Award for Human Urinary Albumin Elisa Kit by The 6th New & High
      Technology Fruits Fair Shen Zhen and National Commercial
      Department;





(4)  100
      important pre-phase projects in Heilongjiang Province covering various medical
      diagnostics kits;





(5)  Material
      Medical Technology Research and Development Company (by Heilongjiang provincial
      Science and Technology Bureau); and





(6)  High
      Technology Industrialized Base of Medical Area, by Heilongjiang Provincial
      Development and Reform Committee (March of 2006).





We
      have
      registered “Kang Xi” as our trademark, which is used for all of our TCM
      products.




**EMPLOYEES**





The
      number of our employees has increased over the past two years, due to growth,
      increased research and development and expanded marketing and distribution
      of
      products Currently we have a total of approximately 1,318 employees and
      manufacturers’ representatives, generally falling into the following categories:




16




By
                  company:**Company**
              
              **Number
                  of
                  Employees**TDR
              
              1,179*First
              
              139TOTAL:
              
              1,318





By nature of job (TDR
                and First
                combined):**Type of Job**
              
              **Number
                  of
                  Employees**Executives and Managers
              
              24Production and clerical
              
              145Sales and Marketing
              
              1,119*Research and Development,
                Technology
              30





*Includes
      manufacturers’ representatives.





We
      have
      employment agreements with a number of our higher level employees. None of
      the
      employees are covered by a collective bargaining agreement; however, we believe
      our relationship with employees is good.





**RISK
      FACTORS**





An
      investment in our securities is highly speculative and subject to numerous
      and
      substantial risks. These risks include those set forth below and elsewhere
      in
      this Form 10-KSB/A. Readers are encouraged to review these risks carefully
      before making any investment decision. Additional
      risks and uncertainties not presently foreseeable to us may also impair business
      operations. If any of the following risks occur, our business, financial
      condition or operating results could be materially and adversely affected.
      In
      such case, the trading price of our Common Stock could decline, and an investor
      could lose all or part of his investment.





Most
      of
      the risks set forth below pertain to the business of our wholly owned
      subsidiary, American California Pharmaceutical Group, Inc. (“ACPG”), which owns
      all of the issued and outstanding shares of registered capital of Harbin Tian
      Di
      Ren Medical Science and Technology Company (“TDR”), a limited liability company
      organized in Heilongjiang Province in the People’s Republic of China (“PRC” or
“China”). Our business is conducted through ACPG and its subsidiary, TDR (and
      its subsidiaries).




17




**CHINA
      RELATED RISKS**




**Our
      business will be affected by the government regulation and Chinese economic
      environment because most of our sales will be in the China market.**




Although
      we have started exporting products to other countries, most of our sales are
      in
      the PRC and Hong Kong. It is anticipated that our products in China will
      continue to represent a significant portion of sales in the near future. As
      a
      result of our reliance on the China markets, our operating results and financial
      performance could be affected by any adverse changes in economic, political
      and
      social conditions in China.





The
      modernization of regulations for the pharmaceutical industry is relatively
      new
      in the PRC, and the manner and extent to which it is regulated will continue
      to
      evolve. As a pharmaceutical company, we are subject to the Pharmaceutical
      Administrative Law, which governs the licensing, manufacture, marketing and
      distribution of pharmaceutical products in the PRC, and sets penalty provisions
      for violations of provisions of the Pharmaceutical Administrative Law. In
      addition as a “Foreign Owned Enterprise,” we will be subject to the Foreign
      Company provisions of the Company Law of the PRC. Changes in these laws or
      new
      interpretations of existing laws may have a significant impact our methods
      and
      our cost of doing business. For example, if legislative proposals for
      pharmaceutical product pricing, reimbursement levels, approval criteria or
      manufacturing requirements should be proposed and adopted, such new legislation
      or regulatory requirements may have a material adverse effect on our financial
      condition, results of operations or cash flows. In addition, we are subject
      to
      varying degrees of regulation and licensing by governmental agencies in China.
      At this time, we are unaware of any China legislative proposals that could
      adversely affect our business. There can be no assurance that future regulatory,
      judicial and legislative changes will not have a material adverse effect on
      our
      operations, that regulators or third parties will not raise material issues
      with
      regard to compliance or non-compliance with applicable laws or regulations,
      or
      that any changes in applicable laws or regulations will not have a material
      adverse effect on our business.





The
      economy of the PRC has been transitioning from a planned economy to market
      oriented economy. Although in recent years the Chinese government has
      implemented measures emphasizing the utilization of market forces for economic
      reforms, the reduction of state ownership of productive assets and the
      establishment of sound corporate governance in business enterprises, a
      substantial portion of productive assets in the PRC are still owned by the
      Chinese government. For example, all lands are state owned and are leased to
      business entities or individuals through governmental granting of State-owned
      Land Use Rights. The granting process is typically based on government policies
      at the time of granting and it could be lengthy and complex. This process may
      adversely affect our future manufacturing expansion. The Chinese government
      also
      exercises significant control over the PRC’s economic growth through the
      allocation of resources, controlling payment of foreign currency and providing
      preferential treatment to particular industries or companies. Uncertainties
      may
      arise with changing of governmental policies and measures. At present, our
      development of research and development technologies and products is subject
      to
      approvals from the relevant government authorities in China. Such governmental
      approval processes are typically lengthy and complex, and never certain to
      be
      obtained.




18




**There
      are risks in** **herent
      in doing business in China.**




The
      PRC
      is a developing country with a young market economic system overshadowed by
      the
      state. Its political and economic systems are very different from the more
      developed countries. China also faces many social, economic and political
      challenges that may produce major shocks and instabilities and even crises,
      in
      both its domestic arena and in its relationship with other countries, including
      but not limited to the United States. Such shocks, instabilities and crises
      may
      in turn significantly and adversely affect our performance.




**Certain
      political and economic considerations relating to the PRC could adversely affect
      our business and operations.**





While
      the
      PRC government has pursued economic reforms since its adoption of the open-door
      policy in 1978, a large portion of the PRC economy is still operating under
      five-year plans and annual state plans. Through these plans and other economic
      measures, such as control on foreign exchange, taxation and restrictions on
      foreign participation in the domestic market of various industries, the PRC
      government exerts considerable direct and indirect influence on the economy.
      Many of the economic reforms carried out by the PRC government are unprecedented
      or experimental, and are expected to be refined and improved. Other political,
      economic and social factors can also lead to further readjustment of such
      reforms. This refining and readjustment process may not necessarily have a
      positive effect on our operations or future business development. Our operating
      results may be adversely affected by changes in the PRC’s economic and social
      conditions as well as by changes in the policies of the PRC government, such
      as
      changes in laws and regulations (or the official interpretation thereof),
      measures which may be introduced to control inflation, changes in the interest
      rate or method of taxation, and the imposition of additional restrictions on
      currency conversion.





**The
      recent nature and uncertain application of many PRC laws applicable to our
      company create an uncertain environment for business operations and they could
      have a negative effect on our business and operations.**





The
      PRC
      legal system is a civil law system. Unlike the common law system, the civil
      law
      system is based on written statutes in which decided legal cases have little
      value as precedents. In 1979, the PRC began to promulgate a comprehensive system
      of laws and has since introduced many laws and regulations to provide general
      guidance on economic and business practices in the PRC and to regulate foreign
      investment. Progress has been made in the promulgation of laws and
      regulations dealing with economic matters such as corporate organization and
      governance, foreign investment, commerce, taxation and trade. The promulgation
      of new laws, changes of existing laws and the abrogation of local regulations
      by
      national laws could have a negative impact on our business, business prospects
      and operations. In addition, as these laws, regulations and legal requirements
      are relatively recent, their interpretation and enforcement involve significant uncertainty.




19




**It
      may be difficult to effect service of process and enforcement of legal judgments
      upon our company and its officers and directors because they reside outside
      the
      United States.**





As
      our
      operations are presently based in the PRC and our directors and officers reside
      in the PRC, service of process on our company and such directors and officers
      may be difficult to effect within the United States. Also, substantially all
      of
      our assets are located in the PRC and any judgment obtained in the United States
      against our company may not be enforceable outside the United
      States.





**Our
      business may be affected by unexpected changes in regulatory requirements in
      the
      jurisdictions in which we operate.**





Our
      company, and its subsidiaries, are subject to many general regulations governing
      business entities and their behavior in China and in other jurisdictions in
      which we and our subsidiaries have, or plan to have, operations and market
      products. In particular, we are subject to laws and regulations covering food,
      dietary supplements and pharmaceutical products. Such regulations typically
      deal
      with licensing, approvals and permits. Any change in product licensing may
      make
      our products more or less available on the market. Such changes may have a
      positive or negative impact on the sale of our products and may directly impact
      the associated costs in compliance and our operational and financial viability.
      Such regulatory environment also covers any existing or potential trade barriers
      in the form of import tariff and taxes that may make it difficult for us to
      import our products to certain countries and regions, such as Hong Kong, which
      would limit its international expansion.





**We
      may have difficulty attracting talent in foreign
      countries.**





Currently,
      over 90% of our sales are in the PRC and in Hong Kong. We are in the process
      of
      attempting to establish marketing and sales presence in the United States and
      other countries. We expect to establish an office in the United States for
      investor relations. In the future, we may explore expanding its operations
      in
      the United States, as well as other countries throughout the world. Upon
      effecting any such expansion, we may not be able to identify and retain
      qualified personnel due to its lack of understanding of different cultures
      and
      lack of local contacts. This may impede international expansion.





**We
      may experience currency fluctuation and longer exchange rate payment
      cycles.**





The
      local
      currencies in the countries in which we sell products may fluctuate in value
      in
      relation to other currencies. Such fluctuations may affect the costs of our
      products sold and the value of our local currency profits. While operations
      in
      countries other than China do not comprise a substantial portion of revenue
      at
      the present time, we intend to expand our business in other countries, which
      would result in an increased risk of exposure of our business to currency
      fluctuation.




20




**FOREIGN
      EXCHANGE CONTROL RISKS**




**Currency
      conversion and exchange rate volatility could adversely affect our financial
      condition.**




The
      PRC
      government imposes control over the conversion of RMB into foreign currencies.
      Under the current unified floating exchange rate system, the People’s Bank of
      China publishes an exchange rate, referred to as the PBOC exchange rate, based
      on the previous day’s dealings in the inter-bank foreign exchange market.
      Financial institutions authorized to deal in foreign currency may enter into
      foreign exchange transactions at exchange rates within an authorized range
      above
      or below the PBOC exchange rate according to market conditions.




Pursuant
      to the Foreign Exchange Control Regulations of the PRC issued by the State
      Council which came into effect on April 1, 1996, and the Regulations on the
      Administration of Foreign Exchange Settlement, Sale and Payment of the PRC
      which
      came into effect on July 1, 1996, regarding foreign exchange control, conversion
      of RMB into foreign exchange by Foreign Investment Enterprises, or FIE’s, for
      use on current account items, including the distribution of dividends and
      profits to foreign investors, is permissible. FIEs are permitted to convert
      their after-tax dividends and profits to foreign exchange and remit such foreign
      exchange to their foreign exchange bank accounts in the PRC.




Conversion
      of RMB into foreign currencies for capital account items, including direct
      investment, loans, and security investment, is still subject to certain
      restrictions. On January 14, 1997, the State Council amended the Foreign
      Exchange Control Regulations and added, among other things, an important
      provision, which provides that the PRC government shall not impose restrictions
      on recurring international payments and transfers under current account items.




Enterprises
      in the PRC (including FIEs) which require foreign exchange for transactions
      relating to current account items, may, without approval of the State
      Administration of Foreign Exchange, or SAFE, effect payment from their foreign
      exchange account or convert and pay at the designated foreign exchange banks
      by
      providing valid receipts and proofs.




Convertibility
      of foreign exchange in respect of capital account items, such as direct
      investment and capital contribution, is still subject to certain restrictions,
      and prior approval from the SAFE or its relevant branches must be sought.




Our
      company is a FIE to which the Foreign Exchange Control Regulations are
      applicable. There can be no assurance that we will be able to obtain sufficient
      foreign exchange to pay dividends or satisfy other foreign exchange requirements
      in the future.




Since
      1994, the exchange rate for RMB against the United States dollars has remained
      relatively stable, most of the time in the region of approximately RMB8.00
      to
      US$1.00. However, in 2005, the Chinese government announced that would begin
      pegging the exchange rate of the Chinese RMB against a number of currencies,
      rather than just the U.S. dollar. As our operations are primarily in China,
      any
      significant revaluation of the Chinese RMB may materially and adversely affect
      cash flows, revenues and financial condition. For example, to the extent
      that we need to convert United States dollars into Chinese RMB for operations,
      appreciation of this currency against the United States dollar could have a
      material adverse effect on our business, financial condition and results of
      operations. Conversely, if we decide to convert Chinese RMB into United States
      dollars for other business purposes and the United States dollar appreciates
      against this currency, the United States dollar equivalent of the Chinese RMB
      that we convert would be reduced.




21




**REGULATORY
      RISKS**




**Our
      business is subject to many governmental regulatory and policy
      risks.**





Our
      business must be conducted in compliance with various government regulations
      and
      in particular, the PRC State Food and Drug Administration (“SFDA”) regulations.
      Government regulations may have material impact on our operations, increase
      costs and could prevent or delay the manufacturing and selling of our products.
      Research, development, testing, manufacturing and marketing activities are
      subject to various governmental regulations in China, including health and
      drug
      regulations. Government regulations, among other things, cover the inspection
      of
      and controls over testing, manufacturing, safety and environmental
      considerations, efficacy, labeling, advertising, promotion, record keeping
      and
      sale and distribution of pharmaceutical products. We will not be able to
      license, manufacture, sell and distribute the vast majority of its products
      without a proper approval from government agencies and in particular the SFDA.
      There is no assurance that we will obtain such approvals.




In
      addition, delays or rejections may be encountered based upon additional
      government regulation from future legislation, administrative action or changes
      in governmental policy and interpretation during the period of product
      development and product assessment. Although we have, so far, obtained the
      rights to sell our products in China, we may not continue to receive and
      maintain regulatory approvals for the sales of these products. Our marketing
      activities are also subject to government regulations with respect to the prices
      that it intends to charge or any other marketing and promotional related
      activities. Government regulations may substantially increase the costs for
      developing, licensing, manufacturing and selling products, impacting negatively
      our operations, revenue, income and cash flow.




**There
      could be changes in government regulations towards the pharmaceutical and
      nutraceutical industries that may adversely affect our
      business.**





The
      manufacture and sale of pharmaceutical and nutraceutical products in the PRC
      is
      heavily regulated by many state, provincial and local authorities. These
      regulations significantly increased the difficulty and costs involved in
      obtaining and maintaining regulatory approvals for marketing new and existing
      products. Our future growth and profitability depends to a large extent on
      our
      ability to obtain regulatory approvals.




The
      SFDA
      of China implemented new guidelines for licensing of pharmaceutical products.
      All existing manufacturers with licenses, which are currently valid under the
      previous guidelines, are required to apply for the Good Manufacturing Practices
      (“GMP”) certifications by June 30, 2004, and to receive approvals by December
      31, 2004. We received certifications for
      our
      current products. However, should we fail to maintain the GMP certifications
      under the new guidelines in the future, or for new products, our businesses
      would be materially and adversely affected.




22




Moreover,
      the laws and regulations regarding acquisitions of the pharmaceutical and
      nutraceutical industries in the PRC may also change and may significantly impact
      our ability to grow through acquisitions.




**BUSINESS
      RISKS**




**Certain
      officers and directors have significant control over our company.**




Dr.
      Liu
      Yan-qing and Ms. Han Xiao-yan, who are officers and directors of China Sky,
      also
      serve as officers and directors of ACPG and TDR. Dr. Liu and Ms. Han own, in
      the
      aggregate, 50.4% of the issued and outstanding shares of our common stock.
      As a
      result, these shareholders are effectively able to control certain corporate
      governance matters requiring shareholders’ approval. Such matters may include
      the approval of significant corporate transactions such as increasing the
      authorized number of our shares to complete the acquisition, if necessary,
      and
      any other transactions requiring a majority vote without seeking other
      shareholders’ approval. They have the ability to control other matters requiring
      shareholder approval including our election of directors which could result
      in
      the entrenchment of management.





**We
      are subject to market and channel risks.**





Over
      90%
      of our sales are made in the PRC, where we primarily sell our products through
      drug chain stores. Because of this, we are dependent to a large degree upon
      the
      success of that distribution channel as well as the success of specific
      retailers in the distribution channel.  Many of the drug stores are
      individual stores or very small chains, and only a few are large chain drug
      stores. We rely on these distribution channels to purchase, market, and sell
      our
      products. Our success is dependent, to a large degree, on the growth and success
      of the drug stores, which may be outside our control. There can be no assurance
      that the drug store distribution channels will be able to grow or prosper as
      it
      faces price and service pressure from other channels, including the mass market.
      There can be no assurance that retailers in the drug store distribution channel,
      in the aggregate, will respond or continue to respond to our marketing
      commitment in these channels.





**We
      are highly dependent upon the public perception and quality of our
      products.**





We
      are
      highly dependent upon consumers’ perception of the safety and quality of our
      products as well as similar products distributed by other companies. Thus,
      the
      mere publication of reports asserting that such products may be harmful could
      have a material adverse effect on our business, regardless of whether these
      reports are scientifically supported. Adverse publicity may have a material
      adverse effect on our business, financial condition, and results of operations.
      There can be no assurance of future favorable scientific results and media
      attention or of the absence of unfavorable or inconsistent
      findings.




23




**Our
      expansion plan may not be successful.**




We
      are
      implementing a strategy to expand the sales of our existing products in the
      PRC
      and other countries, and to introduce additional products under development
      into
      these markets. This expansion strategy may be based on incorrect assumptions
      and
      may be flawed, and may even damage our performance, competitive position in
      the
      market and ultimately even our ability to survive in the marketplace. Even
      if
      the strategy is correct, we may never be able to successfully implement our
      strategy.




**There
      are many safety risks involved in our products and
      services.**




Our
      products and services involve direct or indirect impact on human health and
      life. The drugs, products and services we manufacture and sell may be flawed
      and
      cause dangerous side effects and even fatality in certain cases, and lead to
      major business losses and legal and other liabilities and damages to our
      company.





**Significant
      competition from existing and new entities could adversely affect revenues
      and
      profitability.**





We
      compete with other companies, many of which are offering and/or developing,
      or
      can be expected to develop and offer, products similar to ours. Our market
      is a
      large market with many competitors. Many of our competitors are more established
      than our company, and have significantly greater financial, technical, marketing
      and other resources than our company. Some of our competitors have greater
      name
      recognition and a larger customer base. These competitors may be able to respond
      more quickly to new or changing opportunities and customer requirements and
      may
      be able to undertake more extensive promotional activities, offer more
      attractive terms to customers, and adopt more aggressive pricing policies.
      We
      cannot assure investors that we will be able to compete effectively with current
      or future competitors or that the competitive pressures we face will not harm
      our business.




**Our
      plan to develop and introduce new products and technologies may not be readily
      accepted or meet the need in the marketplace.**





Newly
      developed products and technologies may not be compatible with market needs.
      Because markets for various products differ geographically inside the PRC,
      our
      challenge will be to develop and manufacture products to accurately target
      specific markets to enhance product sales. If we fail to take necessary steps,
      including market research, to understand the health needs of consumers in
      different geographic areas, we may face limited market acceptance of our
      products, which could have a material adverse effect on sales and
      earnings.





**Our
      success will depend on our research and the ability to develop new
      products.**




Our
      growth depends on our ability to consistently discover, develop and
      commercialize new products and find new and improve on existing technologies,
      platforms and products. As such, if we fail to make sufficient investments
      in
      research, to be attentive to consumer needs, or fail
      to
      focus on the most advanced technologies, our current and future products could
      be surpassed by more effective or advanced products of other
      companies.




24




**We
      may have difficulty in defending intellectual property rights from
      infringement.**




Our
      success depends, in large part, on our ability to protect current and future
      technologies and products and to defend our intellectual property rights. If
      we
      fails to protect our intellectual property adequately, competitors may
      manufacture and market similar products. A number of patents covering our
      products have been issued, and we have filed, and expect to continue to file,
      patent applications seeking to protect newly developed technologies and products
      in various countries, particularly in the PRC. Some patent applications in
      the
      PRC are maintained in secrecy until the patent is issued. Because the
      publication of discoveries tends to follow their actual discovery by many
      months, we may not be the first to invent, or file patent applications on any
      of
      its discoveries. Patents may not be issued with respect to any of our patent
      applications and existing or future patents issued to or licensed by us may
      not
      provide competitive advantages for its products. Patents that are issued may
      be
      challenged, invalidated or circumvented by competitors. Furthermore, our patent
      rights may not prevent our competitors from developing, using or commercializing
      products that are similar or functionally equivalent to our products.




To
      the
      extent that we market products in other countries, we may have to take
      additional action to protect our intellectual property. The measures we take
      to
      protect our proprietary rights may be inadequate, and we cannot provide any
      assurance that our competitors will not independently develop formulations
      and
      processes that are substantially equivalent or superior to our products or
      copy
      our products.





We
      also
      rely on trade secrets, non-patented proprietary expertise and continuing
      technological innovation that we seek to protect, in part, by entering into
      confidentiality agreements with licensees, suppliers, employees and consultants.
      These agreements may be breached and there may not be adequate remedies in
      the
      event of a breach. Disputes may arise concerning the ownership of intellectual
      property or the applicability of confidentiality agreements. Moreover, trade
      secrets and proprietary technology may otherwise become known or be
      independently developed by competitors. If patents are not issued with respect
      to products arising from research, we may not be able to maintain the
      confidentiality of information relating to these products.




**We
      will be subject to risks relating to third parties that may claim that we
      infringe on their proprietary rights and may prevent us from manufacturing
      and
      selling certain of our products.**




There
      has
      been substantial litigation in the pharmaceutical and nutraceutical industries
      with respect to the manufacturing, use and sale of new products. These lawsuits
      relate to the validity and infringement of patents or proprietary rights of
      third parties. We may be required to commence or defend against charges relating
      to the infringement of patent or proprietary rights. Any such litigation could
      involve or result in:




25




·
            the
                incurrence of substantial expense, even if we are successful in the
                litigation;





·
            a
                diversion of significant time and effort of technical and management
                personnel;





·
            the
                loss of our rights to develop or make certain products;
                and





·
            the
                payment of substantial monetary damages or royalties in order to
                license
                proprietary rights from third
                parties.





Although
      patent and intellectual property disputes within these industries have often
      been settled through licensing or similar arrangements, costs associated with
      these arrangements may be substantial and could include the long-term payment
      of
      royalties. These arrangements may be investigated by regulatory agencies and,
      if
      improper, may be invalidated. Also, the required licenses may not be made
      available to our company on acceptable terms. Accordingly, an adverse
      determination in a judicial or administrative proceeding or a failure to obtain
      necessary licenses could prevent our company from manufacturing and selling
      some
      of our products or increase costs to market these products.




In
      addition, when seeking regulatory approval for some of our products, we are
      required to certify to regulatory authorities, including the SFDA that such
      products do not infringe upon third party patent rights. Filing a certification
      against a patent gives the patent holder the right to bring a patent
      infringement lawsuit against our company. Any lawsuit would delay regulatory
      approval by the SFDA. A claim of infringement and the resulting delay could
      result in substantial expenses and even prevent us from manufacturing and
      selling certain of our products.




The
      launch of a product prior to a final court decision or the expiration of a
      patent held by a third party may result in substantial damages to our company.
      Depending upon the circumstances, a court may award the patent holder damages
      equal to three times their loss of income. If our company is found to infringe
      a
      patent held by a third party and become subject to such treble damages, these
      damages could have a material adverse effect on our results of operations and
      financial condition.




**Our
      failure to comply with accounting policies and regulations in making reasonable
      estimates and judgments could negatively impact our financial position and
      results of operation.**





We
      will
      be subject to critical accounting policies and actual results may vary from
      estimates. We have followed, and will continue to follow, generally accepted
      accounting principles for the United States in preparing financial statements.
      As part of this work, we must make many estimates and judgments concerning
      future events. These affect the value of the assets and liabilities, contingent
      assets and liabilities, and revenue and expenses reported in such financial
      statements. We believe that these estimates and judgments are reasonable, and
      we
      have made them in accordance with accounting policies based on information
      available at the time. However, actual results could differ from estimates,
      and
      this could require us to record adjustments to expenses or revenues that could
      be material to our financial position and results of operations in the
      future.




26




**We
      do not plan to declare or pay any dividends to our shareholders in the near
      future.**




We
      have
      not declared any dividends in the past, and we do not intend to distribute
      dividends in the near future. The declaration, payment and amount of any future
      dividends will be made at the discretion of the board of directors, and will
      depend upon, among other things, the results of operations, cash flows and
      financial condition, operating and capital requirements, and other factors
      as
      the board of directors considers relevant. There is no assurance that future
      dividends will be paid, and if dividends are paid, there is no assurance with
      respect to the amount of any such dividend.





**We
      are required to be in compliance with the registered capital requirements of
      the
      PRC.**





Under
      the
      Company Law of the PRC, our company will be required to contribute a certain
      amount of “registered capital” to our wholly owned subsidiary. By law, our
      subsidiaries are required to contribute at least 10% of after tax net income
      (as
      determined in accordance with Chinese GAAP) into a statutory surplus reserve
      until the reserve is equal to 50% of the Company and its subsidiaries’
registered capital, and between 5% and 10% of its after tax net income, as
      determined by our board of directors, into a public welfare fund. These reserve
      funds are recorded as part of shareholders’ equity but are not available for
      distribution to shareholders other than in the case of liquidation. As a result
      of this requirement, the amount of net income available for distribution to
      shareholders will be limited.





**Since
      most of our assets are located in the PRC, any dividends or proceeds from
      liquidation are subject to the approval of the relevant PRC government
      agencies.**




Because
      our assets are predominantly located inside the PRC, we will be subject to
      the
      law of the PRC in determining dividends. Under the laws governing foreign
      invested enterprises in the PRC, dividend distribution and liquidation are
      allowed but subject to special procedures under the relevant laws and rules.
      Any
      dividend payment will be subject to the decision of the board of directors
      and
      subject to foreign exchange rules governing such repatriation. Any liquidation
      is subject to both the relevant government agency’s approval and supervision as
      well the foreign exchange control. This may generate additional risk for
      investors in case of dividend payment and liquidation.




**We
      need to manage growth in operations to maximize our potential growth and achieve
      our expected revenues.**





Our
      success depends on our ability to achieve continued growth. In order to maximize
      potential growth in current and potential markets, we believe that we must
      expand our manufacturing and marketing operations. This expansion will place
      a
      significant strain on management and operational, accounting, and information
      systems. We expect that our company will need to continue to improve financial
      controls, operating procedures, and management information systems. We will
      also
      need to effectively train, motivate, and manage our employees. A failure to
      manage our growth could disrupt operations and ultimately prevent us from
      generating the revenues we expect.




27




**We
      cannot assure an investor that our growth strategy will be successful.**





Part
      of
      our strategy is to grow through increasing the distribution and sales of our
      products by penetrating existing markets in the PRC and Hong Kong, and entering
      new geographic markets in the PRC as well as Asia, the United States and other
      countries. However, many obstacles to entering such new markets exist,
      including, but not limited to, international trade and tariff barriers,
      regulatory constraints, shipping and delivery costs, costs associated with
      marketing efforts abroad and maintaining attractive foreign exchange ratios.
      We
      cannot, therefore, assure an investor that we will be able to successfully
      overcome such obstacles and establish our products in any additional markets.
      Our inability to implement this growth strategy successfully may have a negative
      impact on growth, future financial condition, results of operations or cash
      flows.





**We
      may need additional capital to fund growing operations, and we may not be able
      to obtain sufficient capital and may be forced to limit the scope of our
      operations.**





We
      may
      require substantial capital, in addition to the funds from this offering, to
      fund future operations and to fund growth. Our capital needs will depend on
      numerous factors, including (1) profitability; (2) the release of competitive
      products by our competition; (3) the level of our investment in research and
      development; and (4) the amount of our capital expenditures. We cannot assure
      an
      investor that we will be able to obtain capital in the future to meet our needs.





If
      we
      cannot obtain additional funding, we may be required to:





·
            reduce
                our investments in research and
                development;


·
            limit
                our marketing efforts in the PRC and other countries;
                and


·
            decrease
                or eliminate capital expenditures.





Such
      reductions could materially adversely affect our business and our ability to
      compete.





Even
      if
      we are successful in finding a source(s) of additional capital, we may not
      be
      able to negotiate terms and conditions for receiving the additional capital
      that
      are acceptable to management. Any future capital investments could dilute or
      otherwise materially and adversely affect the holdings or rights of our
      shareholders. In addition, new equity or convertible debt securities issued
      by
      our company to obtain financing could have rights, preferences and privileges
      senior to the common stock. There can be no assurance that any additional
      financing will be available, or if available, will be on terms favorable to
      our
      company.





**Our
      products could expose our company to substantial liability.**





We
      face
      an inherent business risk of exposure to product liability claims in the event
      that the use of our products is alleged to have resulted in adverse side
      effects. Side effects or marketing or manufacturing problems pertaining to
      any
      of our products could result in product liability claims or adverse publicity.
      These risks will exist for those products in clinical development
      and with respect to those products that have received regulatory approval for
      commercial sale. To date, we have not experienced any product liability claims.
      However, that does not mean that it will not have any such claims with respect
      to its products in the future. We do not currently carry product liability
      insurance. The lack of product liability insurance may expose our company to
      enormous risks associated with potential product liability claims.




28




**We
      depend on our key management personnel and the loss of their services could
      adversely affect our business.**





We
      place
      substantial reliance upon the efforts and abilities of our executive officers,
      Liu Yan-qing, Chief Executive Officer and Chairman of the Board, Han Xiao-yan,
      Chief Financial Officer, and Wang Hai-feng, Secretary/Treasurer. The loss of
      the
      services of any of these executive officers could have a material adverse effect
      on our business, operations, revenues or prospects. We do not maintain key
      man
      life insurance on the lives of these individuals.





**International
      operations require our company to comply with a number of U.S. and international
      regulations.**





We
      are
      required to comply with a number of international regulations in countries
      outside of the United States. In addition, we must comply with the Foreign
      Corrupt Practices Act, or FCPA, which prohibits U.S. companies or their agents
      and employees from providing anything of value to a foreign official for the
      purposes of influencing any act or decision of these individuals in their
      official capacity to help obtain or retain business, direct business to any person
      or
      corporate entity or obtain any unfair advantage. Any failure to adopt
      appropriate compliance procedures and ensure that our employees and agents
      comply with the FCPA and applicable laws and regulations in foreign
      jurisdictions could result in substantial penalties and/or restrictions in
      our
      ability to conduct business in certain foreign jurisdictions. The U.S.
      Department of The Treasury's Office of Foreign Asset Control, or OFAC,
      administers and enforces economic and trade sanctions against targeted foreign
      countries, entities and individuals based on U.S. foreign policy and national
      security goals. As a result, we are restricted from entering into transactions
      with certain targeted foreign countries, entities and individuals except as
      permitted by OFAC which may reduce our future growth.





**We
      may incur significant costs to ensure compliance with U.S. corporate governance
      and accounting requirements.**





We
      are a
      public reporting company, and, as such, we will incur significant costs
      associated with public company reporting requirements, costs associated with
      newly applicable corporate governance requirements, including requirements
      under
      the Sarbanes-Oxley Act of 2002 and other rules implemented by the U.S.
      Securities and Exchange Commission. All of these applicable rules and
      regulations can be expected to increase legal and financial compliance costs
      and
      to make some activities more time consuming and costly. Management also expects
      that these applicable rules and regulations may make it more difficult and
      more
      expensive to obtain director and officer liability insurance and we may be
      required to accept reduced policy limits and coverage or incur substantially
      higher costs to obtain the same or similar coverage. As a
      result,
      it may be more difficult for our company to attract and retain qualified
      individuals to serve on our board of directors or as executive officers.




29




**We
      may have difficulty raising necessary capital to fund operations as a result
      of
      market price volatility for our shares of common stock.**





In
      recent
      years, the securities markets in the United States have experienced a high
      level
      of price and volume volatility, and the market price of securities of many
      companies have experienced wide fluctuations that have not necessarily been
      related to the operations, performances, underlying asset values or prospects
      of
      such companies. For these reasons, our shares of common stock can also be
      expected to be subject to volatility resulting from purely market forces over
      which we will have no control. If our business development plans are successful,
      we may require additional financing to continue to develop and exploit existing
      and new technologies and to expand into new markets. The exploitation of
      existing and new technologies may, therefore, be dependent upon our ability
      to
      obtain financing through debt and equity or other means.





**RISKS
      RELATED TO COMMON STOCK**




**There
      are substantial risks of lack of liquidity and volatility
      risks.**




Our
      common stock is quoted in the OTC Bulletin Board market under the symbol “CSKI.”
The liquidity of our common stock may be very limited and affected by its
      limited trading market. The OTC Bulletin Board market is an inter-dealer market
      much less regulated than the major exchanges, and is subject to abuses and
      volatilities and shorting. There is currently no broadly followed and
      established trading market for our common stock. An established trading market
      may never develop or be maintained. Active trading markets generally result
      in
      lower price volatility and more efficient execution of buy and sell orders.
      Absence of an active trading market reduces the liquidity of the shares traded
      there.




The
      trading volume of our common stock may be limited and sporadic. As a result
      of
      such trading activity, the quoted price for our common stock on the OTC Bulletin
      Board may not necessarily be a reliable indicator of its fair market value.
      In
      addition, if our shares of common stock cease to be quoted, holders would find
      it more difficult to dispose of, or to obtain accurate quotations as to the
      market value of, our common stock and as a result, the market value of our
      common stock likely would decline.




**We
      may be subject to the risks inherent in a penny stock.**




Our
      common stock may be subject to regulations prescribed by the SEC relating to
      “Penny Stock.” The SEC has adopted regulations that generally define a penny
      stock to be any equity security that has a market price (as defined in such
      regulations) of less than $5.00 per share, subject to certain exceptions. If
      our
      common stock meets the definition of a penny stock, as it currently does, we
      will be subject to these regulations, which impose additional sales practice
      requirements on broker-dealers who sell such securities to persons other than
      established customers and accredited investors—generally institutions with
      assets in excess of $5,000,000 and
      individuals with a net worth in excess of $1,000,000 or annual income exceeding
      $200,000 (individually) or $300,000 (jointly with their spouse).




30





**ITEM
      2. DESCRIPTION OF PROPERTY**





Our
      facilities are located on approximately 92,000 square meters of land, including
      two buildings in the city of Harbin, Heilongjiang Province. (See “Item 1.
      Business—Production and Other Facilities”). We also have a sales and marketing
      facility in Beijing, PRC.





Under
      Chinese law, the government owns all of the land in the PRC and companies and
      individuals are authorized to use the land only through land use rights granted
      by the PRC government. The PRC has granted TDR a land use grant covering the
      land and facilities in which its headquarters are located in downtown Harbin
      City, which expires in 2046. The PRC has granted land use rights on TDR’s two
      production and warehouse facilities, expiring in 2048 and 2053, respectively.
      TDR’s two buildings contain GMP production certified facilities, and are used
      for manufacturing office, warehousing and staff operations.





**ITEM
      3. LEGAL PROCEEDINGS**





The
      Company is not a party to any material pending legal proceedings, and to the
      best of its knowledge, no such proceedings by or against the Company have been
      threatened.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





During
      the quarter ended December 31, 2006, there were no matters submitted to a vote
      of our stockholders.





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND**


**RELATED
      STOCKHOLDER MATTERS**





**Market
      Information - Common Stock**





Our
      common stock (“Common Stock”) is traded on the OTC Bulletin Board under the
      symbol “CSKI.” The range of high and low sales prices for each quarter during
      the last two fiscal years, as quoted on the OTC Bulletin Board for the periods
      discussed above, is set out in the table that follows. These quotations reflect
      inter-dealer prices, without retail mark-up, mark-down, or commission and may
      not necessarily represent actual transactions.




31




Year
                Ended December 31, 2006
            
            Year
                Ended December 31, 2005High
            
            Low
            
            High
            
            Low1st
                Quarter
            
            $
            5.50
            
            $
            1.81
            
            $
            2.72
            
            $
            1.202nd
                Quarter
            
            $
            3.50
            
            $
            3.50
            
            $
            1.60
            
            $
            1.283rd
                Quarter
            
            $
            7.55
            
            $
            3.40
            
            $
            2.64
            
            $
            1.604th
                Quarter
            
            $
            8.50
            
            $
            4.25
            
            $
            2.56
            
            $
            1.60




*All
      numbers give effect to a 1-for-8 reverse split effective as of March 9,
      2006.





As
      of
      March 30, 2007, the closing bid price for our Common Stock was $8.00.





Since
      its
      inception, no dividends have been paid on our Common Stock. We intend to retain
      any earnings for use in our business, so it is not expected that any dividends
      on the Common Stock will be declared and paid in the foreseeable future. We
      do
      not currently have any restrictions that would limit our ability to pay
      dividends, and we are not currently aware of any restrictions that are likely
      to
      limit our ability to pay dividends in the future.





At
      March
      23, 2007, there were approximately 214 holders of record of the Company's common
      stock.





**Sales
      of Unregistered Securities**





On
      May
      11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
      Agreement”) with the shareholders of the Company (then known as “Comet
      Technologies, Inc.”). The terms of the Exchange Agreement were consummated and
      the transaction was closed on May 30, 2006. As a result of the transaction,
      the
      Company issued a total of 10,193,377 shares of its common voting stock to the
      stockholders of ACPG, in exchange for 100% of the capital stock of ACPG. In
      connection with the transaction, a total of 219,212 shares was issued to the
      two
      former officers under a consulting agreement and an option was granted to one
      of
      the former officers, Jack M. Gertino, entitling him to purchase a total of
      50,000 shares, at any time before December 20, 2008, at a price of $3.00 per
      share. (See “Item 12. Certain Relationships and Related Transactions”). The
      common shares were issued in reliance on the exemption from registration set
      forth in Section 4(2) of the Securities Act of 1933 as amended and Regulation
      D
      thereunder.





As
      reported in a Current Report on Form 8-K dated October 17, 2006, and
      incorporated herein by reference, the Company closed a private offering to
      U.S.
      purchasers under Rule 506 of Regulation D, and a separate offering to foreign
      investors pursuant to Regulation S, resulting in the sale of a total of
      $3,000,000 in Units, consisting of common stock and warrants. The Company sold
      a
      total of 200 Units at a price of $15,000 per Unit, each Unit consisting of
      5,000
      shares at a price of $3.00 per share, and 2,500 common stock purchase warrants
      (the “Warrants’). As a result, the Company sold a total of 1,000,000 shares of
      the Company’s common stock, and issued Warrants to purchase up to an aggregate
      of 500,000 additional shares of common stock at any time before October 10,
      2008, at a price of $3.50 per share. The Warrants
      have a “call” provision entitling the Company to call for the exercise of the
      Warrants at any time after January 10, 2008, if the bid price of the Company’s
      common stock averages over $6.00 per share for any consecutive one week period.
      The private offerings commenced on or about August 10, 2006. At the time of
      commencement of the private offering, the bid price of the common stock of
      the
      Company was $3.75. American Eastern Securities, Inc., acted as placement agent
      of the securities, and received a commission of 9% from the gross proceeds
      of
      the private offerings, or a total of $270,000 in cash. The Placement Agent
      also
      received warrants to purchase up to 10% of the Units sold in the offering,
      or a
      warrant
      to purchase a total of 100,000 shares at a price of $3.00 per share, and
      warrants to purchase an additional 50,000 shares at a price of $3.50 per share
      on or before October 10, 2008. All of the warrants involved in the private
      offerings are unexercised as of December 31, 2006, and as of the date of this
      Report.




32




The
      sale
      of Units in the private offering described above was made in the United States
      to only accredited investors, as defined by Rule 501(a) of Regulation D
      promulgated under the Securities Act of 1933, as amended (the “Securities Act”).
      The private offering was made in the United States in reliance upon an exemption
      from registration under Section 4(2) of the Securities Act and Rule 506 of
      Regulation D thereunder. The Company also sold to only accredited investors
      outside the United States in reliance upon Regulation S under the Securities
      Act.





On
      October 3, 2006, Luminus Capital Management, Ltd. (“Luminus”) converted a
      convertible promissory note from the Company dated August 3, 2006 in the
      principal amount of $200,000, together with interest at 6.5% per annum (the
      “Note”), into a total of 102,166 shares of restricted shares of common stock, at
      a price of $2.00 per share. This was a private transaction and was entered
      into
      in reliance upon an exemption from the registration provisions of the Securities
      Act, under Section 4(2), as a transaction not involving a public offering.





In
      October, 2006, the Company granted warrants to two advisors, American Eastern
      Group, Inc., and Shenzhen DRB Investment Consultant Limited, previously agreed
      to under a service agreement, entitling them to each purchase up to 500,000
      shares on or before July 31, 2009, at a price of US$2.00 per share. One-half
      of
      the warrants were considered earned at the time the Company completed the
      Exchange Agreement, and the remaining one-half of the warrants were considered
      earned upon completion of the Company’s public offering. The fair value of the
      warrants was determined to be $1,469,190, under applicable accounting rules,
      of
      which the amount of $734,595 was deducted as expenses, and $734,595 was deducted
      against equity. (See Notes to the Financial Statements, Note 5).




On
      January 3, 2007, an unaffiliated party exercised an outstanding warrant granted
      in March, 1999, to purchase a total of 6,250 shares, using the cashless exercise
      provision of the warrant, resulting in the issuance of a total of 5,160 shares.
      This was a private transaction and was entered into in reliance upon an
      exemption from the registration provisions of the Securities Act, under Section
      4(2), as a transaction not involving a public offering.




33




**ITEM
        6. MANAGEMENT'S DISCUSSION AND ANALYSIS**
 **OR
        PLAN OF OPERATION**
 
 **FORWARD
        LOOKING STATEMENTS**
 
 This
        Amendment No. 1 to the Annual Report on Form 10-KSB contains “forward-looking
        statements” that involve substantial risks and uncertainties.   You
        can identify such statements by forward looking words such as “may,” “expect,”
“plans,” “intends,” “anticipate,” “believe,” “estimate,” and “continue” or
        similar words.   Such statements involve known and unknown risks,
        uncertainties and other factors that may cause actual results, performance
        or
        achievements of China Sky One Medical, Inc. (the “Company”) to be materially
        different from any future results, performance or achievements expressed
        or
        implied by such forward-looking statements. The forward-looking statements
        included herein are based on current expectations that involve numerous risks
        and uncertainties. The Company's plans and objectives are based, in part,
        on
        assumptions involving the continued growth and expansion of the Company’s
        business. Assumptions relating to the foregoing involve judgments with respect
        to, among other things, future economic, competitive and market conditions
        and
        future business decisions, all of which are difficult or impossible to predict
        accurately and many of which are beyond the control of the Company. Although
        the
        Company believes its assumptions underlying the forward-looking statements
        are
        reasonable, any of the assumptions could prove inaccurate and, therefore,
        there
        can be no assurance the forward-looking statements included in this Report
        will
        prove to be accurate. In light of the significant uncertainties inherent
        in the
        forward-looking statements included herein, the inclusion of such information
        should not be regarded as a representation by the Company or any other person
        that the objectives and plans of the Company will be achieved.
 
 **OVERVIEW**
 
 The
        following management’s discussion and analysis (“MD&A”) is intended to
        assist the reader in understanding the business of China Sky One Medical,
        Inc,
        including its subsidiaries (referred to as “CSKI,” “we,” “our” and “us”).
 MD&A is provided as a supplement to, and should be read in conjunction
        with, our consolidated financial statements and accompanying notes.
 References below to the “Company,” “we,” “our” and “us,” refer to the
        Company and its subsidiaries combined.
 
 We
        primarily generate revenues and income and generate cash from sales of products
        in the areas of external-Chinese medicine and over-the counter non-prescription
        health care products in the People’s Republic of China (“PRC”).  Our
        principal products include six (6) product lines: spray, ointment, powder,
        patch, cream, and miscellaneous health and beauty products.
 
 The
        Company achieved continuing growth on the sale of both our own product line
        and
        a contract service line of manufacturer’s products which we sell through our
        distribution channel.  For the year ended December 31, 2006, total
        revenue was $19,881,715, a 158% increased over 2005, and 2006 net income
        was
        $624,415, or $0.05 per share on a diluted basis compared to net income of
        $2,088,828, or $0.19 per share on a diluted basis in 2005.  Net income for
        the year ended December 31, 2006, included expenses of $1.8 million related
        to
        cash, warrants and securities issued to advisors and consultants in connection
        with our reverse merger with Comet.  These adjustments were made pursuant
        to Statement of Financial Accounting Standards No. 123R, pertaining to
        Share-Based Compensation (SFAS 123R).
 
 The
        adoption of SFAS 123R had the following impact on our consolidated
        statement of operations for the year ended December 31, 2006:
 
 Share-based
                  compensation-decrease in net income (net of deferred taxes
                  benefit)
              
              $
              2,744,755Decrease
                  in basic and diluted net income per share :Basic
              
              $
              0.23Diluted
              
              $
              0.21
  34
  In
        addition to growth in our product sales, revenue increased significantly
        during
        the year as a result of a new contract service sales line of other manufactured
        brands that we sell through our distribution channel. We recognized $6.37
        million in contract service revenue in year 2006.
 
 Effective
        May 30, 2006 and pursuant to a plan of reorganization, American California
        Pharmaceutical Group, Inc. (“ACPG”) completed a stock change agreement with
        Comet Technologies, Inc., ("Comet"). Under the terms of the agreement, all
        of
        the ACPG's outstanding stock was exchanged for 10,193,377 shares of Comet
        common
        stock.   The closing of the Exchange Agreement (“Closing”),
        resulted in a change in voting control of Comet.  The original shareholders
        of ACPG hold approximately 93% of the outstanding common stock of Comet,
        and the former Comet shareholders hold a total of 735,993 shares of common
        stock, or 7% of the outstanding common stock, including stock granted under
        a
        consulting agreement to Comet’s two current officers, who resigned as officers
        and directors at the closing.  The common shares were issued in reliance on
        the exemption from registration set forth in Section 4(2) of the Securities
        Act
        of 1933 as amended and Regulation D thereunder.   The transaction is
        treated as a reverse merger for accounting purposes.
 
 On
        July
        26, 2006, the change in the name of the reporting company from “Comet
        Technologies, Inc.” to “China Sky One Medical, Inc.,” became effective. The name
        change was previously disclosed through an Information Statement distributed
        to
        the stockholders of the reporting company pursuant to Regulation 14C adopted
        under the Securities Exchange Act of 1934. At the time of the name change,
        the
        trading symbol of the reporting company on the OTC Bulletin Board changed
        to
“CSKI.”
 
 Our
        Company, a Nevada corporation, is a holding company that conducts its principal
        operations through its subsidiaries, which are engaged in the manufacture,
        marketing and distribution of over-the-counter pharmaceutical and medicinal
        products.  Our subsidiaries are American California Pharmaceutical Group,
        Inc. (“ACPG”), a wholly-owned California corporation; Harbin Tian Di Ren Medical
        Science and Technology Company (“TDR”), Harbin First Bio-Engineering Company
        Limited (“First”) and Harbin Tian Qing Biotech Application Company (“Tian Qing
        Biotech”), subsidiaries of ACPG.
 
 ACPG,
        a
        wholly-owned subsidiary of the Company, operates as a holding company for
        the
        other subsidiaries.  TDR’s principal business is the manufacture and sale
        of branded nutritional supplements and over-the-counter plant and herb-based
        medicinal products. Its manufacturing facilities are in the City of Harbin,
        in
        Heilongjiang Province.  It has evolved into an integrated manufacturer,
        marketer, and distributor of external use natural Chinese medicinal products
        sold primarily to and through domestic pharmaceutical chain stores in China
        through its subsidiary, First (formerly “Kangxi Medical Care Product Factory”
(“Kangxi”)).  First’s principal business activity is to manufacture and
        sell branded external use Chinese medicine and other natural products under
        the
        registered trademark “Kangxi.”  First has six (6) product lines: spray,
        ointment, powder, patch, cream, and miscellaneous health and beauty products.
         First has become one of the leading external use Chinese medicine
        factories with a full range of product lines and development capacity.
 First is also engaged in the research and development of natural medicinal
        plants and biological technology products such as New Endothelin-1.  First
        is one of the first companies in Heilongjiang Province conducting research
        and
        development of high technology biological products. Its facility is now under
        final inspection by the Chinese State Food and Drug Administration (“SFDA”) for
        the qualification as a certified GMP production facility.   On July
        31, 2006, Kangxi merged with First, with Kangxi’s existing business activities
        continuing under First.
 
 In
        October, 2006, we entered into the field of research and development of tissue
        and stem cell banks, with the establishment of Harbin Tian Qing Biotech (“Harbin
        Biotech”), as a wholly-owned subsidiary.  The Health Department of
        Heilongjiang Province, on the basis of the evaluation of results from experts,
        issued a document approving and authorizing Harbin Biotech to enter into
        the
        above-mentioned development areas, and precluding other companies from entering
        the same fields in the Heilongjiang Province.
 
 In
        December, 2006, we acquired all of the products, dealership, and marketing
        network of the Beijing office of Heilongjiang Tianlong Pharmaceutical Company
        (“Tianlong”), and the Beijing office staff for US$381,700.  We have
        historically been competitors with Tianlong.  We had certain sales
        advantages over Tianlong in most cities in China, except in Beijing.
 Facing the continuous increase of sales power of our company in China,
        including Beijing, Tianlong changed its strategy and decided to close its
        branches in all areas of China except its Beijing office, and plans to focus
        on
        the research and manufacturing of drugs. In contrast, we have devoted our
        efforts to realizing the maximum utilization of our sales network by selling
        drugs from domestic and overseas suppliers as well as the development of
        pharmaceuticals with the ownership of the related intellectual property.
          The two companies entered into the agreement as a means of combining
        the efforts, resources and product offerings of both companies.
  35
  Tianlong’s
        Beijing office had revenues of approximately US$1.5 million from January
        to
        November of 2006, with 20% in net profits.  We expect sales to increase by
        30% in 2007, which means the purchase of Tianlong would increase 2007 sales
        to
        approximately US$1.98 million.
 
 Through
        our subsidiaries, we have established several long term partnerships with
        well-known universities and enterprises in the PRC.  We have built a gene
        medicine laboratory through a collaborative effort with Harbin Medical
        University; established a cell laboratory with North East Agricultural
        University; and founded a monoclonal antibody laboratory with Jilin University.
         As a result of one of these collaborations with Harbin Medical University,
        a product known as "Endothelin-1" is currently under development. At such
        time
        as development is successfully completed, we will commence efforts to market
        Endothelin-1 as a new anti-cancer medicine. There can be no assurance, of
        course, that these development efforts, or that any subsequent efforts to
        obtain
        SFDA approval of the product, will be successful.
 
 In
        collaboration with Harbin Medical University, we have completed a laboratory
        experimental study pertaining to Endothelin-1, which is required prior to
        clinical trials, and we are currently applying for approval to enter clinical
        experiments.  This medicine has been recognized by the PRC as the “Top
        Category in New Medicine.”  In order to qualify as the “Top Category in New
        Medicine,” a company must have intellectual property rights, high technology
        involvement, strong innovation, and the medicine must be the first of its
        kind
        to be introduced to the PRC.  We hold the intellectual property rights
        pertaining to this technology, and we have obtained an invention patent to
        this
        intellectual property in the PRC.  Under our partnership arrangements with
        other universities and research institutions, we will generally hold the
        intellectual property rights to any developed technology.
 
 At
        present, our ongoing research is divided into four areas: (1) the development
        of
        an enzyme-linked immune technique to prepare extraneous diagnostic kits;
        (2) the
        development of an enzyme linked gold colloid technique to prepare an extraneous
        rapid diagnostic test strip; (3) the development of a gene recombination
        technique to prepare gene drug; and (4) the development of a biology protein
        chip for various tumor diagnostic applications.  In 2006, we became engaged
        in research and development related to tissue and stem cell banks, as described
        under “Item 1 - Business.”
 
 We
        currently have ten biological products under development:  a human urinary
        albumin elisa kit; an AMI detection kit; HIV detection kit; a uterus cancer
        diagnostic kit; a breast cancer diagnostic kit; a liver cancer diagnostic
        kit; a
        rectum cancer diagnostic kit; a gastric cancer diagnostic kit; a gene
        recombination drug; and a multi-tumor marker protein chip detection kit.
         The development of these products will be completed as early as 2007 for
        some products, and is expected to continue through 2008 or beyond for other
        products.  We are also working to establish two sales networks and cell
        banks covering domestic and international markets.
 
 Our
        AMI
        Diagnostic Kit, Human Urinary Albumin Elisa Kit and Early Pregnancy Diagnostic
        Kit have passed the final stages of national inspection. These diagnostic
        kits
        will be issued new drug certificates and sold through drug stores, hospitals,
        examination stations and independent sales agents throughout the PRC.  We
        also plan to market these products in Vietnam, Indonesia, Philippines and
        eventually in Africa.
 
 Our
        AMI
        Diagnostic Kit is used for early diagnosis of Myocardial Infarction (MI),
        also
        known as heart disease. All the test kits require users to place a blood
        or
        urine sample on the marker and a positive (+) or negative (-) reaction signal
        will result, showing if a user should consult his or her doctor for further
        testing.  According to the China Medical Newspaper, Several million people
        die from MI every year.  MI often occurs to people who are, but not limited
        to, smokers, over-weight and diabetic.  There are approximately 8 million
        new MI patients in China every year.  Recent medical studies have shown
        that heart failure or heart attacks are increasing among younger people in
        China.  This is a result from a more modern life style, the fast pace of
        city life and increased pressure from work or school.  The use of AMI
        Diagnostic Kits will help in early detection that can help in reducing these
        statistics.
  36
  Our
        Human
        Urinary Albumin Elisa Kit is used for early diagnosis of nephropathy, or
        kidney
        problems.  According to the China Medical Newspaper, early kidney
        impairment does not present obvious symptoms, but causes irreversible
        impairments to the kidney. There are billions of people who suffer from
        diabetes, hypertension, cardiovascular disease and nephritis all over the
        world.
 We developed this diagnostic kit to inform users of any major changes
        their kidney may be experiencing.
 
 Our
        Early
        Pregnancy Diagnostic Kit uses monoclonal antibody technology to inform users
        if
        they are pregnant. With this type of technology, a monoclonal antibody is
        created to specifically bind to a hormone, Human Chorionic Gonadotropin (HCG),
        that a pregnant woman produces after conception. This process allows for
        the
        detection of pregnancy.  The ability to determine early pregnancy is
        important in avoiding the absorption of harmful chemicals or drugs that can
        directly affect an infant.
 
 In
        March,
        2007, we entered into a strategic agreement with Takasima Industries
        (“Takasima”). As a result of this agreement, Takasima has been engaged as the
        sole agent of China Sky One's patch products in Malaysia.  Takasima has
        commenced marketing and sales efforts of China Sky One's Slim Patch product
        line. The Slim Patch is a weight loss product that is currently sold in China
        under the "Tian Di Ren" brand. The Slim Patch will be repackaged and sold
        in
        Malaysia under the "Takasima" brand name. The strategic agreement also requires
        that Takasima will generate sales revenue of approximately US$1.0 million
        per
        month. Since the signing of the agreement, Takasima has fulfilled its monthly
        obligation. Management anticipates that this strategic agreement could result
        in
        up to US$12 million in additional annual sales revenue in 2007, with a net
        profit margin of approximately 20%. The agreement also provides that Takasima
        has a first right of refusal to become the sole distributor of the Slim Patch
        in
        all of Southeast Asia.
 
 **Significant
        Accounting Estimates and Policies**
  The
        discussion and analysis of our financial condition and results of operations
        is
        based upon our financial statements which have been prepared in accordance
        with
        accounting principles generally accepted in the United States. The preparation
        of these financial statements requires us to make estimates and judgments
        that
        affect the reported amounts of assets and liabilities. On an on-going basis,
        we
        evaluate our estimates including the allowance for doubtful accounts, the
        salability and recoverability of our products, income taxes and contingencies.
        We base our estimates on historical experience and on other assumptions that
        we
        believes to be reasonable under the circumstances, the results of which form
        our
        basis for making judgments about the carrying values of assets and liabilities
        that are not readily apparent from other sources. Actual results may differ
        from
        these estimates under different assumptions or conditions.
  Property
        and equipment are evaluated for impairment whenever indicators of impairment
        exist. Accounting standards require that if an impairment indicator is present,
        we must assess whether the carrying amount of the asset is unrecoverable
        by
        estimating the sum of the future cash flows expected to result from the asset,
        undiscounted and without interest charges. If the recoverable amount is less
        than the carrying amount, an impairment charge must be recognized, based
        on the
        fair value of the asset.
  As
        part
        of the process of preparing our consolidated financial statements, we are
        required to estimate our income taxes. This process involves estimating our
        current tax exposure together with assessing temporary differences resulting
        from differing treatment of items for tax and accounting purposes. These
        differences result in deferred tax assets and liabilities. We must then assess
        the likelihood that our deferred tax assets will be recovered from future
        taxable income, and, to the extent we believe that recovery is not likely,
        we
        must establish a valuation allowance. To the extent that we establish a
        valuation allowance or increase this allowance in a period, we must include
        a
        tax provision or reduce our tax benefit in the statements of operations.
        We use
        our judgment to determine our provision or benefit for income taxes, deferred
        tax assets and liabilities and any valuation allowance recorded against our
        net
        deferred tax assets. We believe, based on a number of factors including
        historical operating losses, which we will not realize the future benefits
        of a
        significant portion of our net deferred tax assets and we have accordingly
        provided a full valuation allowance against our deferred tax assets. However,
        various factors may cause those assumptions to change in the near
        term.
  37
  We
        cannot
        predict what future laws and regulations might be passed that could have
        a
        material effect on our results of operations. We assess the impact of
        significant changes in laws and regulations on a regular basis and update
        the
        assumptions and estimates used to prepare our financial statements when we
        deem
        it necessary.
  We
        have
        determined the significant principles by considering accounting policies
        that
        involve the most complex or subjective decisions or assessments. Our most
        significant accounting policies are those related to intangible assets and
        research and development.
  **Intangible
        assets -** Intangible
        assets consist patents, distribution rights and customer lists. Patent costs
        are
        being amortized over the remaining term of the patent. Distribution rights
        and
        customer lists are being amortized over 10 years.
 
 Intangible
        assets are accounted for in accordance with Statement of Financial Accounting
        Standards No. 142, *Goodwill
        and Other Intangible Assets* (“SFAS
        142”).  Intangible assets with finite useful lives are amortized while
        intangible assets with indefinite useful lives are not amortized. As prescribed
        by SFAS 142, goodwill and intangible assets are tested periodically for
        impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment
        or
        Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly,
        the
        Company reviews its long-lived assets, including property and equipment and
        finite-lived intangible assets for impairment whenever events or changes
        in
        circumstances indicate that the carrying amount of the assets may not be
        fully
        recoverable. To determine recoverability of its long-lived assets, the Company
        evaluates the probability that future undiscounted net cash flows will be
        less
        than the carrying amount of the assets. Impairment costs, if any, are measured
        by comparing the carrying amount of the related assets to their fair
        value.
 
 **Research
        and development** —Research
        and development expenses include the costs associated with the Company’s
        internal research and development as well as research and development conducted
        by third parties. These costs primarily consist of salaries, clinical trials,
        outside consultants, and materials. All research and development costs discussed
        above are expensed as incurred.
 
 Third-party
        expenses were reimbursed under non-refundable research and development
        contracts, and are recorded as a reduction to research and development expense
        in the statement of operations.
 
 The
        Company recognizes in-process research and development in accordance with
        FASB
        Interpretation No. 4, *Applicability
        of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
        Method* and
        the ** AICPA
        Technical Practice Aid, Assets Acquired in a Business Combination to be used
        in
        Research and Development Activities:  A Focus on Software, Electronic
        Devices, and Pharmaceutical Industries. Assets to be used in research and
        development activities, specifically, compounds that have yet to receive
        new
        drug approval and would have no alternative use, should approval not be given,
        are immediately charged to expense when acquired.
 
 For
        the
        year ended December 31, 2006, the Company incurred $2,026,788 in research
        and
        development expenditures, and $63,749 for year 2005.
  38
  **New
        Accounting Pronouncements**
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, *Fair
        Value Measurements* (“Statement No. 157”).  The standard provides enhanced guidance for using
        fair value to measure assets and liabilities and also responds to investors’
requests for expanded information about the extent to which company’s measure
        assets and liabilities at fair value, the information used to measure fair
        value, and the effect of fair value measurements on earnings.  While the
        standard applies whenever other standards require (or permit) assets or
        liabilities to be measured at fair value, it does not expand the use of fair
        value in any new circumstances.  Statement No. 157 is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. Management of the Company
        is
        evaluating the impact of this standard, but does not anticipate that it will
        have a significant impact on its financial statements.
  In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements (“SAB No. 108”).  This bulletin expresses
        the Staff’s views regarding the process of quantifying financial statement
        misstatements.  The interpretations in this bulletin were issued to address
        diversity in practice in quantifying financial statement misstatements and
        the
        potential under current practice for the accumulation of improper amounts
        on the
        balance sheet.  SAB No. 108 is effective for annual financial statements
        starting with the year ending December 31, 2006.  The Company is evaluating
        the impact of this bulletin and based on current information, the Company
        does
        not believe that it will have a material impact on its financial
        statements.
  In
        July
        2006, the FASB issued Financial Accounting Standards Board Interpretation
        No.
        48, *Accounting
        for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
        109,
        Accounting for Income Taxes* (“FIN
        No. 48”). This interpretation creates a single model to address uncertainty in
        tax positions. FIN 48 clarifies the accounting for income taxes by prescribing
        the minimum recognition threshold a tax position is required to meet before
        being recognized in the financial statements. The interpretation also provides
        guidance on derecognition, measurement, classification, interest and penalties,
        accounting in interim periods, disclosure, and transition.  FIN 48 is
        effective for years beginning after December 15, 2006. Management of the
        Company
        is evaluating the impact of this pronouncement, but does not anticipate that
        it
        will have a significant impact on its financial statements.
  In
        September 2006, the FASB issued Statement No. 158, “Employers’ Accounting
        for Defined Benefit Pension and Other Postretirement Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
        and 132(R). SFAS No. 158 requires (a) recognition of the funded
        status (measured as the difference between the fair value of the plan assets
        and
        the benefit obligation) of a benefit plan as an asset or liability in the
        employer’s statement of financial position, (b) measurement of the funded
        status as of the employer’s fiscal year-end with limited exceptions, and
        (c) recognition of changes in the funded status in the year in which the
        changes occur through comprehensive income. The requirement to recognize
        the
        funded status of a benefit plan and the disclosure requirements are effective
        as
        of the end of the fiscal year ending after December 15, 2006. The
        requirement to measure the plan assets and benefit obligations as of the
        date of
        the employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. This Statement has no current
        applicability to the Company’s financial statements. Management plans to adopt
        this Statement on December 31, 2006 and it is anticipated the adoption of
        SFAS No. 158 will not have a material impact to the Company’s
        financial position, results of operations, or cash flows.
  **RESULTS
        OF OPERATIONS**
 
 ***Year
        Ended December 31, 2006 as compared to Year Ended December 31,
        2005***
 
 Our
        principal business operations are conducted through our wholly owned subsidiary,
        Harbin Tian Di Ren Medical Science and Technology Company (“TDR”), and TDR’s
        subsidiaries.  The results of operations of TDR have been included in the
        below financial statements since the acquisition date.
  39
  December
                  312006
              
              
              
              2005REVENUES
              
              
              
              
              
              VarianceProduct
                  Sales (net of sales allowance)
              
              $
              13,386,223
              
              
              78.42
              %
              $
              7,502,682Contract
                  Sales
              
              
              6,382,737
              
              
              101975
              %
              
              6,253Government
                  Grant
              
              
              112,755
              
              
              -44.38
              %
              
              202,706Total
                  revenues
              
              
              19,881,715
              
              
              
              
              
              7,711,641COST
                  OF GOOD SOLDCost
                  of good sold
              
              
              5,063,084
              
              
              129
              %
              
              2,213,667Gross
                  Profit
              
              $
              14,818,631
              
              
              170
              %
              $
              5,497,974
 
 Total
        sales increased by 158% in 2006 compared to 2005.  The $12.17 million
        increase in sales is attributable to strong performances from our sales
        distribution channel, as well as the addition of a new line of contract sale
        service in 2006 to sell other manufactured brands through our distribution
        channel.
 
 Product
        sales increased by 78.42% in the year ended December 31, 2006, to $13,386,233
        from $7,502,682 in 2005.  This growth in sales is attributable to volume
        and continuing efforts to develop our distribution channels by hiring direct
        territory managers and sales agents to assure that our products and their
        associated benefits are seen by those making or influencing the purchasing
        decisions.
 
 Government
        grant was recognized of $112,755 in 2006 compared to $202,706 in 2005. The
        government grant was issued to support our research and development, and
        the
        production of new medicines.  The grant is recognized as income over the
        period necessary to match the related costs.  This decrease in government
        grant received was also due to the expansion in our size and an increase
        in
        revenue and capital which made us less qualified for certain government grant
        that are issued to small businesses.
 
 ***Contract
        and Other Revenue***
 
 The
        following table summarizes the period over period changes in our contract
        and
        other revenues:
 
 2006
              
              Change
              
              2005Contract
                  and other revenue
              
              $
              6,382,737
              
              
              101975
              %
              $
              6,253
 
 Contract
        and other revenue was $6,382,737 in 2006, or a significant increase of
        $6,376,484 over nominal sales of $6,253 in 2005. In 2006, contract and other
        revenue increased primarily due to net product distribution service revenue
        from
        sales of other manufactured brands through our distribution channel, which
        constitutes approximately 32% of total sales in 2006.
 
 ***Cost
        of Goods Sold and Product Gross Margin***
 
 The
        following table summarizes the period over period changes in our product
        sales
        and cost of goods sold and product gross margin:
  **2006**
              
              **Variance**
              
              **2005**Total
                  sales
              
              $
              19,881,715
              
              
              158
              %
              $
              7,711,641Cost
                  of goods sold
              
              $
              5,063,084
              
              
              129
              %
              $
              2,213,667Product
                  gross margin
              
              
              75
              %
              
              
              
              
              71
              %
  Our
        product gross margin for 2006 was 75%, compared to 71% for 2005. The lower
        gross
        margin was primarily due to the launch of a new sales line of other manufactured
        brands through our distribution channel, the gross margin for this contract
        service line is around 80% with a corresponding impact to our product gross
        profit.
 
 ***Selling,
        General and Administrative Expenses.***
  The
        following table summarizes the period over period changes in our selling,
        general and administrative (SG&A) expenses over the last two years:
 
 December
                  312006
              
              Variance
              
              2005Operating
                  ExpensesR&D
                  Expenses
              
              
              2,026,788
              
              
              3079
              %
              
              63,749General,
                  administrative and selling expenses
              
              $
              10,738,303
              
              
              268
              %
              $
              2,914,190Depreciation
                  and amortization
              
              
              121,522
              
              
              
              
              
              57,563Total
                  operating expenses
              
              
              12,886,595
              
              
              
              
              
              3,035,502Other
                  (Income) ExpensesInterest
                  expense
              
              
              227,857
              
              
              1197
              %
              
              17,563Total
                  other ( income) expenses
              
              $
              227,857
              
              
              
              
              $
              17,563
  40
  Gross
        sales increased approximately $12.17 million in 2006, and corresponding,
        selling, general and administrative expenses (“SG&A”) for 2006 increased by
        $7,824,095 over 2005. Higher expenses were primarily driven by higher headcount
        which increased compensation and benefits by $1.12 million including employee
        stock-based compensation expense of $65,604 from our adoption of SFAS 123R
        on
        January 1, 2006.  In addition, this increase is attributable to an increase
        in advertising costs of $648,225; $2.5 million related to a general expansion
        of
        our sales and marketing activities; our promotional program relating to our
        business growth; business development activities; and the sales force expansion
        planned for the anticipated launch in our new contract service line.  The
        increase in SG&A was also impacted by the inclusion of approximately of $1.8
        million in professional and advisory fees related to the reverse merger with
        Comet.
  Research
        and development (“R&D”) expenses were $2,026,788 for 2006 compared to
        $63,749 for 2005.  We anticipate R&D expenses will increase as we
        conduct additional clinical trials and seek out additional patents and claims
        for our products.
 
 Finance
        costs increased by $210,299 from 2005, associated with bank loans of $511,642
        and preferential conversion feature expense of $177,803.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 The
        following table summarizes our cash, cash equivalents and marketable securities,
        our working capital, and our cash flow activity as of the end of, and for
        each
        of, the last two years:
  2006
              
              2005As
                  of December 31:Cash,
                  cash equivalents and marketable securities
              
              $
              6,586,800
              
              $
              2,937,333Working
                  capital
              
              
              7,797,928
              
              
              2,935,221Year
                  Ended December 31:Cash
                  provided by (used in):Operating
                  activities
              
              
              5,182,539
              
              
              1,089,769Investing
                  activities
              
              
              (4,596,507
              )
              
              (776,488
              )Financing
                  activities
              
              
              2,930,832
              
              
              590,635
 
 As
        of
        December 31, 2006, cash and cash equivalents were $6,586,800, an increase
        of 124% over December 31, 2005. The increase of $3,649,467 in 2006 was
        primarily due to: an approximately $5.18 million was generated from
        operations in China tax jurisdictions; net proceeds generated from a private
        common stock issuance of $2,715,000, and notes of $215,832.  These
        increases were partially offset by capital expenditures of $4.23 million
        in
        2006.
 
 The
        Company’s current ratio at December 31 was 4.29, and quick ratio was 4.17.
 Its primary sources of funds include cash balances, cash flow from
        operations, and potentially the proceeds of borrowing and sales of equity.
         Management endeavors to ensure that funds are available to take advantage
        of new investment opportunities and that funds are sufficient to meet future
        liquidity and capital needs.  Management considers current working capital
        and borrowing capabilities adequate to cover the Company's current operating
        and
        capital requirements.
 
 There
        was
        no restrictive bank deposit pledged as of December 31, 2006. Therefore, the
        Company did not have to maintain any minimum balance in the relevant deposit
        account as security.
 
 Our
        total
        outstanding liabilities were $2.37 million as of December 31, 2006.
 
 Cash
        flows provided by operating activities were $5.18 million for the year
        ended December 31, 2006 compared to cash provided by operating activities
        of $1.09 million for the comparable 2005 period. The increase in cash
        provided by operating activities of $4 million was attributable primarily
        to sales growth, which is also enhanced by a $1.94 million increase in accounts
        receivable, and offset by increased inventories of approximately $103,000
        plus
        an increase of approximately $0.7 million increase in accounts payable and
        accrued expenses.
 
 Working
        capital at December 31, 2006 was $7.8 million, compared to $2.94 million at
        December 31, 2005. Significant factors that resulted in an increase in 2006
        working capital were: a $3.65 million increase in cash, cash equivalents; a
        $1.70 million of non cash share-based compensation; and a $1.94 million increase
        in accounts receivable primarily due to increased sales of $12.26 million
        in
        2006, offset by higher collection activity.
  41
  These
        increases were partially offset by:  a $420,795 increase in income taxes
        payable primarily due to higher profitability; a $1,688,896 increase in
        liabilities reflecting the share-based compensation pursuant to the requirement
        of SFAS 123R; a $519,531 increase in accounts payable, and other accrued
        liabilities including increases in accruals in wages.
 
 Accounts
        receivables increased by $1,940,913 or 154% to $3,199,026 as of December
        31,
        2006, compared to $1,258,113 as of December 31, 2005.  This increase is
        primarily due to an increase in sales of $12,260,025.  More than ninety
        percent of the Company’s receivables are aged less than 90 days.
 
 Inventories
        decreased by $102,578 to $278,562 as of December 31, 2006, from $381,140
        as of
        December 31, 2005.  The Company has a small inventory on hand primarily due
        to the enhanced productivity of newly purchased equipment and machinery,
        and the
        popularity of Company products in the market.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements that are currently material or
        reasonably likely to be material to our financial position or results of
        operations.
 
 **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 As
        of
        December 31, 2006, the Company had no material derivative instruments. The
        Company may enter into derivative financial instrument transactions in order
        to
        mitigate its interest rate risk on a related financial instrument in the
        future.
 
 The
        Company’s balance sheet includes amount of assets and liabilities whose fair
        values are subject to market risk. Market risk is the risk of loss arising
        from
        adverse changes in market prices or interest rates. Generally, the Company’s
        borrowing is short to medium term in nature and therefore approximates fair
        value. The Company currently has interest rate risk as it relates to its
        fixed
        maturity mortgage participation interest. The Company seeks to limit the
        impact
        of interest rate changes on earnings and cash flows and to lower its overall
        borrowing costs by closely monitoring its interest rate debt.
 
 The
        Company has certain equity risks as it relates to its marketable equity
        securities, and foreign currency risks as it relates to investments denominated
        in foreign currencies. The Company and its subsidiaries are mainly located
        in
        China, and there were no significant changes in exchange rates, during the
        reported periods.  However, unforeseen developments may cause a significant
        change in exchange rates.  The Company is subject to commodity price risks
        arising from price of construction materials.
 
 The
        Company is subject to market and channel risks. Over 90% of the Company’s sales
        are made in the PRC, where the Company primarily sells its products through
        drug
        chain stores. Because of this, the Company is dependent to a large degree
        upon
        the success of that distribution channel as well as the success of specific
        retailers in the distribution channel. Many of the drug stores are individual
        stores or very small chains, and only a few are large chain drug stores.
         The Company relies on these distribution channels to purchase, market, and
        sell its products.  The Company’s success is dependent, to a large degree,
        on the growth and success of the drug stores, which may be outside its control.
        There can be no assurance that the drug store distribution channels will
        be able
        to grow or prosper as it faces price and service pressure from other channels,
        including the mass market.  There can be no assurance that retailers in the
        drug store distribution channel, in the aggregate, will respond or continue
        to
        respond to the Company’s marketing commitment in these channels.
 
 The
        Company is highly dependent upon the public perception and quality of its
        products, consumers’ perception of the safety and quality of its products, as
        well as similar products distributed by other companies.  Thus, the mere
        publication of reports asserting that such products may be harmful could
        have a
        material adverse effect on the Company, regardless of whether these reports
        are
        scientifically supported.  Adverse publicity may have a material adverse
        effect on the Company’s business, financial condition, and results of
        operations.  There can be no assurance of future favorable scientific
        results and media attention, or of the absence of unfavorable or inconsistent
        findings.
 
 42




**ITEM
      7. FINANCIAL STATEMENTS**




**China
      Sky One Medical, Inc.**








**Table
      of contents**




PageIndependent
                  Auditors’ Report
              
              
              F-2Restated
                  Consolidated Balance Sheets
              
              
              F-3Restated
                  Consolidated Statements of Operations
              
              
              F-4Restated
                  Consolidated Statements of Shareholders’ Equity
              
              
              F-5Restated
                  Consolidated Statements of Cash Flows
              
              
              F-6Notes
                  to the Restated Consolidated Financial Statements
              
              
              F-7
                  to F-17





F-1




**E-FANG
      ACCOUNTANCY CORP., & CPA**


**17800
      CASTLETON ST., SUITE 208, CITY OF INDUSTRY, CA 91748**







*REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*


**TO
        THE BOARD OF DIRECTORS AND SHAREHOLDERS OF**
 ***China
        Sky One Medical, Inc. and Subsidiaries***
 **(Incorporated
        in the State of Nevada, USA)**
  We
        have audited the accompanying consolidated balance sheets of China Sky One
        Medical, Inc. and its subsidiaries (the “Company”) as of December 31, 2006 and
        the related consolidated statements of income, retained earnings and cash
        flows
        for the years ended December 31, 2006 and 2005.  These financial statements
        are the responsibility of the Company’s management.  Our responsibility is
        to express an opinion on these financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with generally accepted auditing standards
        as
        established by the Auditing Standards Board (United States) and in accordance
        with the standards of the Public Company Accounting Oversight Board (United
        States).  Those standards require that we plan and perform the audits to
        obtain reasonable assurance about whether the financial statements are free
        of
        material misstatement.  The Company is not required to have, nor were we
        engaged to perform, an audit of its internal control over financial reporting.
         Our audit included consideration of internal control over financial
        reporting as a basis for designing audit procedures that are appropriate
        in the
        circumstances, but not for the purpose of expressing an opinion on the
        effectiveness of the Company’s internal control over financial reporting.
 Accordingly, we express no such opinion.  An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        presentation of the financial statements.  We believe that our audits
        provide a reasonable basis for our opinion.
 
 In
        our opinion, the consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of China Sky One
        Medical, Inc. and its subsidiaries as of December 31, 2006 and the Company’s
        results of its operations and cash flows for the years ended December 31,
        2006
        and 2005 in conformity with accounting principles generally accepted in the
        United States of America.
 
 As
          more fully disclosed in Note 24, the Company changed its financial reporting
          regarding certain significant accounting errors to conform to accounting
          principles generally accepted in the United States of America. Our report
          date
          remains the same but the financial statements, as presented herein, are
          different from that expressed in our previous report.
 
 **e-Fang
        Accountancy Corp. & CPA**
 Certified
        Public Accountant
 
 /s/
        e-Fang Accountancy Corp. & CPA
 City
        of Industry, California
 March
        19, 2007
 
 (November
          7, 2007 for Note 24 with respect to correction of errors)


(August
        7, 2008 for Note 5 with respect to share-based compensation)


F-2





**China
      Sky One Medical, Inc. and Subsidiaries**


**Consolidated
        Balance Sheet**


**December
        31, 2006 (As Restated)**




**ASSETS**





**Current
                Assets**Cash
                and cash equivalents
            
            $
            6,586,800Accounts
                receivable, net
            
            
            3,199,026Other
                receivables
            
            
            -Inventories
            
            
            278,562Prepaid
                expenses
            
            
            103,734**Total
                current assets**
            
            
            10,168,122**Property
                and equipment, net**
            
            
            4,503,397**Intangible
                assets, net**
            
            
            2,009,517$
            16,681,036**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Accounts
                payable and accrued expenses
            
            $
            822,786Wages
                payable
            
            
            260,290Welfare
                payable
            
            
            141,489Taxes
                Payable
            
            
            566,416Deferred
                revenue
            
            
            67,541Notes
                payble
            
            
            511,672**Total
                current liabilities**
            
            
            2,370,194**Stockholders'
                Equity**Preferred
                stock ($0.001 par value, 5,000,000 shares authorized,none
                issued and outstanding)
            
            
            -Common
                stock ($0.001 par value, 20,000,000 shares authorized,12,031,536
                issued and outstanding)
            
            
            12,032Additional
                paid-in capital
            
            
            8,821,502Accumulated
                other comprehensive income
            
            
            422,119Retained
                earnings
            
            
            5,055,189**Total
                stockholders' equity**
            
            
            14,310,842$
            16,681,036






The
      accompanying notes are an integral part of these financial
      statements.




F-3




**China
      Sky One Medical, Inc. and Subsidiaries**


**Consolidated
        Statements of Operations**


**For
      the Year Ended December 31, 2006 and 2005**


2006
                
                2005(As
                    Restated)**Revenues**
                
                $
                19,881,715
                
                $
                7,711,641**Cost
                    of Goods Sold**
                
                
                5,063,084
                
                
                2,213,667**Gross
                    Profit**
                
                
                14,818,631
                
                
                5,497,974**Operating
                    Expenses**Research
                    and development
                
                
                2,026,788
                
                
                63,749Selling,
                    general and administrative
                
                
                10,738,285
                
                
                2,914,190Amortization
                
                
                121,522
                
                
                57,563**Total
                    operating expenses**
                
                
                12,886,595
                
                
                3,035,502**Other
                    Income (Expense)**Interest
                    expense
                
                
                (227,857
                )
                
                (17,563
                )**Total
                    other income (expense)**
                
                
                (227,857
                )
                
                (17,563
                )**Net
                    Income Before Provision for Income Tax**
                
                
                1,704,179
                
                
                2,444,909**Provision
                    for Income Taxes**Current
                
                
                764,462
                
                
                356,081Deferred
                
                
                315,302
                
                
                -1,079,764
                
                
                356,081**Net
                    Income**
                
                $
                624,415
                
                $
                2,088,828**Basic
                    Earnings Per Share**
                
                $
                0.05
                
                $
                0.19**Basic
                    Weighted Average Shares Outstanding**
                
                
                12,031,536
                
                
                10,929,370**Diluted
                    Earnings Per Share**
                
                $
                0.05
                
                $
                0.19**Diluted
                    Weighted Average Shares Outstanding**
                
                
                12,941,283
                
                
                10,929,370**The
                    Components of Other Comprehensive Income**Net
                    Income
                
                $
                624,415
                
                $
                2,088,828Foreign
                    currency translation adjustment
                
                
                364,565
                
                
                57,554**Comprehensive
                    Income**
                
                $
                988,980
                
                $
                2,146,382






The
      accompanying notes are an integral part of these financial
      statements.




F-4




**China
      Sky One Medical, Inc. and Subsidiaries**


**Consolidated
          Statements of Stockholders' Equity**
 **For
        the Years Ended December 31, 2006 and 2005**
  Common
                    Stock
                
                (As
                    Restated)Number
                    of Shares
                
                Par
                    Value
                
                Additional
                    Paid-in Capital
                
                Retained
                    Earnings (Deficit)
                
                Accumulated
                    Other Comprehensive Income
                
                Total
                    Stockholers'
                  EquityBalance
                    at December 31, 2004
                
                
                10,929,370
                
                $
                10,929
                
                $
                2,847,438
                
                $
                2,341,946
                
                $
                -
                
                $
                5,200,313Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                57,554
                
                
                57,554Net
                    income for the year endedDecember
                    31, 2005
                
                
                
                
                
                
                
                
                
                
                
                2,088,828
                
                
                
                
                
                2,088,828Balance
                    at December 31, 2005
                
                
                10,929,370
                
                
                10,929
                
                
                2,847,438
                
                
                4,430,774
                
                
                57,554
                
                
                7,346,695Conversion
                    of notes payable
                
                
                102,166
                
                
                103
                
                
                204,229
                
                
                -
                
                
                -
                
                
                204,332Issuance
                    of addition common stock
                
                
                1,000,000
                
                
                1,000
                
                
                2,978,853
                
                
                
                
                
                
                
                
                2,979,853Non-employees
                    share-based compensation
                
                
                
                
                
                
                
                
                2,547,575
                
                
                
                
                
                
                
                
                2,547,575Preferential
                    conversion feature of note
                
                
                
                
                
                
                
                
                177,803
                
                
                
                
                
                
                
                
                177,803Employee
                    stock options
                
                
                
                
                
                
                
                
                65,604
                
                
                
                
                
                
                
                
                65,604Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                364,565
                
                
                364,565Net
                    income for the year endedDecember
                    31, 2006
                
                
                -
                
                
                -
                
                
                -
                
                
                624,415
                
                
                -
                
                
                624,415Balance
                    at December 31, 2006
                
                
                12,031,536
                
                
                12,032
                
                
                8,821,502
                
                
                5,055,189
                
                
                422,119
                
                
                14,310,842






The
        accompanying notes are an integral part of these financial
        statements.




F-5




**China
        Sky One Medical, Inc. and Subsidiaries**
 **Consolidated
          Statements of Cash Flows**
 **For
          the Years Ended December 31, 2006 (As Restated) and
          2005**
  2006
                
                2005(As
                    Restated)**Cash
                    flows from operating activities****Net
                    Income**
                
                $
                624,415
                
                $
                2,088,828**Adjustments
                    to reconcile net cash provided by****operating
                    activities**Depreciation
                    and amortization
                
                
                246,556
                
                
                98,779Share-based
                    compensation expense
                
                
                2,878,031
                
                
                -Preferential
                    conversion feature of note
                
                
                177,803
                
                
                -**Net
                    change in assets and liabilities**Accounts
                    receivables and other receivables
                
                
                (1,994,678
                )
                
                (153,163
                )Inventories
                
                
                105,655
                
                
                269,686Construction
                    in progress
                
                
                2,517,215
                
                
                (45,158
                )Prepaid
                    expenses and other
                
                
                (87,979
                )
                
                4,737Accounts
                    payable and accrued liabilities
                
                
                101,698
                
                
                (1,255,005
                )Related
                    party payable
                
                
                (18,540
                )
                
                (38,601
                )Wages
                    payable
                
                
                141,776
                
                
                40,378Welfare
                    payable
                
                
                45,056
                
                
                28,554Taxes
                    payable
                
                
                433,419
                
                
                94,919Deferred
                    revenue
                
                
                12,112
                
                
                (44,185
                )Advances
                    by customers
                
                
                -
                
                
                -**Net
                    cash (used in) provided by operating activities**
                
                
                5,182,539
                
                
                1,089,769**Cash
                    flows from investing activities**Purchases
                    of fixed assets
                
                
                (3,022,448
                )
                
                (367,555
                )Purchase
                    of intangible assets
                
                
                (1,574,059
                )
                
                (408,933
                )**Net
                    cash (used in) investing activities**
                
                
                (4,596,507
                )
                
                (776,488
                )**Cash
                    flows from financing activities**Sale
                    of common stock for cash
                
                
                2,715,000
                
                
                94,795Issuance
                    of convertiable notes
                
                
                200,000
                
                
                -Proceeds
                    from short-term loan
                
                
                15,832
                
                
                495,840**Net
                    cash provided by financing activities**
                
                
                2,930,832
                
                
                590,635**Effect
                    of exchange rate**
                
                
                132,603
                
                
                22,986**Net
                    increase in cash**
                
                
                3,649,467
                
                
                926,902**Cash
                    and cash equivalents at beginning of year**
                
                
                2,937,333
                
                
                2,010,431**Cash
                    and cash equivalents at end of year**
                
                $
                6,586,800
                
                $
                2,937,333**Supplemental
                    disclosure of cash flow information****Interest
                    paid**
                
                $
                36,429
                
                $
                17,563**Taxes
                    paid**
                
                $
                767,701
                
                $
                288,533**Share-based
                    compensation expense**
                
                $
                2,878,049
                
                $
                -






The
        accompanying notes are an integral part of these financial
        statements.




F-6




**China
        Sky One Medical, Inc. and Subsidiaries**
 **Notes
          to the Consolidated Financial Statements**
 **As
        of December 31, 2006**


**1.**
                **Description
                    of Business**
 
 China
          Sky One Medical, Inc. ("China Sky One"), a Nevada corporation, was formed
          on
          February 7, 1986, and formerly known as Comet Technologies, Inc. (“Comet”).
 On July 26, 2006, the change in the name of the reporting company from
          "Comet Technologies, Inc." to "China Sky One Medical, Inc.," became effective.
 
 Effective
          May 30, 2006 and pursuant to a plan of reorganization, American California
          Pharmaceutical Group, Inc. (“ACPG”) completed a stock change agreement with
          Comet Technologies, Inc., ("Comet"). Under the terms of the agreement,
          all of
          the ACPG's outstanding stock was exchanged for 10,193,377 shares of Comet
          common
          stock.   The closing of the Exchange Agreement (“Closing”),
          resulted in a change in voting control of Comet.  The original shareholders
          of ACPG hold approximately 93% of the outstanding common stock of Comet,
          and the former Comet shareholders hold a total of 735,993 shares of common
          stock, or 7% of the outstanding common stock, including stock granted under
          a
          consulting agreement to Comet’s two current officers, who resigned as officers
          and directors at the closing.  The common shares were issued in reliance on
          the exemption from registration set forth in Section 4(2) of the Securities
          Act
          of 1933 as amended and Regulation D thereunder.   The transaction is
          treated as a reverse merger for accounting purposes.
 
 American
          California Pharmaceutical Group, Inc. (“ACPG”) was incorporated in the State of
          California on December 16, 2003. On December 8, 2005, ACPG completed its
          merger
          with Harbin TDR Medical Science & Technology Developing CO., Ltd (“TDR”) by
          exchanging 100% of its issued and outstanding common stock for 100% of
          the
          issued and outstanding shares of common stock of TDR and its subsidiaries.
           TDR, formerly known as “Harbin City Tian Di Ren Medical Co.,” was
          originally formed in 1994 and maintained its principal executive office
          in
          Harbin City of Heilongjiang Province, the People’s Republic of China (“PRC”).
          TDR was reorganized and incorporated as a limited liability company on
          December
          29, 2000 pursuant to the “Corporation Laws and Regulations” of the People’s
          Republic of China.  Originally it has two wholly-owned subsidiaries, Harbin
          First Bio-Engineering Company Limited (“First”) and Kangxi Medical Care Product
          Factory (“Kangxi”).  Kangxi merged with First on July 31, 2006.
 
 On
          October 16, 2006, the Company successfully entered into the field of research
          and development of tissue and stem cell banks, with the establishment of
          Harbin
          Tian Qing Biotech Application Company (“Harbin Biotech”).  The Health
          Department of Heilongjiang Province, on the basis of the evaluation of
          results
          from experts, issued a document approving and authorizing the Company to
          enter
          into the above-mentioned development areas.  Harbin Biotech, now a
          wholly-owned subsidiary of the Company, obtained legal operation rights
          in these
          fields, which prevents other companies from entering the same fields in
          Heilongjiang Province.
 
 TDR
          and First are leading producers and distributors of external-Chinese medicine
          products in China.  The principal activities of TDR and First are
          the research, manufacture and sale of over-the counter non-prescription
          health care products.   TDR commenced its business in the sale of
          branded nutritional supplements and over-the-counter pharmaceutical products
          in
          Heilongjiang Province.  TDR has subsequently evolved into an integrated
          manufacturer, marketer, and distributor of external use natural Chinese
          medicine
          products sold primarily to and through China domestic pharmaceutical chain
          stores.
 
 China
          Sky One is a holding company whose principal operations are through its
          subsidiaries; it has no revenues separate from its subsidiaries, and has
          nominal
          expenses related to its status as a public reporting company and to its
          ownership interest in ACPG, TDR and TDR’s subsidiaries.
 
 **2.**
                **Basis
                    of Preparation of Financial
                    Statements**
 
 Principles
          of Consolidation - The consolidated financial statements include the accounts
          of
          the Company and its subsidiaries, ACPG, TDR, First and Harbin Biotech.
          All
          inter-company transactions and balances were eliminated.
 
 These
          financial statements are stated in U.S. Dollars and have been prepared
          in
          accordance with accounting principles generally accepted in the United
          States of
          America. This basis of accounting differs from that used under applicable
          accounting requirements in the PRC.  No material adjustment was required.
          Certain amounts in prior years have been reclassified to conform to current
          year's classification.
  **3.**
                **Summary
                    of Significant Accounting
                    Policies**
 
 **Use
          of estimates** - The preparation of these financial statements in conformity with accounting
          principles generally accepted in the United States of America, requires
          management to make estimates and assumptions that affect the reported amounts
          of
          assets and liabilities, disclosure of contingent assets and liabilities
          at the
          dates of the financial statements, and the reported amounts of revenues
          and
          expenses during the reported periods.
  F-7
  **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
  Significant
          estimates included values and lives assigned to acquire intangible assets,
          reserves for customer returns and allowances, uncollectible accounts receivable,
          and slow moving and/or obsolete/damaged inventory. Actual results may differ
          from these estimates.
 
 **Earnings
          per share -** The
          Company computes net income per share in accordance with Statement of Financial
          Accounting Standards No. 128, *Earnings
          per Share* .
          Net income per share is based upon the weighted average number of common
          shares
          outstanding during the period. Diluted income per share is equivalent to
          basic
          net income per share for all periods presented herein because common equivalent
          shares from unexercised stock options.
 
 **Cash
          and cash equivalents -** The **** Company
          considers all highly liquid debt instruments purchased with maturity period
          of
          three months or less to be cash equivalents. The carrying amounts reported
          in
          the accompanying consolidated balance sheet for cash and cash equivalents
          approximate their fair value.
 
 **Accounts
          receivable -** Accounts
          receivable are stated at net realizable value, net of an allowance for
          doubtful
          accounts. Provision of allowance is made for estimated bad debts based
          on a
          periodic analysis of individual customer balances including an evaluation
          of
          days of sales outstanding, payment history, recent payment trends, and
          perceived
          credit worthiness.
 
 **Prepaid
          Account -** The Company records the balance of the amortized slotting fee not used
          in the
          current period as prepaid expenses.  Prepaid account as well includes
          advances to employees that include cash prepaid to employees for their
          travel, **** entertainment
          and transportation expenditures.
 
 **Inventories** - Inventories were accounted for using the first-in, first-out method and
          included finished goods, raw materials, freight-in, packing materials,
          labor,
          and overhead costs. Values stated were at the lower of cost or market while
          cost
          was determined by a moving weighted average. Provisions were made for slow
          moving, obsolete and/or damaged inventory based on a periodic analysis
          of
          individual inventory items including an evaluation of historical usage
          and/or
          movement, age, expiration date, and general conditions.
 
 **Property
          and equipment** - Property and equipment are stated at the historical cost less accumulated
          depreciation. Depreciation on property, plant, and equipment is provided
          using
          the straight-line method over the estimated useful lives of the assets.
 An
          estimated residual value of 5% of cost or valuation was made for each items
          for
          both financial and income tax reporting purposes. The estimated lengths
          of
          useful lives are as follows:
  Buildings
                  30
                      yearsLand
                      use rights
                  50
                      yearsFurniture
                      & Equipments
                  5
                      to 7 yearsMotor
                      vehicles
                  5
                      to 15 yearsMachineries
                  7
                      to 14 years
 Expenditures
          for renewals and betterments were capitalized while repairs and maintenance
          costs were normally charged to the statement of operations in the year
          in which
          they were incurred. In situations where it can be clearly demonstrated
          that the
          expenditure has resulted in an increase in the future economic benefits
          expected
          to obtain from the use of the asset, the expenditure is capitalized as
          an
          additional cost of the asset. Upon sale or disposal of an asset, the historical
          cost and related accumulated depreciation or amortization of such asset
          were
          removed from their respective accounts, and any gain or loss was recorded
          in the
          Consolidated Statements of Operations.
 
 Property
          and equipment are evaluated for impairment in value annually or whenever
          an
          event or change in circumstances indicates that the carrying values may
          not be
          recoverable. If such an event or change in circumstances occurs and potential
          impairment is indicated because the carrying values exceed the estimated
          future
          undiscounted cash flows of the asset, the Company would measure the impairment
          loss as the amount by which the carrying value of the asset exceeds its
          fair
          vale.
 
 **Construction-in-progress** - Properties currently under development are accounted for as
          construction-in-progress. Construction-in-progress is recorded at acquisition
          cost, including land rights cost, development expenditure, professional
          fees,
          and the interest expenses for the purpose of financing the project capitalized
          during the course of construction.
 
 Upon
          completion and readiness for use of the project, the cost of
          construction-in-progress is to be transferred to the facility. In the case
          of
          construction-in-progress, management takes into consideration the estimated
          cost
          to complete the project when making the lower of cost or market
          calculation.
  F-8
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 **Intangible
          assets -** Intangible
          assets consist patents, distribution rights and customer lists. Patent
          costs are
          being amortized over the remaining term of the patent. Distribution rights
          and
          customer lists are being amortized over 10 years.
 
 Intangible
          assets are accounted for in accordance with Statement of Financial Accounting
          Standards No. 142, *Goodwill
          and Other Intangible Assets* (“SFAS 142”).  Intangible assets with finite useful lives are amortized
          while intangible assets with indefinite useful lives are not amortized.
          As
          prescribed by SFAS 142, goodwill and intangible assets are tested periodically
          for impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment
          or Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly,
          the
          Company reviews its long-lived assets, including property and equipment
          and
          finite-lived intangible assets for impairment whenever events or changes
          in
          circumstances indicate that the carrying amount of the assets may not be
          fully
          recoverable. To determine recoverability of its long-lived assets, the
          Company
          evaluates the probability that future undiscounted net cash flows will
          be less
          than the carrying amount of the assets. Impairment costs, if any, are measured
          by comparing the carrying amount of the related assets to their fair
          value.
 
 **Foreign
          currency translation** -These
          financial statements have been prepared in U.S. dollars.  China Sky One is
          only a holding company; it has no revenues and only nominal expenses, which
          are
          related to its status as a public reporting company and its ownership interest
          in TDR and subsidiaries. The functional currency for TDR and its subsidiaries
          is
          denominated in “Renminbi” (“RMB”) or “Yuan”. TDR maintains its books and
          accounting records in Renminbi ("RMB"), the currency of the primary economic
          environment in which the entities operate. FASB Statement of Financial
          Accounting Standards No. 52, “Foreign Currency Translation” requires
          differentials to be calculated and allocated using the current rate method
          if
          the foreign entity’s functional and local currencies are the same.
 Non-monetary assets and liabilities are translated at historical exchange
          rates.  Monetary assets and liabilities are translated at the exchange
          rates in effect at the end of the year.  The income statement accounts are
          translated at average exchange rates.  The conversion gains and losses are
          not recognized in the income statement under the functional currency approach.
          They are accumulated in a separate account in stockholders’ equity (i.e., the
          cumulative foreign exchange translation adjustments account). This treatment
          is
          based on the FASB’s view that translation gains or losses are not directly
          related to the foreign entities’ operating cash flows.
 
 **Revenue
          recognition** - Revenue is recognized in accordance with Staff Accounting Bulletin
          No. 104, Revenue Recognition, which states that revenue should be
          recognized when the following criteria are met: (1) persuasive evidence of
          an arrangement exists; (2) the product has been shipped and the customer
          takes ownership and assumes the risk of loss; (3) the selling price is
          fixed or determinable; and (4) collection of the resulting receivable is
          reasonably assured. The Company believes that these criteria are satisfied
          upon
          shipment from its facilities. Revenue is reduced by provisions for estimated
          returns and allowances as well as specific known claims, if any, which
          are based
          on historical averages that have not varied significantly for the periods
          presented.
 
 The
          Company occasionally applies to various government agencies for research
          grants.
          Revenue from such research grants is recognized when earned. In situations
          where
          TDR receives payment in advance for the performance of research and development
          services, such amounts are deferred and recognized as revenue as the related
          services are performed.
 
 Interest
          income is recognized when earned, taking into account the average principal
          amounts outstanding and the interest rates applicable.
 
 **Research
          and development** —Research
          and development expenses include the costs associated with the Company’s
          internal research and development as well as research and development conducted
          by third parties. These costs primarily consist of salaries, clinical trials,
          outside consultants, and materials. All research and development costs
          discussed
          above are expensed as incurred.
 
 Third-party
          expenses were reimbursed under non-refundable research and development
          contracts, and are recorded as a reduction to research and development
          expense
          in the statement of operations.
 
 The
          Company recognizes in-process research and development in accordance with
          FASB
          Interpretation No. 4, *Applicability
          of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
          Method* and
          the ** AICPA
          Technical Practice Aid, Assets Acquired in a Business Combination to be
          used in
          Research and Development Activities:  A Focus on Software, Electronic
          Devices, and Pharmaceutical Industries. Assets to be used in research and
          development activities, specifically, compounds that have yet to receive
          new
          drug approval and would have no alternative use, should approval not be
          given,
          are immediately charged to expense when acquired.
 
 For
          the year ended December 31, 2006, the Company incurred $2,026,788 in research
          and development expenditures, and $63,749 for year 2005.
  F-9
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 **Advertising** —The
          Company expensed advertising costs the first time the respective advertising
          took place.  The total advertising expenses incurred for the years ended
          December 31, 2006 and 2005 was $1,576,781 and $1,007,748,
          respectively.
 
 **Slotting
          fees** —
          From time to time, the Company enters into arrangements with customers
          in
          exchange for obtaining rights to place our products on customers' shelves
          for
          resale at retail.  The Company also engages in promotional discount
          programs in order to enhance sales in specific channels.  These payments,
          discounts and allowances reduce our reported revenue in accordance with
          the
          guidelines set forth in EITF 01-9 and SEC Staff Accounting Bulletin No.
          104
 
 The
          Company records its obligations under each arrangement at inception and
          amortizes the total required payments using the straight-line method over
          a term
          of time, which is normally the minimum time that we are allowed to sell
          our
          products in given retail outlets.  The Company records the balance of the
          amortized slotting fee not used in the current period as prepaid expenses.
          As
          the Company applies the amortized slotting fee as contra revenue,  it
          reduces the reported gross revenue by an amount equal to the reduction
          in
          prepaid expenses. The slotting fees incurred for the year 2006 was $777,217
          and
          $7,840 for 2005
 
 **Taxation** - The Company uses the asset and liability method of accounting for deferred
          income taxes.  The Company’s provision for income taxes includes income
          taxes currently payable and those deferred because of temporary differences
          between the financial statement and tax bases of assets and liabilities.
           The Company records liabilities for income tax contingencies based on our
          best estimate of the underlying exposures.
 
 The
          Company periodically estimates its probable tax obligations using historical
          experience in tax jurisdictions and informed judgments. There are inherent
          uncertainties related to the interpretation of tax regulations in the
          jurisdictions in which the Company transacts business. The judgments and
          estimates made at a point in time may change based on the outcome of tax
          audits,
          as well as changes to, or further interpretations of, regulations.  The
          Company adjusts income tax expense in the period in which these events
          occur.
  Provision
          for the PRC’s enterprise income tax is calculated at the prevailing rate based
          on the estimated assessable profits less available tax relief for losses
          brought
          forward.
 
 ***Enterprise
          income tax***
 
 Under
          the Provisional Regulations of The People’s Republic of China Concerning Income
          Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises
          at a rate of 33% of their taxable income. Preferential tax treatment may,
          however, be granted pursuant to any law or regulations from time to time
          promulgated by the State Council.
 
 According
          to “Enterprise Income Tax and Certain Preferential Policies Notice” published by
          the Ministry of Finance and the National Tax Affairs Bureau, if the enterprise
          is authorized by the State Council as a special entity, the enterprise
          income
          tax rate is reduced to 15%. The income tax rate for TDR is 15% based on
          State
          Council approval.
 
 The
          High-Tech Industrial Development District was established in China to accelerate
          the development and industrialization of high-tech industries in some economic
          zones of the PRC. In order to create unique incentives for companies to
          locate
          in the High-Tech Industrial Development District, favorable corporate income
          tax
          rates have been established.
 
 First
          has chosen to locate in the High-Tech Industrial Development District is
          levied
          at 15 percent annually.
 
 Enterprise
          income tax (“EIT”) is provided on the basis of the statutory profit for
          financial reporting purposes, adjusted for income and expense items, which
          are
          not assessable or deductible for income tax purposes.
 
 ***Value
          added tax***
 
 The
          Provisional Regulations of The People’s Republic of China Concerning Value Added
          Tax promulgated by the State Council came into effect on January 1, 1994.
          Under
          these regulations and the Implementing Rules of the Provisional Regulations
          of
          the PRC Concerning Value Added Tax, value added tax is imposed on goods
          sold in
          or imported into the PRC and on processing, repair and replacement services
          provided within the PRC.
 
 Value
          added tax payable in the PRC is charged on an aggregated basis at a rate
          of 13%
          or 17% (depending on the type of goods involved) on the full price collected
          for
          the goods sold or, in the case of taxable services provided, at a rate
          of 17% on
          the charges for the taxable services provided, but excluding, in respect
          of both
          goods and services, any amount paid in respect of value added tax included
          in
          the price or charges, and less any deductible value added tax already paid
          by
          the taxpayer on purchases of goods and services in the same financial
          year.
  F-10
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 According
          to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value
          Added Tax Waiver” published by the Ministry of Finance and the National Tax
          Affairs Bureau, the value added tax for agriculture related products is
          to be
          taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant
          are
          by definition agriculture related products.
 
 **Contingent
          liabilities and contingent assets**  **-** A contingent liability is a possible obligation that arises from past events
          and
          whose existence will only be confirmed by the occurrence or non-occurrence
          of
          one or more uncertain future events not wholly within the control of the
          Company. It can also be a present obligation arising from past events that
          is
          not recognized because it is not probable that outflow of economic resources
          will be required or the amount of obligation cannot be measured
          reliably.
 
 A
          contingent liability is not recognized but is disclosed in the notes to
          the
          financial statements. When a change in the probability of an outflow occurs
          so
          that the outflow is probable, they will then be recognized.
 
 A
          contingent asset is a possible asset that arises from past events and whose
          existence will be confirmed only by the occurrence or non-occurrence of
          one or
          more uncertain events not wholly within the control of the Company.
 
 Contingent
          assets are not recognized but are disclosed in the notes to the financial
          statements when an inflow of economic benefits is probable. When inflow
          is
          virtually certain, an asset is recognized.
 
 **Related
          companies**  **-** A related company is a company in which the director has beneficial interests
          in
          and in which the Company has significant influence.
 
 **Retirement
          benefit costs** - According to the PRC regulations on pension plans, the Company contributes
          to
          a defined contribution retirement plan organized by municipal government
          in the
          province in which the Company was registered and all qualified employees
          are
          eligible to participate in the plan.
 
 Contributions
          to the pension or retirement plan are calculated at 23.5% of the employees’
salaries above a fixed threshold amount.  The employees contribute 2% to 8%
          to the pension plan, and the Company contributes the balance contribution
          of
          21.5% to 15.5%. The Company has no other material obligation for the payment
          of
          retirement benefits beyond the annual contributions under this
          plan.
 
 **Fair
          value of financial instruments -** The
          carrying amounts of certain financial instruments, including cash, accounts
          receivable, commercial notes receivable, other receivables, accounts payable,
          commercial notes payable, accrued expenses, and other payables approximate
          their
          fair values as at  December 31, 2006 because of the relatively short-term
          maturity of these instruments.
 
 **Recent
          accounting pronouncements** - In September 2006, the FASB issued Statement of Financial Accounting
          Standards No. 157, *Fair
          Value Measurements* (“Statement No. 157”).  The standard provides enhanced guidance for using
          fair value to measure assets and liabilities and also responds to investors’
requests for expanded information about the extent to which company’s measure
          assets and liabilities at fair value, the information used to measure fair
          value, and the effect of fair value measurements on earnings.  While the
          standard applies whenever other standards require (or permit) assets or
          liabilities to be measured at fair value, it does not expand the use of
          fair
          value in any new circumstances.  Statement No. 157 is effective for
          financial statements issued for fiscal years beginning after November 15,
          2007,
          and interim periods within those fiscal years. Management of the Company
          is
          evaluating the impact of this standard, but does not anticipate that it
          will
          have a significant impact on its financial statements.
  In
          September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements (“SAB No. 108”).  This bulletin expresses
          the Staff’s views regarding the process of quantifying financial statement
          misstatements.  The interpretations in this bulletin were issued to address
          diversity in practice in quantifying financial statement misstatements
          and the
          potential under current practice for the accumulation of improper amounts
          on the
          balance sheet.  SAB No. 108 is effective for annual financial statements
          starting with the year ending December 31, 2006.  The Company is evaluating
          the impact of this bulletin and based on current information, the Company
          does
          not believe that it will have a material impact on its financial
          statements.
  In
          July 2006, the FASB issued Financial Accounting Standards Board Interpretation
          No. 48, *Accounting
          for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
          109,
          Accounting for Income Taxes* (“FIN No. 48”). This interpretation creates a single model to address
          uncertainty in tax positions. FIN 48 clarifies the accounting for income
          taxes
          by prescribing the minimum recognition threshold a tax position is required
          to
          meet before being recognized in the financial statements. The interpretation
          also provides guidance on derecognition, measurement, classification, interest
          and penalties, accounting in interim periods, disclosure, and transition. 
FIN 48 is effective for years beginning after December 15, 2006. Management
          of
          the Company is evaluating the impact of this pronouncement, but does not
          anticipate that it will have a significant impact on its financial
          statements.
  F-11
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
  In
          September 2006, the FASB issued Statement No. 158, “Employers’ Accounting
          for Defined Benefit Pension and Other Postretirement Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
          and 132(R). SFAS No. 158 requires (a) recognition of the funded
          status (measured as the difference between the fair value of the plan assets
          and
          the benefit obligation) of a benefit plan as an asset or liability in the
          employer’s statement of financial position, (b) measurement of the funded
          status as of the employer’s fiscal year-end with limited exceptions, and
          (c) recognition of changes in the funded status in the year in which the
          changes occur through comprehensive income. The requirement to recognize
          the
          funded status of a benefit plan and the disclosure requirements are effective
          as
          of the end of the fiscal year ending after December 15, 2006. The
          requirement to measure the plan assets and benefit obligations as of the
          date of
          the employer’s fiscal year-end statement of financial position is effective for
          fiscal years ending after December 15, 2008. This Statement has no current
          applicability to the Company’s financial statements. Management plans to adopt
          this Statement on December 31, 2006 and it is anticipated the adoption of
          SFAS No. 158 will not have a material impact to the Company’s
          financial position, results of operations, or cash flows.
  **4.**
                **Earnings
                    per Share**
  We
          have applied SFAS No. 128, “Earnings Per Share” in its calculation and
          presentation of earnings per share - “basic” and “diluted”. Basic earnings per
          share are computed by dividing income available to common shareholders
          (the
          numerator) by the weighted average number of common shares (the denominator)
          for
          the period. The computation of diluted earnings per share is similar to
          basic
          earnings per share, except that the denominator is increased to include
          the
          number of additional common shares that would have been outstanding if
          the
          potentially dilutive common shares had been issued.
  Stock
          warrants and options to purchase 1,813,500 shares of common stock, all
          but
          113,500 of which were exercisable during the three months ended March 31,
          2007, were included in the computation of diluted earnings per share
          because the option exercise prices were more than the average market price
          of
          our common stock during these periods.
 
 The
          following table sets forth our computation of basic and diluted net income
          (loss) per share:
 
 **Years
                    ended December 31,****2006**
                
                **2005**Numerator:Net
                    income (loss) used in calculation of basic earnings (loss) per
                    share
                
                $
                624,415
                
                $
                2,088,828Net
                    income (loss) used in calculation of diluted earnings (loss)
                    per
                    share
                
                
                624,415
                
                
                2,088,828Denominator:Weighted-average
                    common shares outstanding used in calculation of basic earnings
                    (loss) per
                    share
                
                
                12,031,536
                
                
                10,929,370Effect
                    of dilutive securities:Stock
                    options and equivalents
                
                
                909,747
                
                
                -Weighted-average
                    common shares used in calculation of diluted earnings (loss)
                    per
                    share
                
                
                12,941,283
                
                
                10,929,370Net
                    income (loss) per share:Basic
                
                
                0.05
                
                
                0.19Diluted
                
                
                0.05
                
                
                0.19
 **** F-12
  **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 
 **5.**
                  **Share-based
                      Compensation**
 
 Effective
            January 1, 2006, we adopted the fair value recognition provisions of SFAS
            No. 123R, Share-Based Payment (“SFAS No. 123R”), for options granted
            to employees and directors, using the modified prospective transition
            method,
            and therefore have not restated results from prior periods. Compensation
            cost
            for all stock-based compensation awards granted after December 31, 2005 is
            based on the grant date fair value estimated in accordance with the provisions
            of SFAS No. 123R. Under the fair value recognition provisions of SFAS
            No. 123R, we recognize stock-based compensation net of an estimated
            forfeiture rate and only recognize compensation cost for those shares
            expected
            to vest on a straight-line prorated basis over the requisite service
            period of
            the award. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”)
            No. 107, Share-Based Payment (“SAB No. 107”), regarding the SEC’s
            guidance on SFAS No. 123R and the valuation of share-based payments for
            public companies. We have applied the provisions of SAB No. 107 in the
            adoption of SFAS No. 123R. The Company uses the Black-Scholes model to
            value stock-based compensation expense. The risk-free interest rate is
            based on
            the U.S. Treasury zero coupon issues with an equivalent remaining term
            at the
            time of the option grant. Expected volatility is based on the historical
            volatility of the Company’s stock price and the volatility of public companies
            that the Company considered comparable.  The effect of adoption of the new
            standard for the year ended December 31, 2006 related to stock options to
            employees were additional non-cash expenses of $65,604.   As of
            December 31, 2006, stock options to acquire 113,500 shares of common
            stock are held by employees and begin to vest in June, 2007.   None of
            these options have been exercised. The weighted average exercise price
            for these
            options is $3.65 and the weighted average grant date fair value was $1.65.
 
 Options
            or stock awards issued to non-employees and consultants are recorded
            at their
            fair value as determined in accordance with SFAS No. 123R and EITF
            No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
            Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, and
            recognized over the related vesting or service period. In connection
            with
            closing of the Stock Exchange Agreement, the Company agreed to grant
            warrants to
            advisors for the services they already performed for reverse merger,
            entitling
            them to purchase up to 500,000 shares on or before July 31, 2009, at
            a price of
            US$2.00 per share and options to purchase up to 50,000 shares on or before
            December 20, 2008 at a price of US$3.00 per share. The weighted average
            exercise
            price for the remaining 500,000 shares is $2.00 and the weighted average
            grant
            date fair value was $1.10 for these shares. The weighted average exercise
            price
            for the 50,000 shares is $3.00 and the weighted average grant date fair
            value
            was $2.92 for these shares. The fair value of these warrants and options
            were
            determined to be $772,275 and deducted as expenses using the Black-Scholes
            option-pricing model with the following assumptions:  no dividends;
            risk-free interest rate of 4%; the contractual life of 2.5-3.5 years
            and
            volatility of 39%. The Company based its estimate of expected volatility
            on the
            historical, expected or implied volatility of similar entities whose
            share or
            option prices are publicly available.  In addition, on May 11, 2006, a
            total of 219,212 shares were issued to the two former officers of Comet,
            under a
            consulting agreement for a two year term, in connection with the merger
            transaction, the fair value of these shares as of December 31, 2006,
            were
            determined to be $657,618 and deducted as expenses during the year ended
            December 31, 2006.
 
 On
            October 17, 2006 the Company closed a private offering (the “October 2006
            Offering”) of 200 units of equity at $15,000 per unit. Each unit consisted of
            5,000 shares of the Company’s common stock at a price of $3.00 per share and a
            warrant to purchase 2,500 shares at $3.50 per share. In this offering
            the
            Company issued a total of 1,000,000 common shares and granted warrants
            for the
            purchase of 500,000 at $3.50 per share. The Company netted $2,715,000
            after fees
            of $275,000. The warrants in this offering expire on October 10, 2008.
            The
            warrants contain a call provision at any time after January 10, 2008,
            if the bid
            price of the Company’s common stock averages over $6.00 per share for any
            consecutive one week period.
  In
            connection with the October 2006 Offering the Company granted the placement
            agent two warrants as follows: (i) a warrant to purchase 100,000 shares
            of
            common stock at an exercise price of $3.00 per share and (ii) a warrant
            to
            purchase 50,000 shares at $3.50 per share. The offering stipulates that
            the
            $3.00 per shares options are to be exercised prior to any of the $3.50
            per share
            options being exercised. Both warrants to the placement agent expire
            on October
            10, 2008.
  During
            the year ended December 31, 2006 the Company granted to two advisors,
            in
            connection with services performed for the private placement, warrants
            for
            500,000 shares of the Company at $2.00 per share. These warrants expire
            on July
            31, 2009. The fair value of above warrants were computed as
            $916,622.
  As
          of December 31, 2006, stock options and warrants to acquire approximately
          1,700,000 shares of common stock are held by non-employee consultants and
          remained unexercised.
 
 Information
          related to outstanding warrants at December 31, 2006:
 
 Exercise
                    Price
                Outstanding
                  December
                    31, 2005
                Granted
                Expired
                    or Exercised
                Outstanding
                  December
                    31, 2006
                Expiration
                    Date$1.50
                25,000
                -0-
                -0-
                25,000$2.00
                -0-
                1,000,000
                -0-
                1,000,000
                7/31/2009$3.00
                -0-
                100,000
                -0-
                100,000
                10/10/2008$3.50
                -0-
                550,000
                -0-
                550,000
                10/10/2008
  F-13
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 Information
          related to outstanding options at December 31, 2006:
 
 Exercise
                      Price
                  Outstanding
                    December
                      31, 2005
                  Granted
                  Expired
                      or Exercised
                  Outstanding
                    December
                        31, 2006
                  Expiration
                      Date$3.65
                  -0-
                  113,500
                  -0-
                  113,500$3.00
                  -0-
                  50,000
                  -0-
                  50,000
                  12/20/2008
  **6.**
                **Concentrations
                    of Business and Credit
                    Risk**
 
 Substantially
          all of the Company’s bank accounts are in banks located in the PRC and are not
          covered by any type of protection similar to that provided by the FDIC
          on funds
          held in U.S banks. The Company places its cash in high credit quality financial
          institutions.
 
 The
          Company obtains detailed credit evaluations of customers generally without
          requiring collateral, and establishes credit limits as required. Exposure
          to
          losses on receivables is principally dependent on each customer’s financial
          condition. The Company continuously monitors collections and payments from
          its
          customers and maintains an allowance for estimated credit losses based
          on the
          creditworthiness of each customer as well as any specific customer collection
          issues are identified.  Concentration of credit risk with respect to trade
          receivables is limited due to the Company's large number of diverse customers
          in
          different locations in China. Ninety percent (90%) of the Company’s accounts
          receivable are less than 60 days in arrears. While such credit issues have
          not
          been significant, there can be no assurance that the Company will continue
          to
          experience the same level of credit losses in the future.  The Company is
          operating in China, which may give rise to significant foreign currency
          risks
          from fluctuations and the degree of volatility of foreign exchange rates
          between
          U.S. dollars and the Chinese currency RMB.
 
 **7.**
                **Cash
                    and Cash Equivalents**
 
 As
          of December 31, 2006, Cash and Cash Equivalents consist of the
          following:
 
 ***Cash
                      and Cash Equivalents***Cash
                    on Hand
                
                $
                2,499Bank
                    Deposits
                
                
                4,944,286Restricted
                    Cash
                
                
                1,640,015Total
                    Cash and Cash Equivalents
                
                $
                6,586,800
 
 The
          amount of US$1,640,015 of restricted cash was temporarily held by the China
          State Administration of Foreign Exchange as of December 31, 2006 as a result
          of
          additional regulations announced in 2006 aimed at further strengthening
          China's
          anti-money laundering efforts.  The amount of $744,380 was released to TDR
          on January 22, 2007; the rest of amount will be released to TDR by the
          end of
          March, 2007.
 
 **8.**
                **Accounts
                    Receivable**
 
 As
          of December 31, 2006, Accounts Receivable totaled $3,199,026, net of Provisions
          for Doubtful Accounts.  All the accounts receivable aging is less than 180
          days; fifty two percent (52%) of the Company’s receivable are less than 30 days
          and total ninety five percent (95%) is less than 90 days in
          arrears.
 
 ***Accounts
                    Receivable***Trade
                    receivables
                
                $
                3,199,026Allowance
                    for doubtful accounts
                
                
                -Total
                    Accounts Receivable
                
                $
                3,,199,026
 
 F-14
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 **9.**
                **Inventories**
 
 The
          Company values its inventories at the lower of cost and market method.
          Inventories are accounted for using the first-in, first-out method. Inventories
          in the balance sheet include packing materials, raw materials, supplemental
          materials, work-in-process, and finished products.
 
 As
          of December 31, 2006, inventories consist of the following:
 
 ***Inventory***Raw
                      Material
                  
                  $
                  59,068Supplemental
                      Material
                  
                  
                  108,394Work-in-Process
                  
                  
                  78,770Finished
                      Products
                  
                  
                  32,330Total
                      Inventory
                  
                  $
                  278,562
 
 **10.**
                **Property
                    and Equipment**
 
 All
          of TDR and its subsidiaries’ buildings and fixed assets are located in the PRC
          and the land is used pursuant to a land use right granted by the PRC for
          50
          years commencing in 2004.  As of December 31, 2006, Property and Equipment
          consist of the following:
 
 ***Property
                    and Equipment***Buildings
                
                $
                2,632,973Machinery
                    and equipment
                
                
                1,432,986Land
                    use rights
                
                
                510,886Automobiles
                
                
                264,641Furniture
                    and Equipments
                
                
                4,382Total
                    Property and Equipment
                
                
                4,845,868Less:
                    Accumulated Depreciation
                
                
                (342,471
                )Property
                    and Equipment, Net
                
                $
                4,503,397
 
 For
          the year ended December 31, 2006 depreciation expense totaled
          $125,034.
 
 **11.**
                **Intangible
                    Assets**
 
 As
          of December 31, 2006, the Company’s intangible assets consist of:
 
 ***Intangible
                    Assets***Patents
                
                $
                1,878,842Distribution
                    rights and customer lists
                
                
                353,262Less
                    amortization
                
                
                222,587Total
                    Intangible Assets
                
                $
                2,009,517
 
 For
          the year ended December 31, 2006 amortization expense totaled
          $121,522.
 
 F-15
  **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
          of December 31, 2006**
  **12.**
                **Accounts
                    Payable and Accrued
                    Expense**
 
 As
          of December 31, 2006, Accounts Payable and Accrued Expense consist of the
          following:
 
 ***Accounts
                    Payable and Accrued Expense***
                
                
                **12/31/2006**Accounts
                    Payable and Accrued Expense
                
                $
                423,425Other
                    Accounts Payable
                
                
                399,361Total
                    Accounts Payable & Accrued Expenses
                
                $
                822,786
 
 Other
          Accounts Payable includes advance customer deposits which represents the
          collections of cash in advance to ensure the future delivery of goods or
          services.  Advances customer deposits are classified as current liabilities
          if the goods and services are to be delivered within the next year (or
          the
          operating cycle, if longer).  The other accounts payable also included
          $200,000 payable due to an agent in connection with the reverse merger
          with
          Comet.
 
 **13.**
                **Short-Term
                    Loan**
 
 TDR
          has secured a loan with a bank in the amount of $516,796, which bears monthly
          interest at a rate of 0.6825%, and is secured by real property that has
          an
          estimated value of $619,988.  The loan is also personally guaranteed by
          Yanqing Liu, the Company’s President and a principal shareholder.  The loan
          is due on its maturity date on June 22, 2007.  TDR incurred $48,933 of
          interest expense associated with this loan for the year ended December
          31,
          2006.
 
 **14.**
                **Promissory
                    Note Conversion**
 
 On
          August 3, 2006, ACPG signed a convertible promissory note (the “Note”) with
          Luminus Capital Management, Ltd. (“Luminus”), in the amount of $200,000.
 The Note bears interest at 6.5% per annum with a maturity date of August
          3, 2007, and is payable upon maturity or conversion of the Note. The
          preferential conversion feature of this note was valued at $177,803 and
          charged
          against interest expense for the year ended December 31, 2006. On October
          3,
          2006, the Company announced that Luminus served notice to convert the Note
          into
          common shares at a price of $2.00 per share. The note (including accrued
          interest) was converted on October 3, 2006, into a total of 102,166 shares
          of
          common stock.
 
 **15.**
                **Taxes
                    Payable**
 
 As
          of December 31, 2006, taxes payable consists of the following:
 
 ***Taxes
                    Payable***Value
                    Added Tax
                
                $
                236,605Enterprise
                    Income Tax
                
                
                320,750City
                    Tax
                
                
                4,426Payroll
                    Tax
                
                
                4,635Total
                    Taxes Payable
                
                $
                566,416
 
 **16.**
                **Income
                    Taxes**
 
 TDR
          was incorporated in the PRC which is governed by the Income Tax Law of
          the PRC
          concerning Enterprises and various local income tax laws (the “Income Tax
          Laws"). Under the Income Tax Laws, enterprises generally are subject to
          an
          income tax at an effective rate of 33% (30% state income taxes plus 3%
          local
          income taxes) on income as reported in their statutory financial statements
          after appropriate tax adjustments unless the enterprise is located in specially
          designated regions or cities for which more favorable effective rates apply.
 
 First
          elected to locate in the province designated as the High-Tech Industrial
          Development District, which is levied at 15 percent annually.
  F-16
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 As
          of December 31, 2006, TDR has attained profitable operations for tax purposes.
          TDR and First are the enterprises authorized by the State Council as special
          entities; consequently, the enterprise income tax rate is reduced to
          15%.
 
 We
          record a full valuation allowance to reduce our deferred tax assets to
          the
          amount that is more likely than not to be realized. While we have considered
          future taxable income and ongoing prudent and feasible tax planning strategies
          in assessing the need for the valuation allowance, in the event we were
          to
          determine that we would be able to realize our deferred tax assets in the
          future
          in excess of its net recorded amount, an adjustment to the deferred tax
          asset
          would increase income in the period such determination was made.
 
 A
          portion of the deferred tax assets related to net operating loss carryforwards
          of China Sky One US operation as of December 31, 2006 include amounts
          related to share-based stock option deductions.  Pursuant to Sections 382
          and 383 of the Internal Revenue Code (“IRC”), annual use of the Company’s net
          operating losses and tax credit carryforwards may be limited because of
          cumulative changes in ownership of more than 50% that have
          occurred.
 
 Significant
          components of the Company’s deferred tax assets are shown below.  Nil
          valuation allowance has been established to offset the deferred tax assets,
          as
          realization of such assets is certain per the management valuation.  The
          tax benefit has been reported in the December 31, 2006 consolidated financial
          statements since the potential tax benefit is not offset by a valuation
          allowance.
 
 Net
          deferred tax assets consist of the following components as of December
          31,
          2006:
 
 **Deferred
                    tax assets:**NOL
                    Carryover from China Sky One (formerly known as Comet)
                
                $
                223,430Share-based
                    compensation expenses based on 123R
                
                
                1,878,583Deferred
                    Tax at 15% tax rate
                
                
                315,302**Deferred
                    tax liabilities:**Valuation
                    allowance
                
                
                315,302Net
                    deferred tax asset
                
                $
                -
 
 **17.**
                **Deferred
                    Revenue - Government Grant**
 
 The
          Company received several federal government grants supporting the facility
          construction, research, development, and production of medicines.  These
          grants were nonrefundable to the State once awarded as long as the grants
          are
          used in the areas requested by the grants.  First used these federal grants
          to fund research and development projects, build infrastructure for development
          and/or manufacturing of medicines, and other activities that are within
          the
          scope of grants.  The remainder of the grants is deferred to the following
          years for qualified research and development activities.  All the completed
          projects and activities funded by the government grants were reported to
          and
          approved by the funding agencies for qualification of future grants.
  For the year ended December 31, 2006, the Company has recognized
          $112,755 federal grant, with the balance $67,541 deferred.  For the year
          ended December 31, 2005, the Company has recognized $202,706 federal grant,
          with
          the balance $55,782 deferred.
 
 **18.**
                **Employee
                    Retirement Benefits and Post Retirement
                    Benefits**
 
 According
          to the Heilongjiang Provincial regulations pertaining to State pension
          plans,
          both employees and employers have to contribute to a pension plan. The
          pension
          contributions include an 8% contribution by individuals (employees) and
          contributions from the Company to the state retirement plan based on 20%
          of the
          employees’ monthly basic salaries. TDR’s employees in the PRC are entitled to
          retirement benefits calculated with reference to their basic salaries on
          retirement and their years of service in accordance with a government managed
          benefits plan.
  F-17
  **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
          of December 31, 2006**
  **19.**
                **Stock
                    Compensation Plan**
 
 In
          July 2006, the Company’s stockholders approved the 2006 Stock Incentive Plan
          (the “2006 Plan”). The 2006 Plan, provides for the grant of stock options,
          restricted stock awards, and performance shares to qualified employees,
          officers, directors, consultants and other service providers. The 2006
          Plan
          originally authorized the Company to grant options and/or rights to purchase
          up
          to an aggregate of 1,500,000 shares of common stock.  As of March 31,
          2007, non-qualified options to purchase a total of 113,500 shares were
          granted
          and reserved for issuance under the 2006 Stock Incentive Plan.
 
 **20.**
                **Acquisition
                    of assets from Heilongjiang Tianlong Pharmaceutical
                    Company**
 
 In
          December, 2006, we acquired all of the products, dealership, and marketing
          network of the Beijing office of Heilongjiang Tianlong Pharmaceutical Company
          (“Tianlong”) for $381,700. Tianlong also agreed to a non-compete agreement in
          which Tianlong agreed to withdrawl from the Bejing market forever. The
          values
          assigned to the assets in the acquisition are as follows:
  Fixed
                      Assets
                  
                  $
                  28,438Non-compete
                      agreement
                  
                  
                  353,262$
                  381,700
 
 The
          non-compete agreement is being amortized over a 10 year estimated useful
          life.
 
 **21.**
                **Foreign
                    Currency Translation
                    Adjustment**
 
 We
          consider the local currency for all of our foreign subsidiaries to be the
          functional currency for that subsidiary. Assets and liabilities are translated
          at current rates of exchange. Income and expense items are translated at
          the
          average exchange rates for the year. Adjustments resulting from the translation
          of the financial statements of our foreign operations into U.S. dollars are
          excluded from the determination of net income and are accumulated in a
          separate
          component of shareholders’ equity. As a result, we include translation
          adjustments for these subsidiaries in stockholders’ equity. Our stockholders’
equity includes net cumulative foreign currency translation gains of $422,119
          at
          December 31, 2006 and $57,554 at December 31, 2005.
 
 Gains
          and losses on all other foreign currency transactions, including gains
          and
          losses attributable to foreign currency forward contracts, are included
          in
          income statement as our results of operations and were a net gain of $1,977
          at
          December 31, 2006 and nil in 2005.
 
 **22.**
                **Commitments
                    and Contingencies**
 
 The
          formulation, manufacturing, processing, packaging, labeling, advertising,
          distribution and sale of external use Chinese medicine such as those sold
          by the
          Company are subject to regulations by one or more federal agencies. The
          principal federal agencies include the State Food and Drug Administration
          of the
          Government of the Peoples Republic of China, the Food and Drug Administration
          (the “FDA”), Heilongjiang Provincial Food and Drug Administration of the
          People's Republic of China (PFDA), National Biology Products Inspection
          Institute (NBPI) and the National Food and Drug Administration (NFDA) of
          the
          People's Republic of China and, to a lesser extent, the Consumer Product
          Safety
          Commission. These activities are also regulated by various governmental
          agencies
          for the countries, states and localities in which the Company’s products are
          sold.
 
 Although
          management believes that the Company is in material compliance with the
          statutes, laws, rules and regulations of every jurisdiction in which it
          operates, no assurance can be given that the Company’s compliance with the
          applicable statutes, laws, rules and regulations will not be challenged by
          governing authorities or private parties, or that such challenges will
          not lead
          to material adverse effects on the Company’s financial position, results of
          operations, or cash flows.
 
 The
          Company, like any other distributor or manufacturer of products that are
          designed to be ingested, exposes the Company to the inherent risk of product
          liability claims in the events of possible injuries caused by the use of
          its
          products. The Company does not have liability insurance with respect to
          product
          liability claims; the insurance environment of China is neither sufficient
          nor
          mature. Inadequate insurance or lack of contractual indemnification from
          parties
          supplying raw materials or marketing its products, and product liabilities
          related to defective products could have material adverse effects on the
          Company.
 
 The
          Company is not involved in any legal matters arising in the normal course
          of
          business. While incapable of estimation, in the opinion of the management,
          the
          individual regulatory and legal matters in which it might involve in the
          future
          are not expected to have a material adverse effect on the Company’s financial
          position, results of operations, or cash flows.
  F-18
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
              to the Consolidated Financial Statements**
 **As
            of December 31, 2006**
 **23.**
                **Subsequent
                    Events**
 
 The
          amount of US$1,640,015 of restricted cash that was temporarily held by
          the China
          State Administration of Foreign Exchange as of December 31, 2006 as result
          of
          the additional regulations were announced in 2006 aimed at further strengthening
          China's anti-money laundering efforts.  The amount of $744,380 was released
          to TDR on January 22, 2007; the rest of amount will be released to TDR
          on the
          ended of Mach, 2007.
 
 **24.**
                **Correction
                    of Errors**
 
 During
          the process of preparing the financial statements of China Sky One Medical,
          Inc.
          for the quarter ended March 31, 2007, management determined that certain
          significant accounting errors had been made in prior quarters. These financial
          statements have been restated to account for these changes.
 
 The
          correction of errors included in these financials are:
 Effect
                      on December 31, 2006 Earnings
                  
                  Effect
                      on prior years earnings
                  
                  Cumulative
                      effect on Retained EarningsCapitalization
                      of research and development costs which should have been charged
                      to
                      operations when incurred
                  
                  $
                  (1,879,885
                  )
                  $
                  (12,280
                  )
                  $
                  (1,892,165
                  )Amortization
                      of patent rights and covenants not to compete
                  
                  
                  (121,522
                  )
                  
                  (69,813
                  )
                  
                  (191,335
                  )Correction
                      of valuation of shares issued for consulting
                  
                  
                  (446,879
                  )
                  
                  --
                  
                  
                  (446,879
                  )Reclassification
                      of value of warrants issued from additional paid-in capital
                      to consulting
                      expense
                  
                  
                  (734,595
                  )
                  
                  --
                  
                  
                  (734,595
                  )Record
                      the value of the preferential conversion feature of the convertible
                      notes
                      payable
                  
                  
                  (177,803
                  )
                  
                  --
                  
                  
                  (177,803
                  )Valuation
                      allowance on deferred tax asset
                  
                  
                  (315,302
                  )
                  
                  --
                  
                  
                  (315,302
                  )Reclassification
                      of stock compensation of $1,688,896 from a liability to contributed
                      capital
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --$
                  (3,675,986
                  )
                  $
                  (82,093
                  )
                  $
                  (3,758,079
                  )
  F-19




**ITEM
        8. RESTATED CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON** **ACCOUNTING
        AND FINANCIAL DISCLOSURE**




There
      have been no disagreements regarding accounting and financial disclosure matters
      with the independent public accountants of the Company.




As
      reported in a Current Report on Form 8-K dated July 26, 2006, and incorporated
      herein by reference, effective July 21, 2006, the Company engaged e-Fang
      Accountancy Corp. (“e-Fang”), as its independent registered accounting firm to
      audit the financial statements of China Sky One Medical, Inc. for the fiscal
      year ended December 31, 2006. At the time of the engagement, the services of
      HJ
& Associates, LLC (“HJ”), the firm that audited the financial statements of
      the Company for the year ended December 31, 2005, was dismissed by the Company.
      The dismissal was approved by the board of directors of the Company. During
      the
      two fiscal years ended December 31, 2005, and the subsequent interim period
      ended March 31, 2006, there were no disagreements between the Company and HJ
      on
      any matter of accounting principles of practice, financial statement disclosure,
      or auditing scope or practice which if not resolved to the satisfaction of
      HJ
      would have caused disagreement in connection with its reports. e-Fang had been
      engaged as the independent accounting firm for the Company’s subsidiary,
      American California Pharmaceutical Group, Inc., a California corporation
      (“ACPG”), which the Company acquired in 2006. In the interest of expediency and
      cost, and because this has been treated as a reverse acquisition for accounting
      purposes, the Board of Directors of the Company determined to make the change
      in
      accounting firms for the parent company, China Sky One.




**ITEM
      8A. CONTROLS AND PROCEDURES**




The
      Company’s management is responsible for establishing and maintaining a system of
      disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
      under the Exchange Act) that is designed to ensure that information required
      to
      be disclosed by the Company in the reports that the Company files or submits
      under the Exchange Act is recorded, processed, summarized and reported, within
      the time periods specified in the Commission’s rules and forms. Disclosure
      controls and procedures include, without limitation, controls and procedures
      designed to ensure that information required to be disclosed by an issuer in
      the
      reports that it files or submits under the Exchange Act is accumulated and
      communicated to the issuer’s management, including its principal executive
      officer or officers and principal financial officer or officers, or persons
      performing similar functions, as appropriate to allow timely decisions regarding
      required disclosure.




In
      accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was
      completed under the supervision and with the participation of the Company’s
      management, including the Company’s principal executive officer and principal
      financial officer, of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures as of the end of the period covered
      by this Annual Report. Based on that evaluation, the Company’s Principal
      Executive Officer and Principal Financial Officer concluded that the Company’s
      disclosure controls and procedures are effective, to provide reasonable
      assurance that information required to be disclosed in the Company’s reports
      filed or submitted under the Exchange Act is recorded, processed, summarized,
      and reported within the time periods specified in the Commission’s rules and
      forms. There have been no changes to the Company’s internal controls over
      financial reporting that occurred during our last fiscal quarter of the year
      ended December 31, 2006, that materially affected, or were reasonably likely
      to
      materially affect, our internal controls over financial reporting.




43




**ITEM
      8B. OTHER INFORMATION**





Not
      applicable.





**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL**


**PERSONS;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**





**DIRECTORS
      AND OFFICERS**





**Directors
      and Officers**





(a)  Identification
      of Directors and Executive Officers .
      The
      following table sets forth certain information regarding the Company’s directors
      and executive officers for the fiscal year ended December 31, 2006:




**Name**
            
            **Age**
            
            **Positions**Liu Yan-qing
            
            43
            
            Chief Executive Officer, President and
              DirectorHan Xiao-yan
            
            40
            
            Chief Financial Officer and
              DirectorWang Hai-feng
            
            31
            
            Secretary/Treasurer and
              Director





The
      officers and directors were elected to their current positions in May, 2006,
      in
      connection with the completion of the reverse merger with Comet. The following
      information reflects the business background and experience of each director
      and
      officer.





Liu
      Yan-qing is our Chief Executive Officer and President, and Director of TDR
      and
      the General Manager of First. He graduated from Prophylactic Department of
      Harbin Medicine University, where he obtained his bachelor’s degree. In 2005, he
      studied at Tsing Hua University and got an Executive Masters of Business. Before
      establishing his own company, he had 8 years of experience as a reporter of
      Family Health Newspaper. He
      has 10
      years of experience in drug marketing, research and development of new drugs
      and
      enterprise management. He has been instrumental in establishing TDR’s sales
      program and sales network covering the PRC.





Han
      Xiao-yan is our Chief Financial Officer, and the General Manager of TDR and
      the
      Vice Director of First. She received a master of business administration at
      Harbin Industrial University. She had five years of hygiene and medical media
      experience before becoming employed by TDR, and has been instrumental in
      developing and marketing TDR’s products and expanding its sales. She serves as
      senior marketing manager and administrative manager. She has
      10
      years of financial management experience. In 2004, she was appointed the general
      manager of TDR, with responsibility for financing, production, quality control
      and purchasing. In 2003, she was appointed vice director of First
      Bio-Engineering Company Limited.




44




Wang
      Hai-feng, our Secretary/ Treasurer, graduated from Heilongjiang University
      where
      he majored in English Literature and received two bachelors’ degrees in English
      and International Trade. He joined TDR in 2003 and has served as the manager
      of
      the international business department, and the assistant to the president and
      the secretary of the board of directors. He has been instrumental in the
      establishment of the Company’s international business department and the
      expansion of foreign trade. In 2005, he assisted in product innovation and
      branding for international markets. Through the efforts of Mr. Wang, the Company
      has established strategic relationships with several foreign partners. Before
      his employment by TDR, Mr. Wang had experience in product exporting, translating
      and project operations in foreign companies.





(b)  Significant
      Employees .
      As of
      the date hereof, the Company has no significant employees.




(c)  Family
      Relationships .
      None.




(d)  Involvement
      in Certain Legal Proceedings .
      There
      have been no events under any bankruptcy act, no criminal proceedings and no
      judgments, injunctions, orders or decrees material to the evaluation of the
      ability and integrity of any director, executive officer, promoter or control
      person of Registrant during the past five years.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors, executive
      officers and persons who own more than ten percent of a registered class of
      our
      equity securities, to file with the Securities and Exchange Commission initial
      reports of ownership and reports of changes in ownership of our common stock.
      Based on the Company’s review of copies of such forms received by it, the
      Company believes all such filing requirements applicable to officers, directors
      and 10% owners of its common stock have been complied with.





**Code
      of Ethics**





The
      Company has adopted a Code of Ethics that applies to the Company’s principal
      chief executive officer, principal financial officer, principal accounting
      officer or controller, or persons performing similar functions, as well as
      other
      employees (the “Code of Ethics”). A copy of the Code of Ethics is attached
      hereto as Exhibit 14.1. The Code of Ethics is being designed with the intent
      to
      deter wrongdoing, and to promote the following:





·
            Honest
                and ethical conduct, including the ethical handling of actual or
                apparent
                conflicts of interest between personal and professional
                relationships




45




·
            Full,
                fair, accurate, timely and understandable disclosure in reports and
                documents that a small business issuer files with, or submits to,
                the
                Commission and in other public communications made by the small business
                issuer





·
            Compliance
                with applicable governmental laws, rules and
                regulations





·
            The
                prompt internal reporting of violations of the code to an appropriate
                person or persons identified in the
                code





·
            Accountability
                for adherence to the code





**Nominating
      Committee**





We
      have
      not adopted any procedures by which security holders may recommend nominees
      to
      our Board of Directors.





**Audit
      Committee**





The
      Board
      of Directors currently acts as the audit committee. The Company does not have
      a
      qualified financial expert at this time. The Company intends to continue to
      search for a qualified individual for hire.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth the cash compensation paid by the Company to its
      President and all other executive officers who earned annual compensation
      exceeding $100,000 for services rendered during the fiscal years ended December
      31, 2006 and December 31, 2005.




46




**SUMMARY
      COMPENSATION TABLE**





**Name
                and principal position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Stock
                Awards ($)(1)**
            
            **Option
                Awards ($)**
            
            
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **Nonqualified
                Deferred Compensation Earnings ($)**
            
            **All
                Other Compensation ($)**
            
            
            
            **Total
                ($)**Liu
                Yan-Qing
              Principal
                  Executive
            
            
            2006
            
            
            19,500
            
            
            --
            
            
            --
            
            
            4,377
            
            (1)
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            23,877Officer
              and Director
            
            
            2005
            
            
            19,500
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            19,500Han
                Xiao-Yan
              Principal
                Financial
            
            
            2006
            
            
            16,500
            
            
            --
            
            
            --
            
            
            3,502
            
            (1)
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            20,002Officer
              and
              Director
            
            
            2005
            
            
            16,500
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            16,500Wang
                Hai-Feng,
            
            
            2006
            
            
            13,500
            
            
            --
            
            
            --
            
            
            1,124
            
            (1)
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            14,624Secretary/Treasurer
            
            
            2005
            
            
            13,500
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            13,500Richard
                B. Stuart, former Principal Executive Officer
            
            
            2006
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            28,200
            
            (2)
            
            
            28,200and
              Director
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            10,000
            
            (2)
            
            
            10,000Jack
                M. Gertino, former Principal Financial Officer
            
            
            2006
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            56,325
            
            (2)
            
            
            56,325and
              Director
            
            
            2005
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            20,000
            
            (2)
            
            
            20,000TOTAL
            
            
            
            
            
            99,000
            
            
            --
            
            
            --
            
            
            9,003
            
            
            
            
            
            --
            
            
            --
            
            
            114,525
            
            
            
            
            
            222,528





(1)  Option
      Awards represent the aggregate grant date fair value of options to purchase
      10,000 common shares for Dr Liu, 8,000 common shares for Ms. Han, and 5,000
      common shares for Mr. Wang, computed in accordance with FAS 123R. The grant,
      vesting and forfeiture information and assumption made in valuation may be
      found
      in Note 5 to our financial statements for the year ended December 31, 2006,
      which are attached hereto, beginning on Page F-1, and in the notes following
      the
      table below.





(2)  The
      Company recorded compensation expense for Richard B. Stuart and Jack M. Gertino,
      former officers and directors of the Company, computed on an hourly basis,
      in
      the amounts indicated, for their efforts in reviewing specific business
      opportunities for a possible business combination during the fiscal year,
      participating in meetings and conference calls in connection with such
      opportunities, and undertaking related activities.





**Summary
      of Employment Agreements and Arrangements**





In
      February, 2006, the Company entered into five-year employment agreements with
      each of its officers at the annual salaries set forth in the above
      table.




47




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





**Outstanding
      Equity Awards at Fiscal Year-end**





**Name**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Unexercisable**
            
            **Equity
                Incentive Plan Awards: Number of Securities Unexercised Unearned
                Options**
              **(#)**
            
            **Option
                Exercise Price**
              **($)**
            
            **Option
                Expiration Date**
            
            **Number
                of Shares or Units of Stock That Have Not Vested**
              **(#)**
            
            **Market
                Value of Shares or Units of Stock That Have Not
                Vested**
              **($)**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested**
              **(#)**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested**
              **($)****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**
            
            **(f)**
            
            **(g)**
            
            **(h)**
            
            **(i)**
            
            **(j)**Liu
                Yan-Qing
              Principal
                Executive Officerand
                Director
            
            
            0
            
            
            0
            
            
            10,000(1)
            
            $
            3.65
            
            
            October
                26, 2011
            
            
            0
            
            
            0
            
            
            0
            
            
            0Han
                Xiao-Yan
              Principal
                Financial Officerand
                Director
            
            
            0
            
            
            0
            
            
            8,000(2)
            
            $
            3.65
            
            
            October
                26, 2011
            
            
            0
            
            
            0
            
            
            0
            
            
            0Wang
                Hai-Feng, Secretary/Treasurer
            
            
            0
            
            
            0
            
            
            5,000(3)
            
            $
            3.65
            
            
            October
                26, 2011
            
            
            0
            
            
            0
            
            
            0
            
            
            0





(1)  On
      October 26, 2006, we issued to Liu Yan-Qing under our 2006 Incentive Stock
      Plan
      (the “Plan”), options to purchase 10,000 shares of common stock, 6,000 options
      vesting June 30, 2007, and the remaining 4,000 options vesting on June 30,
      2008.
      These options are exercisable for a five-year period from the date of grant
      at
      an exercise price of $3.65 per share.





(2)  On
      October 26, 2006, we issued to Han Xiao-Yan under our Plan, options to purchase
      8,000 shares of common stock, 4,800 options vesting June 30, 2007, and the
      remaining 3,200 options vesting on June 30, 2008. These options are exercisable
      for a five-year period from the date of grant at an exercise price of $3.65
      per
      share.





(3)  On
      October 26, 2006, we issued to Wang Hai-Feng under our Plan, options to purchase
      5,000 shares of common stock, 2,000 options vesting December 31, 2007, 2,000
      options vesting December 31, 2008, and the remaining 1,000 options vesting
      on
      December 31, 2009. These options are exercisable for a five-year period from
      the
      date of grant at an exercise price of $3.65 share.




48




**Equity
      Compensation Plan Information**




The
      Company’s board of directors adopted a 2006 Stock Incentive Plan (the “Plan”),
      to be effective on July 31, 2006. The Plan was approved by the shareholders
      on
      July 31, 2006. The Plan authorizes the granting of incentive stock options
      and
      nonqualified stock options to purchase common stock, stock appreciation rights
      (“SARs”), restricted stock, performance stock and bonus stock, to key executives
      and other key employees and consultants of the Company, including officers
      of
      the Company and its subsidiaries. The purpose of the Plan is to attract and
      retain key employees, to motivate key employees to achieve long-range goals
      and
      to further identify the interests of key employees with those of the other
      shareholders of the Company. The Plan authorizes the award of 1,500,000 shares
      of Common Stock to be used for stock, SARs, restricted stock and performance
      and
      bonus stock. If an award made under the Plan expires, terminates or is
      forfeited, canceled or settled in cash, without issuance of shares covered
      by
      the award, those shares will be available for future awards under the Plan.
      The
      Plan will terminate on July 31, 2017. The Plan is intended to qualify for
      favorable treatment under Section 16 of the Exchange Act, as amended, pursuant
      to Rule16b-3 promulgated thereunder (“Rule 16b-3”).  The Plan provides for
      the grant of “incentive stock options,” as defined in Section 422 of the
      Internal Revenue Code (“Code”) and nonqualified stock options.





The
      Plan
      designates a Stock Option Committee appointed by the Board of Directors and
      authorizes the Stock Option committee to grant or award to eligible participants
      of the Company and its subsidiaries and affiliates, stock options, SARs,
      restricted stock performance stock awards and Bonus Stock awards for up to
      1,500,000 shares of common stock of the Company. The initial members of the
      Stock Option Committee are the Board of Directors.





On
      October 26, 2006, the Company granted a total of 113,500 non-qualified options
      under the Plan to key employees, including its officers. These options are
      exercisable at a price of $3.65 per share, or 85% of the fair market value
      of
      the Shares covered by the options as of the date of grant. The options begin
      to
      vest in June, 2007, and typically vest in increments over either a two-year
      or
      three year period, and expire in October, 2011, unless earlier terminated by
      their terms. The outstanding options include a total of 23,000 options held
      by
      current officers and directors.





The
      following table provides certain information with respect to the Company’s
      equity compensation plans in effect as of December 31, 2006.




**Plan Category**
            
            **(a) Number of securities to**
              **be issued upon exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **(b) Weighted-average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **(c) Number of securities remaining**
              **available for future issuance under
                equity compensation plans**
              **(excluding securities reflected in**
              **column a)**Equity
                compensation plans approved by security holders
            
            
            113,500
            
            $
            3.65
            
            
            1,386,500Equity
                compensation plans not approved by security holders
            
            
            NoneTotal
            
            
            113,500
            
            
            
            
            
            1,386,500




49




**DIRECTOR
      COMPENSATION**





We
      do not currently pay any cash fees to our directors.





**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS**


**AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





The
      following table sets forth as of the date of this report, the number and
      percentage of the outstanding shares of common stock which, according to the
      information supplied to the Company, were beneficially owned by (i) each person
      who is currently a director of the Company, (ii) each executive officer, (iii)
      all current directors and executive officers of the Company as a group and
      (iv)
      each person who, to the knowledge of the Company, is the beneficial owner of
      more than 5% of the outstanding common stock. Except as otherwise indicated,
      the
      persons named in the table have sole voting and dispositive power with respect
      to all shares beneficially owned, subject to community property laws where
      applicable.





**Name
                and Address of****Beneficial
                Owner**
            
            **Common**
              **Stock****(1)**
            
            **Percent
                of Class****Officers
                and Directors:**Liu
                Yan-qing (2)
            
            
            4,660,595
            
            
            42.52Han
                Xiao-yan (2)
            
            
            1,402,907
            
            
            12.80Wang
                Hai-feng (2)
            
            
            0
            
            
            0.00All
                Officers and Directors as a group (3 persons):
            
            
            6,063,502
            
            
            55.32**Principal
                Shareholders:**Liu
                Yan-qing (2)
            
            
            ------------See
                above------------Han
                Xiao-yan (2)
            
            
            ------------See
                above------------Trang
                Chong “Charles” Hung (3)
            
            
            77,685
            
            
            *American
                Eastern Group, Inc. (3)
            
            
            600,185
                (4
            )
            
            4.79American
                Eastern Securities, Inc. (3)
            
            
            204,803
                (5
            )
            
            1.68




*Less
      than 1%





(1)  All
      shares are held of record and beneficially.




50




(2)  The
      mailing address for each shareholder is the principal executive offices of
      the
      Company, Room
      1706, No. 30 Di Wang Building, Gan Shui Road, Nandang District, Harbin, People’s
      Republic of China 150001.





(3)  The
      address for each of Mr. Hung and these two entities is 865 South Figueroa
      Street, #3340, Los Angeles, CA 90017. Mr. Hung is a principal of both American
      Eastern Group, Inc. and American Eastern Securities, Inc., and has voting and
      dispositive power over all of the listed shares in addition to those held in
      his
      name.





(4)  Includes
      warrants to purchase 500,000 shares of the common stock of the Company. (See
      “Item 12. Certain Relationships and Related Transactions”).





(5)  Includes
      warrants to purchase up to 150,000 shares of the common stock of the Company.
      (See “Item 12. Certain Relationships and Related Transactions”).





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





Effective
      March 9, 2006, we completed a 1-for-8 reverse split of its outstanding common
      stock. All numbers in this report give effect to the reverse split.





Effective
      May 30, 2006, we acquired 100% of American California Pharmaceutical Group,
      Inc.
      (“ACPG”) in a stock-for-stock exchange. The transaction was treated as a reverse
      merger and a recapitalization of ACPG for financial reporting purposes. As
      part
      of the exchange, Liu Yan-qing and Han Xiao-yan, officers and directors of ACPG,
      received 4,660,595 and 1,402,907 shares, respectively of the common stock of
      the
      Company in exchange for their ownership interest in ACPG. The other shareholders
      of ACPG received a total of 4,129,875 shares of common stock of the Company
      for
      their ownership interest in ACPG, including American Eastern Group, Inc.,
      American Eastern Securities, Inc., and its principal, Trang Chong (Charles)
      Hung, who received 87,685 shares, 54,803 shares, and 87,685 shares of the
      Company, respectively, in connection with the transaction.





In
      connection with the closing of the stock exchange described above, the Company
      entered into a consulting agreement with former officers of the Company dated
      May 11, 2006, with Jack M. Gertino and Richard B. Stuart, officers and directors
      who resigned at closing, providing for their services as consultants. For
      such
      services, the Company and ACPG agreed to compensate Messrs. Gertino and Stuart
      as follows: (a) the sum of $3,000 per month for a period of two years; (b)
      the
      issuance of a total of 219,212 shares of restricted common stock (or 109,606
      shares each) of the Company. In addition, under this arrangement, the Company
      granted to Mr. Gertino an option to purchase a total of 50,000 shares at a
      price
      of $3.00 per share at any time before December 20, 2008.





The
      Company has incurred fees to American Eastern Group, Inc. (“AEG”), and Shenzhen
      DRB Investment Consultant Limited (“DRB”), in the amount of $200,000 in cash for
      services rendered in connection with the Exchange Agreement. In addition, in
      October, 2006, the Company granted to AES and DRB warrants to each purchase
      a
      total of 500,000 shares of common stock exercisable at any time before July
      31,
      2009, at a price of $2.00 per share. One- half
      of
      such warrants were deemed to be earned as of the completion of the Exchange
      Agreement, and the other one-half was deemed earned after completion of the
      Company’s private offering in October, 2006. The fair value of the above
      warrants was calculated as $1,469,190 as of December 31, 2006, based on the
      Black-Scholes model of accounting, and the total value of compensation to AES
      and DRB has been determined to be $2,317,128.




51




American
      Eastern Securities, Inc., acted as placement agent for the Company in connection
      with its private offering completed in October, 2006. The Company sold a total
      of 200 Units in the private offering, at a price of $15,000 per Unit, for total
      gross proceeds of $3,000,000 and net cash proceeds of approximately $2,745,000.
      Each Unit in the private offering consisted of a total of 5,000 shares of common
      stock and a warrant to purchase an additional 2,500 shares of common stock
      at
      any time prior to October 10, 2008, at a price of $3.50 per share. As a result,
      the Company sold a total of 1,000,000 shares of common stock, and issued
      warrants to purchase an additional 500,000 shares of common stock. As placement
      agent, American Eastern Securities earned a placement fee of $270,000 or 9%
      of
      the total proceeds from the private offering, and was granted a warrant to
      purchase Units equivalent to 10% of the Units sold in the offering, or a total
      of 100,000 shares at a price of $3.00 per share, and, subject to exercising
      the
      $3.00 Warrants in full, a warrant for an additional 50,000 shares exercisable
      at
      $3.50 per share. All of the warrants described above have an expiration date
      of
      October 10, 2008. None of the warrants described in this paragraph have been
      exercised.





**ITEM
      13. EXHIBITS**





(a)  Exhibits.
      Copies of the following documents are included as exhibits to this report
      pursuant to Item 601 of Regulation S-B.


3.1
              Articles of Incorporation, as amended (incorporated
                by
                reference to Exhibit 3.1 to the Company’s Registration Statement on Form
                10-SB, as filed with the Securities and Exchange Commission on May
                13,
                1999).
 3.2
                By-Laws of the Company (incorporated by reference
                  to
                  Exhibit 3.2 to the Company’s Registration Statement on Form 10-SB, as
                  filed with the Securities and Exchange Commission on May 13,
                  1999).


10.1
            Option
                granted to Richard B. Stuart dated March 11, 1999 (incorporated by
                reference to Exhibit 10.1 to the Company’s Registration Statement on Form
                10-SB, as filed with the Securities and Exchange Commission on May
                13,
                1999).





10.2
            Option
                granted to Philip C. Gugel dated March 11, 1999 (incorporated by
                reference
                to Exhibit 10.2 to the Company’s Registration Statement on Form 10-SB, as
                filed with the Securities and Exchange Commission on May 13, 1999).





10.3
            Option
                granted to Jack M. Gertino dated March 11, 1999 (incorporated by
                reference
                to Exhibit 10.3 to the Company’s Registration Statement on Form 10-SB, as
                filed with the Securities and Exchange Commission on May 13, 1999).




52




10.4
            Warrant
                granted to Mark E. Lehman dated March 11, 1999 (incorporated by reference
                to Exhibit 10.4 to the Company’s Registration Statement on Form 10-SB, as
                filed with the Securities and Exchange Commission on May 13, 1999).





10.5*
            Warrant
                granted to American Eastern Group, Inc., dated October 10,
                2006.




10.6*
            Warrant
                granted to American Eastern Securities, Inc., dated October 24,
                2006.




14.1*
              Code
                  of Ethics
 21.1*
                Subsidiaries
                    of the Company
 31.1**
                  Certification
                      of Principal Executive Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 2002
 31.2**
                    Certification
                        of Principal Financial Officer pursuant to Section 302 of
                        the
                        Sarbanes-Oxley Act of 2002
 32.1**
                      Certification
                          of Chief Executive Officer pursuant to Section 906 of the
                          Sarbanes-Oxley
                          Act of 2002
 32.2**
                        Certification
                            of Chief Financial Officer pursuant to Section 906 of
                            the Sarbanes-Oxley
                            Act of 2002


*
      Previously filed as exhibits to the Annual Report on Form 10-KSB, originally
      filed on April 2, 2007.


**
      Filed herewith




53





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      aggregate fees billed by our principal accountants for fiscal years ended
      December 31, 2006 and 2005 are as follows:


**Accountant
                  Name**
              
              **Audit
                  Fees**
              
              **Audit**
                **Related
                  Fees**
              
              **Tax
                  Fees**
              
              **All**
                **Other
                  Fees**HJ
                  & Associates, LLCfor
                  fiscal year ended:December
                  31, 2005
              
              $
              5,480
              
              $
              -
              
              $
              247
              
              $
              -December
                  31, 2006
              
              $
              4,142
              
              $
              -
              
              $
              -
              
              $
              -e-Fang
                  Accountancy Corp. & CPAfor
                  fiscal year ended:December
                  31, 2005
              
              $
              30,000
              
              $
              -
              
              $
              -
              
              $
              -December
                  31, 2006
              
              $
              30,000
              
              $
              24,000
              
              $
              -
              
              $
              -




The
      Company does not currently have an audit committee. As a result our board of
      directors performs the duties of an audit committee. The Company’s board of
      directors will evaluate and approve in advance, the scope and cost of the
      engagement of an auditor before the auditor renders audit and non-audit
      services. We do not rely on pre-approval policies and procedures.




54




**SIGNATURES**





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


**CHINA
                  SKY ONE MEDICAL, INC.**Date:
                  August 13, 2008
              By:
              /s/ Liu Yan-QingLiu
                Yan-Qing, President, CEO and Director




Date:
                    August 13, 2008
                By:
                /s/ Zhang YukunZhang Yukun, Interim
                    CFO




In
      accordance with the Exchange Act, this report has been signed by the following
      persons on behalf of the registrant and in the capacities and on the dates
      indicated.




Date:
                      August 13, 2008
                  
                  /s/ Liu Yan-QingLiu Yan-Qing, President, CEO and Director
                    (principal
                        executive officer)
  Date:
                      August 13, 2008
                  
                  /s/ Zhang YukunZhang Yukun, Interim CFO
                    (principal
                        financial and accounting
                        officer)
 Date:
                      August 13, 2008
                  
                  /s/ Han XiaoyanHan
                    Xiaoyan, Vice Chairman
  55