**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**





**FORM
      10-**KSB****





**xAnnual
      Report Pursuant
      to Section 13 or 15(d) of the Securities Exchange Act of 1934**




For
      the
      fiscal year ended December 31, 2007.





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





**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,


Nandang
      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 Pursuant to Section 12(b) of the Act:




Securities
      Registered Pursuant to Section 12(g) of the Act: Common
      Stock, par value $.001 per share.




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




**Yes oNo x**




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
        whether there is no disclosure of delinquent filers pursuant to
        Item 405 of Regulation S-B is contained herein, and will not 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.




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
        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:
  The
        market value of a Common Stock held by non
        affiliates as of March 20, 2008 was $105,464,544.


At
      March
      20, 2008, 14,852,214 shares
      of the registrant’s Common Stock, $0.001 were outstanding.










**TABLE
      OF CONTENTS**




**ITEM
      NUMBER AND CAPTION**


**Page
                  No.****PART
                  I**Item
                  1.
              Description
                  of Business
              4Risk
                  Factors
              19Item
                  2.
              Properties
              27Item
                  3.
              Legal
                  Proceedings
              27Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              27**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              27Item
                  6.
              Management’s
                  Discussion and Analysis or
                  Plan of Operationand Results of Operations
              29Item
                  73
              Financial
                    Statements and Supplementary Data
              40**PART
                  III**Item
                    8.
              Changes
                  In And Disagreements With Accountants On Accounting And Financial
                  Disclosures
              40Item 8A(T).
              Controls
                  and Procedures
              40Item
                  8B.
              Other
                  Information
              41Item
                  9.
              Directors,
                  Executive Officers and Corporate Governance
              42Item
                  10.
              Executive
                  Compensation
              47Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              47Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              47Item
                  13.
              Exhibits
              49Item
                  14.
              Principal
                    Accountant Fees and Services
              50




2




This
      Annual Report on Form 10-KSB
      (the “Annual Report”) of China Sky One Medical, Inc., a Nevada corporation,
      includes forward-looking statements within the meaning of Section 27A of
      the Securities Act and Section 21E of the Securities Exchange Act of 1934,
      as amended. All statements, other than statements of historical fact, are
      statements that could be deemed forward-looking statements, including, but
      not
      limited to, statements regarding our development, regulatory approval and sale
      of new products, the acceptance of these products, our ability to expand sales
      in China and throughout the world, our general business disclosure and the
      Management Discussion and Analysis, our ability to raise capital if and as
      needed, currency exchange rates, business strategy and plans and objectives
      of
      management for future operations. When used in this Annual Report, the words
      “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”
“expect” and similar expressions are intended to identify forward-looking
      statements.




We
      have
      based these forward-looking statements largely on our current expectations
      and
      projections about future events and financial trends that we believe may affect
      our financial condition, results of operations, business strategy, short-term
      and long-term business operations and objectives, and financial needs. These
      forward-looking statements are subject to certain risks and uncertainties that
      could cause our actual results to differ materially from those reflected in
      the
      forward-looking statements. Factors that could cause or contribute to such
      differences include, but are not limited to, the risks discussed under the
      heading “Risk Factors”. Except as required by law, we assume no obligation to
      update these forward-looking statements publicly or to update the reasons actual
      results could differ materially from those anticipated in these forward-looking
      statements, even if new information becomes available in the future.




In
      light
      of these risks, uncertainties and assumptions, the forward-looking events and
      circumstances discussed in this Annual Report may not occur and actual results
      could differ materially and adversely from those anticipated or implied in
      the
      forward-looking statements. Accordingly, readers are cautioned not to place
      undue reliance on such forward-looking statements.




All
      revenue amounts are stated in U.S. dollars as converted from PRC Yuan (“RMB”) at
      recent exchange rates of 7.006 RMB for each dollar, rounded to the nearest
      dollar.




3




**PART
      I**





**Item
      1. Description of Business.**





All
      of
      our business is conducted through our wholly-owned subsidiary, American
      California Pharmaceutical Group, Inc., a California corporation (“ACPG”), which,
      in turn, wholly owns Harbin Tian Di Ren Medical Science and Technology Company
      (“TDR”) a company organized in the People’s Republic of China (the “PRC” or
“China”), and TDR’s subsidiaries, described below. All references in this Annual
      Report to “China Sky One” refers to the parent company, China Sky One Medical,
      Inc., a Nevada corporation formerly known as Comet Technologies, Inc. All
      references in this Annual Report, unless the context otherwise indicates, to
      “the “Company,” “we,” “us,” “our,” and the like, shall mean China Sky One,
      combined with ACPG, and its operating and research subsidiary, TDR, and TDR’s
      operating subsidiaries on a consolidated basis.





We
      are
      engaged, through our China based indirect subsidiaries described below, in
      the
      development, manufacture, marketing and sale of over-the-counter, branded
      nutritional supplements and over-the-counter plant and herb based pharmaceutical
      and medicinal products.   Our principal products are external use
      Traditional Chinese Herbal Remedies/ Medicines commonly referred to in the
      industry as “TCM.” We have evolved into an integrated manufacturer, marketer and
      distributor of external use Chinese medicine products sold primarily in China
      and through PRC domestic pharmaceutical chains and have been expanding our
      worldwide sales effort as well.  We sell both our own manufactured
      products, as well as medicinal and pharmaceutical products manufactured by
      others in the PRC.





**Corporate
      History**





ACPG,
      our
      non operating United States holding company subsidiary, 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 Agreement with China Sky One (then known
      as
“Comet Technologies, Inc.”) and TDR, described herein. On December 8, 2005, ACPG
      completed a stock exchange transaction with TDR and TDR’s subsidiaries (the “TDR
      Acquisition”), each of which were fully operating companies. 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 China Sky One. 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. As a result of this 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 PRC based operating 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 PRC. TDR was reorganized and incorporated as
      a
      limited liability company on December 29, 2000, under the “Corporation Laws and
      Regulations” of the PRC. At the time of the TDR Acquisition by ACPG in December
      of 2005, TDR had two wholly-owned subsidiaries, Harbin First Bio-Engineering
      Company Limited and Kangxi Medical Care Product Factory, until July, 2006,
      when
      the two were merged, with Harbin First Bio-Engineering Company Limited as the
      surviving subsidiary of TDR.




We
      have
      also recently organized Harbin Tian Qing Biotech Application Company as a
      wholly-owned PRC subsidiary of TDR, to conduct research and development in
      the
      areas of tissue and stem cell banks, which is described in more detail below.





On
      February 22, 2008, TDR entered into an Equity Transfer Agreement with
      Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
      laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
      external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
      sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
      Agreement, TDR acquired 100% of the issued and outstanding capital stock of
      Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
      aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
      stock of the parent company, China Sky One with a dollar value of $300,000.
      The
      acquisition, which is subject to the our due diligence review of Heilongjiang,
      as well as approval by the appropriate regulatory authorities in the PRC, is
      expected to close on or before March 31, 2008. While we have not completed
      this
      acquisition, we have begun oversight of its operations pending completion.




4





**Principal
      Products and Markets**





We
      are
      engaged, through TDR and its respective subsidiaries in the PRC, in the
      development, manufacture, marketing and sale of over-the-counter, 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 and sales facilities are in the City of Harbin, Heilongjiang
      Province and we have sales offices in Beijing.





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. We intend to concentrate many of our efforts during the next several
      years on development, production and sales of TCM products and biological test
      kits and in particular, tissue and our stem cell research as described more
      fully below.





Our
      principal operations are in China, where TDR and its subsidiaries have sales
      distribution covering most of China and the Hong Kong Special Administration
      Region.   Our overall revenues in 2007 was $49,318,308, most of which
      was from sales in China, of which, export sales for our main countries of
      export (in order of revenues during the year ended 2007) were as follows:


**Export
                  Country**
              
              **2007
                  Revenues**Malaysia
              
              
              93,016,227
                  RMBUnited
                  Kingdom
              
              
              540,364
                  RMBHong
                  Kong
              
              
              319,064
                  RMB,United
                  Arab Emirates
              
              
              46,215
                  RMBUnited
                  States
              
              
              45,884
                  RMBRussia
              
              
              20,160
                  RMBSweden
              
              
              4,458
                  RMBIreland
              
              
              3,346
                  RMB





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, we hope to develop a number of
      additional products that we will be able to manufacture and market both in
      the
      PRC and in other countries.




Below
      is
      a chart depicting the corporate organization of the Company and all related
      subsidiaries.




graph1




5




**SFDA
      Licenses**





The
      State
      Food and Drug Administration of the government of Heilongjiang, China (“SFDA”)
      issues the licenses and petitions for permission to manufacture and market
      pharmaceutical products in the PRC.  Our licenses relate primarily to
      medical machine producing licenses which are needed mainly for topical products,
      ointments and external test kits. TCM products also require a permit for sales,
      which permits are generally granted on a non-exclusive basis for four to five
      years depending on the TCM. TDR has been granted 11 product licenses and
      permits, inclusive of our recently approved Cardiac Arrest Early Examination
      and
      kidney disease testing kits, which have allowed TDR to commercialize a total
      of
      38 products.  TDR is undertaking efforts to develop a series of 8 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.





**Our
      TDR Owns the Following Subsidiaries in China**





*Harbin
      Bio-Engineering; Enzyme Immunity and Colloid Gold Production*





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





*Kangxi
      Medical; Topical Applications*





Kangxi
      Medical Care Product Factory (referred to herein as “Kangxi Medical”) 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 Medical
      manufactures and sells branded external use Chinese medicine and other natural
      products under the registered trademark “Kangxi.”  Our Kangxi Medical
      division has four production lines: spray, ointment and cream, powder, and
      patch.   In July 2006 Kangxi Medical was merged into Harbin Bio-Engineering
      with Harbin Bio-Engineering as the surviving subsidiary of TDR.





*Harbin
      Tian Qing Biotech Application Company; Research and
      Development*





We
      have
      also recently organized Harbin Tian Qing Biotech Application Company as a
      wholly-owned PRC subsidiary of TDR, to conduct research and development in
      the
      areas of tissue and stem cell banks, which is described in more detail below.
      (See “Research and Development” below.)





*Heilongjiang
      Pharmaceuticals; External Use Pharmaceuticals*





On
      February 22, 2008, our TDR subsidiary entered into an Equity Transfer Agreement
      with Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under
      the laws of the PRC (referred to herein as “Heilongjiang Pharmaceuticals”),
      which is in the business of manufacturing external-use pharmaceuticals. TDR
      previously, in 2006, acquired the Beijing office of this company. Additional
      information about the terms of this acquisition and the business of Heilongjiang
      Pharmaceuticals is contained in “Recent Developments” below. No assurance can be
      made that we will complete this acquisition.





**Product
      Line**





We
      manufacture over thirty-eight (38) branded products, which management believes
      enables us 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 our indirect subsidiaries’
facilities located in Harbin City, China.  Additionally, we maintain a
      working relationship with a number of outside manufacturers, including softgel
      manufacturers and packagers, and utilize these outside sources from
      tim e
      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).  We sell these products in four main
      different forms, including, without limitation, sprays, ointments and creams,
      powders, a nd
      patches.  A description of our main product lines follows.




6





***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, believed to regulate and restrain the
      excessive secretion of certain hormones, while promoting others. The Sumei
      Slim
      Patch is also 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.





***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 skin disease that is difficult to treat.  Our research scientists have
      focused their efforts in finding treatments for this disease.  Yin Ke
      Psoriasis Spray is a spray that contains Chinese herbal ingredients that are
      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 viruses in a tumors or warts.
 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 topically to the affected 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).




7





***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.





**Testing
      Kits Approved and Brought to Market in 2007**





***Cardiac
      Arrest Early Examination Kit***





This
      product is used for early stage diagnosis of myocardial infarction (heart
      attacks). We completed SFDA clinical testing of the Cardiac Arrest Early
      Examination Kit and began sales of this product in 2007. This kit is patented
      in
      PRC.





***Kidney
      Disease Testing Kit***





The Urinate
      Micro Albumin Examination Testing Kit is used in connection with early stage
      diagnosis for primary kidney disease, hypertension and diabetes. We completed
      SFDA clinical testing for the Urinate Micro Albumin Examination Testing Kit
      and
      commenced sales of this product in 2007. This kit is patented in
      PRC.





***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.





Historically
      we have sold only products that we manufactured. However, during the 2007 fiscal
      year, we 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 2007 from products manufactured by other companies under exclusive
      sales arrangements totaled approximately $12,998,000 or approximately 26% of
      total sales in the year ended December 31, 2007, as compared to $6,383,000,
      for
      the year ended December 31, 2006.   We market and sell these products
      through our existing distribution channels to our customers throughout the
      world
      and primarily in China.   We intend to expand our product line
      under sales and manufacturing contracts with third-party manufacturers with
      a
      goal of increasing sales revenue from current and new pharmaceutical and
      medicinal products manufactured by other companies.




8




**Revenues
      by General Product Lines**




Management
      believes that the most accurate benchmark of revenue breakdown is based on
      the
      method of application as different applications have different sales channels.
      Below is a breakdown of revenues for 2007 based on application and application
      usage.




*Revenues
      based on Application Category*




Our
      revenues during 2007 were $49,318,308.
      The following table sets forth our principal product categories based on
      application type and the approximate amount and percentage of revenue from
      each
      of such product categories, during the fiscal year ended December 31,
      2007:





**Revenue
                in 2007****Product
                Category**
            
            **Approx.**
              **Amount
                (U.S.$)**
            
            **Approx.**
              **%
                of Revenue**Sprays
            
            $
            8,742,088
            
            
            18
            %Patches
            
            
            1,402,736
            
            
            3
            %Ointments
            
            
            3,209,732
            
            
            7
            %Liquids,
                Creams and Powders
            
            
            1,704,979
            
            
            3
            %Miscellaneous
                Health and Beauty and Products Manufactured by others(43
                items)
            
            
            34,198,773
            
            
            69
            %**Total
                Gross Sales **From
                Above Categories****
            
            $
            **49,258,308**
            
            
            100
            %




**Research
      and Development**





We
      currently conduct all of our research and development (“R&D”) activities,
      either internally or through collaborative arrangements with universities and
      research institutions in the PRC.   We have our own research,
      development and laboratory facilities located at TRD’s principal headquarters in
      the city of Harbin, Heilongjiang Province.   We have also recently
      organized Harbin Tian Qing Biotech Application Company (“Harbin Biotech”) as a
      wholly-owned PRC subsidiary of TDR, to conduct research and development in
      the
      areas of tissue and stem cell banks, which is described in more detail below.
        In all, our internal R&D team currently consists of
      approximately 35 people, of which 25 are full time researchers and
      10 ** are
      part
      time technical experts. Many of our team members are professors affiliated
      with
      universities in the PRC.




9





Additionally,
      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.   Under our
      partnership arrangements with other universities and research institutions,
      we
      will generally hold the intellectual property rights to any developed
      technology.   As a result of one of these collaborations with Harbin
      Medical University, a product known as “Endothelin-1” is currently under
      development as a cancer suppressing product. Additional information relating
      to
      this product and other products being developed is set forth under “Products
      Under Development” below and under the general product descriptions throughout
      this Annual Report.





During
      the year ended December 31, 2007 we invested $3,158,351 in our own internal
      R&D with approximately $2,707,679 (18,970,000 RMB) (unaudited) invested by
      our R&D partners. Our R&D investment in 2006 was $2,026,788.
      Additional information about our R&D investments is included in the
      financial statements to this Annual Report (and notes thereto) and our
“Management Discussion and Analysis on Financial Condition and Results of
      Operations” section below.





**Products
      Under 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 - Examination and Diagnosis Kits**





We
      currently have various biological products under development at various stages
      of clinical testing and development.  The development of some of these
      prod ucts
      are
      expected to be completed as early as 2008 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)**AIDS
                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.




10




**New
      Products**





We
      are
      currently conducting toxicology experiments, quality standard measurement and
      other experimentation for our products under development.  It is estimated
      that the experimental time takes about another seven to eight months for each
      product. We also hope to commence with clinical testing of 8 testing kit
      products in 2008 for: Uterine cancer, cervical cancer, ovulatory cancer, liver
      cancer, breast cancer and neisseria gonorrhea. 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 Endothelin-1***





One
      of
      our various products under development is Endothelin-1. As of the date of this
      Annual Report, we have completed oxicology and teratogenicity testing, and
      have
      established quality standards, and further developments are underway to improve
      the product quality of Endothelin-1.   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. At such time as development
      and clinical testing is successfully completed, we will commence efforts to
      market Endothelin-1 in the PRC and where legal, 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 (or other foreign drug
      regulatory authority approval where we may wish to market this drug) of the
      product, will be successful. We hope to develop Endothelin-1 as a cancer
      treatment drug that works by “starving” cancer cells by restricting the
      generation of blood vessels around cancer lesions, thereby inhibiting, to a
      degree, the source of nutrients upon which the cancer cells survive.
      Endothelin-1 has been recognized by the PRC medical industry as a “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 for Endothelin-1.   We expect that research and development
      and testing will be completed for manufacturing in 2009. To date we have
      expensed over approximately $2,278,047 (15,690,000 RMB) (unaudited) on research
      and development for Endothelin-1.





*Research
      and Development for Cord Blood Stem Cell Bank*





In
      2006,
      we 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. We are now in the process of perfecting our cultivation methods
      and freezing/storage of stem cells. It is expected that these efforts will
      continue over the next two years or more in particular in the research and
      development of technology, applications and methodology for the establishment
      of
      a cord blood stem cell bank.  We have recently organized Harbin Tian Qing
      Biotech Application Company (referred to herein as “Harbin Biotech”) as a
      wholly-owned subsidiary, to conduct research and development in the areas of
      tissue and stem cell banks.   This project will involve substantial
      expense and involve numerous risks.   We entered into a development
      agreement with the Heilongjiang Provincial Red Cross out-patient department
      for
      purposes of defraying the costs of developing and marketing this product and
      are
      seeking additional R&D partners with laboratories having substantial
      experience in this area for this purpose as well.





*Exclusive
      Regional License for Stem Cell Research*





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, we 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,
      our
      application was approved on October 16, 2006, granting us, through our
      subsidiary, the exclusive right and license to become engaged in tissue and
      stem
      cell bank activities in the Heilongjiang Province of the PRC, through December
      2010 and currently intend to renew this license from time to time as
      necessary. **** The
      Company organized Harbin Biotech to conduct these business operations, as
      required by Heilongjiang Province.  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.




11





*Our
      Stem Cell Research*





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.   While we are not aware
      of a method to calculate the size of the stem cell market, management believes
      that the market for this business in PRC and elsewhere is potentially very
      large.  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.





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, our Harbin Biotech subsidiary will have the exclusive
      right and license to establish a research and development business in this
      area
      in northeast China through 2010. ******





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.





This
      project is a substantial commitment by the Company, and consequently involves
      a
      number of significant risks, including, without limitation:





·
            our
                need to raise substantial additional capital to fund our stem cell
                R&D
                project over the next two or more years, through borrowings, the
                sale of
                equity or from income from operations, which, if not obtained on
                a timely
                basis, the could severely compromise this project and our rights,


·
            our
                continued compliance with laws and requirements of the PRC and reliance
                on
                a license from the PRC government to engage in these research and
                business
                operations in northeast China on an exclusive basis,  ·
            the developing nature of stem cell banking and research,
              and numerous technical and development challenges, including issues
              pertaining to the long-term viability of cryogenically frozen cord
              blood,
              and





·
            our
                reliance on the efforts of management, in particular Liu Yan-Qing,
                our
                President to continue to manage our stem sell research.





There
      can
      be no assurance we will be successful in obtaining capital when needed, or
      on
      favorable terms or that 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.





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





During
      the 2007 fiscal year, the Company had capital expenditures of over $10,671,398
      (74,763,814RMB) on equipment and construction; $3,427,979 (24,016,420 RMB)
      on
      R&D and $256,922 (1,800,000RMB) on initiating and continuing the stem cell
      bank program as well as additional costs in previous periods on equipment,
      construction and R&D as described in this Annual Report.




12




**Sales
      Approach**




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.  We have established a marketing network through
      independent agents to develop an international market.  At present, while
      our primary initial growth focus remains mainland PRC, we have also established
      over 20 international agents to sell our products, and are expanding our
      overseas sales efforts.




**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 as listed above.  Approximately 75% ****** of
      our
      revenues in 2007 were from the sale of products in China and Hong Kong with
      Malaysia marking our largest country of export.





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 943
      customers, not including branches of retail and drug supply chains. Only two
      customers accounted for more than 5% of our
      total revenues in 2007.





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.  Under a typical arrangement we expect to 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").





We
      also
      export a number of its products to various countries, including Malaysia, United
      Arab Emirates, United Kingdom, Hong Kong, the United States, and others, and
      utilize agents and independent distributors for these marketing and sales
      efforts.





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.
       Some of these competitors are far larger, have more resources then us and
      have stronger sales and distribution networks.





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 both from existing competitors
      and new market entrants.  We will also face competition from foreign
      companies who may have established products, a strong proprietary pipeline
      and
      strong financial resources.   Our management believes that we have
      certain competitive advantages in introducing new products to market due to
      key
      focus areas for development, 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.




13





**Production
      and Other Facilities**





We
      have
      two separate facilities, headquartered in the city of Harbin in the Heilongjiang
      Province of China.  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 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.





We
      also
      have a sales office in Beijing, which TDR acquired in December of 2006, when
      it
      completed the acquisition of the products, dealership and marketing network
      of
      Heilongjiang. We have recently entered into an agreement to acquire the
      remaining interests of Heilongjiang. (See “Corporate History” above and “Recent
      Developments” and “Management’s Discussion and Analysis or Plan of Operation”
below).





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.   Our business is subject to
      various regulations and permit systems of the government of the PRC.
      Additionally, we are subject to government licensing rights and regulations,
      which relating to our stem cell R&D license. Permits we attain for TCM
      products are granted on a non-exclusive basis and one limited for four to five
      years.





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.





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.




14





Because
      we and our 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, and also limits
      our
      ability to pay dividends.





***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
      continue to 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 which lasts for up to 20 years for
      traditional medicines depending on the type of patent, and is renewable for
      indefinite number of times. Patents for arts and crafts and packaging have
      10
      year patent protection periods which are also renewable.   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 6 patents and one patent application (Endothelin-1) in the PRC,
      pertaining to our TCMs and biotech diagnostic kits and drugs, as
      follows:





·
            Package
                foil bag design patent of Sumei slim patch, registered December 4,
                2001;


·
            Package
                box design patent for all TCM products, registered December 4,
                2001;


·
            Arts
                and crafts patent of Human Urinary Albumin Elisa Kit, registered
                August
                24, 2004;


·
            Arts
                and crafts patent of Sumei slim patch, registered in
                2001;


·
            Arts
                and crafts design patent of myocardial infarction testing kit, registered
                March 16, 2004;


·
            Arts
                and crafts patent of Suning cough removing patch, initially registered
                December 4, 2001; and


·
            Endothelin-1
                patent relating to anti-tumor technology (application for public
                instruction made), registered October 4, 2006;





We
      have
      received awards and grants from the government of the PRC for R&D in 2007
      for the below listed products, resulting in a total amount of $2,141,022
      (15,000,000 RMB) of which $42,492 (300,000 RMB) has been paid with the remaining
      amount anticipated to be available to us in 2008:





·
            High
                Technology products certificates by Heilongjiang High Technology
                Products
                Committee covering the following
                products:


·
            The
                Coryza Spray;


·
            Dermatitis
                Spray;


·
            Pharyngitis
                Spray;


·
            Tinea
                Pedis spray;


·
            Gonorrhea
                Cleaning Spray;


·
            Wart-removing
                liquid;


·
            Sumei
                Slim patch;


·
            Suning
                Cough removing patch; and


·
            Psoriasis
                Spray.


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


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


·
            100
                important pre-phase projects in Heilongjiang Province covering various
                medical diagnostics kits;






15




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


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





**Trademarks**





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 1,443 full time
      employees and manufacturers’ representatives, generally falling into the
      following categories:





By
      subsidiary company:


**Company**
              
              
              **Number
                  of
                  Employees**TDR
                  (includes Harbin Biotech)
              
              
              1,269*Harbin
                  Bio-Engineering
              
              
              174**TOTAL:**
              
              
              **1,443**





By
      nature
      of job (TDR and Harbin Bio-Engineering combined):





**Type
                of Job**
            
            
            **Number
                of Employees**Executives
                and Managers
            
            
            26Production
                and clerical
            
            
            170Sales
                and Marketing
            
            
            1,222Research
                and Development, Technology
            
            
            25**TOTAL:**
            
            
            **1,443**





*
      Includes manufacturers’ representatives.




**
      Does
      not include 10 part time technical researchers.





We
      do not
      have employment agreements in place with our executive management.  None of
      the employees are covered by a collective bargaining agreement, however, we
      believe our relationship with employees is good.




**Recent
      Developments**





On
      January 31, 2008 China Sky One entered into a Securities Purchase Agreement
      with
      certain accredited investors, for the purchase and sale of 2,500,000 units
      of
      securities at $10.00 per unit, pursuant to which we sold an aggregate of
      (i) 2,500,000 shares of common stock, and (ii) Class A Warrants to purchase
      750,000 additional shares of common stock, at an exercise price of $12.50 per
      share, for an aggregate purchase price prior to expenses and fees of
      $25,000,000. Holders of the 2,500,000 shares of common stock sold in this
      offering have certain put rights and rights to receive additional shares from
      certain key shareholders in the event that certain thresholds are not met.
      Additional information relating to the securities sold in this offering and
      to
      the put or make whole rights of the investors may be found in the Risk Factors
      of this Annual Report, in the section under the caption “Item 5. Market for
      Common Equity and Related Stockholder Matters” and in the section titled “Item
6.
      Management’s Discussion and Analysis or
      Plan
      ofOperation” and other sections below and are incorporated by
      reference.





As
      of
      February 22, 2008, the board of directors of China Sky One authorized an
      increase in the number of directors on the Board from three (3) to seven (7),
      and appointed Song Chun Fan, Jiang Qi Feng, Zhao Jie and Qian Xu Feng to fill
      the vacancies created as a result of such increase, to serve until such time
      as
      their successors shall be duly elected, unless they resign, are removed from
      office, or are otherwise disqualified from serving as directors of the
      Corporation. The biographies of Song Chun Fan, Jiang Qi Feng, Zhao Jie and
      Qian
      Xu Feng as well as additional information relating to these committees is also
      provided below in the section captioned “Item 9. Directors, Executive Officers
      and Corporate Governance”.




16





On
      February 22, 2008, TDR entered into an Equity Transfer Agreement with
      Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
      laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
      external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
      sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
      Agreement, TDR acquired 100% of the issued and outstanding capital stock of
      Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
      aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
      stock of the parent company, China Sky One with a dollar value of $300,000.
      The
      acquisition, which is subject to the our due diligence review of Heilongjiang,
      as well as approval by the appropriate regulatory authorities in the PRC, is
      expected to close on or before March 31, 2008. While we have not completed
      this
      acquisition, we have begun oversight of its operations pending completion.




17




*Our
      business and financial condition is subject to numerous and substantial risks
      including, without limitation, risks relating to our forward looking statements.
      A description of theses forward looking statements is contained in the forepart
      of this Annual Report and incorporated by reference herein. These risks include
      those set forth below and elsewhere in this Annual Report. 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, ACGP which in turn, owns all of the issued and
      outstanding shares of registered capital of TDR.*





**BUSINESS
      RISKS**




***Certain
      officers and directors have significant control over our company, and we do
      not
      have employment agreements with them.***




Dr.
      Liu
      Yan-qing and Ms. Han Xiao-yan, who are officers and directors of China Sky
      One,
      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 transactions in which they have an
      interest other than as a shareholder of the Company, the approval of significant
      corporate transactions such as increasing the authorized number of our shares
      to
      complete acquisitions or raise capital, if necessary, and any other transactions
      requiring a majority vote without seeking other shareholders’ approval. These
      persons also have the ability to control other matters requiring shareholder
      approval including our election of directors which could result in the
      entrenchment of management.




Additionally,
      we do not have employment agreements with such management. Accordingly, if
      any
      of these persons should leave the Company we would have no remedy or protections
      in place and would not be able to prevent them from competing with us or working
      for competitors.





***Our
      expansion plan may not 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, product liability concerns, shipping and delivery costs,
      costs associated with marketing efforts abroad and maintaining attractive
      foreign exchange ratios.  Moreover, our 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. We cannot, therefore, assure shareholders
      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.





***There
      are many safety risks involved in our products and services that could expose
      us
      to liability or inhibit our ability to secure
      insurance.***




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. In the event that any of our products are alleged to have adverse
      side
      effects, we could be subject to product liability claims. In addition to the
      threat of liability, there may be insurance costs if we enter into certain
      markets or may not be able to obtain insurance for certain products in some
      countries. Some distributors may refuse to sell our products in certain
      countries if they perceive such products to have a high risk or to be
      uninsurable.





***We
      are highly dependent upon the public perception and quality of our
      products.*** ***Additionally, anti-corruption measures taken by the government to correct
      corruptive practices in the pharmaceutical industry could adversely affect
      our
      sales and reputation.***




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.




The
      government has recently taken anti-corruption measures to correct corrupt
      practices. In the pharmaceutical industry, such practices include, among others,
      acceptance of kickbacks, bribery or other illegal gains or benefits by the
      hospitals and medical practitioners from pharmaceutical distributors in
      connection with the prescription of a certain drug. Substantially all of our
      sales to our ultimate customers are conducted through third-party distributors.
      We have no control over our third-party distributors, who may engage in corrupt
      practices to promote our products. While we maintain strict anti-corruption
      policies applicable to our internal sales force and third-party distributors,
      these policies may not be effective. If any of our third-party distributors
      engage in such practices and the government takes enforcement action, our
      products may be seized and our own practices, and involvement in the
      distributors’ practices may be investigated. If this occurs, our sales and
      reputation may be materially and adversely affected.




18





***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.





***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 we are, 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.





***We
      may not be able to obtain sufficient financing, and may not be able to develop
      our product candidates.***




We
      may
      need to incur debt or issue equity in order to fund research and
      other expenditures as well as to make acquisitions and other investments.
      We cannot assure you that debt or equity financing will be available to us
      on
      acceptable terms or at all. If we cannot or are limited in the ability to incur
      debt, issue equity or enter in strategic collaborations, we may be unable to
      fund discovery and development of our product candidates, address gaps in our
      product offerings or improve our technologies.




We
      anticipate that we will need to raise substantial amounts of money to fund
      a
      variety of future activities integral to the development of our business, which
      may include but are not limited to the following:




·
            obtaining
                regulatory approval for our products and conducting research and
                development to successfully develop our stem cell and other
                technologies,


·
            filing
                and prosecuting patent applications and defending and assessing patents
                to
                protect our technologies,


·
            retaining
                qualified employees, particularly in light of intense competition
                for
                qualified scientists,


·
            manufacturing
                products ourselves or through third
                parties,


·
            marketing
                our products, either through building our own sales and distribution
                capabilities or relying on third parties, and


·
            acquiring
                new technologies, licenses or
                products.




We
      cannot
      assure you that any needed financing will be available to us on acceptable
      terms
      or at all. If we cannot obtain additional financing in the future, our
      operations may be restricted and we may ultimately be unable to continue to
      develop and potentially commercialize our product candidates.





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





Over
      75%
      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 our PRC based 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
      may have difficulty in defending intellectual property rights from
      infringement.***




Our
      TCM
      products are generally not protected by patents but by trade secrets. Certain
      TCM license agreements are made on a non-exclusive basis. 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 fail to
      protect our intellectual property adequately, competitors may manufacture and
      market similar products.  We continually 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.




19




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:




· 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.




20





***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, were 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.




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.





***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 and will require substantial additional capital.  We
      will need to continue to improve financial controls, operating procedures,
      and
      management information systems if and as we grow.  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.





***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.




21





***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.





***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.





**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.***




The
      manufacture and sale of pharmaceutical products in China is heavily regulated
      by
      many state, provincial and local authorities. The State Food and Drug
      Administration of China requires pharmaceutical manufacturers to obtain Good
      Manufacturing Practices, or GMP, certifications. We currently have the
      certifications needed for our current operations. However, should we fail to
      receive or maintain the GMP certifications in the future, we would no longer
      be
      able to manufacture pharmaceuticals in China, and our businesses would be
      materially and adversely affected. These regulations significantly increase
      the
      difficulty and costs involved in obtaining and maintaining regulatory approvals
      for marketing new and existing products. Our future growth and profitability
      depend to a large extent on our ability to obtain regulatory approvals.
      Additionally, the law could change so as to prohibit the use of certain
      pharmaceuticals. If one of our products becomes prohibited, this change would
      cease the productivity of that product. The China National Development and
      Reform Commission, or CNDRC, has recently implemented price adjustments on
      many
      marketed pharmaceutical products. We have no control over such governmental
      policies, which may impact the pricing and profitability of our products.




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.




22




***Certain
      political and economic considerations relating to China could adversely affect
      our company.***




China
      is
      transitioning from a planned economy to a market economy. While the PRC
      government has pursued economic reforms since its adoption of the open-door
      policy in 1978, a large portion of the Chinese 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 China’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, 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.




Accordingly,
      government actions in the future, including any decision not to continue to
      support recent economic reforms and to return to a more centrally planned
      economy or regional or local variations in the implementation of economic
      policies, could have a significant effect on economic conditions in China or
      particular regions thereof, and could require us to divest ourselves of any
      interest we then hold in Chinese properties or joint ventures.





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




The
      PRC
      is a developing country with a young market economic system overshadowed by
      the
      state under heavy regulation and scrutiny. 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.





***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.





***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.




23





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





Currently,
      over 75% 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.





***Currency
      conversion and exchange rate volatility could adversely affect our financial
      condition, by making acquisitions in China or of Chinese products ore
      expensive.***




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.
      These rules are subject to change.





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.  Currently, exchange rates are
      approximately RMB 7.006 to US$1.00 resulting in the increase in price of Chinese
      products to U.S purchasers. 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.





***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.




24





***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.
      We are not likely to declare dividends in the near
      future.***




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.




**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
      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 for
      the
      subject to PRC law, 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.





***Sales
      of our common stock may have an adverse effect on the market price of our common
      stock. Additionally, we may issue shares upon exercise of outstanding warrants
      that are exercisable at prices that are below current market prices which will
      be dilutive to the common stock.***





As
      of
      March 20, 2008, there were 14,852,214 shares of common stock outstanding, which
      includes 2,500,000 shares of our common stock we sold in January 2008
      private offering, many of which will become freely transferable under Rule
      144
      in July 2008. Moreover we are required to register 2,500,000 shares and (among
      other securities) 750,000 shares underlying warrants exercisable at various
      exercise prices in a registration statement. The sale of these shares may have
      an adverse effect on the market price for our common stock.





The
      exercise of options and warrants at prices below market price of our common
      stock could adversely affect the price of our common stock and on our ability
      to
      obtain future private or public financings. Additional dilution may result
      from
      the issuance of shares of our capital stock in connection with outstanding
      warrants or shares issued in connection with financing or other share for
      service arrangements.





Specifically,
      the following shares underlying warrants are outstanding which include:





·
            100,000
                shares of common stock issuable upon exercise of warrants at $3.00
                per
                share, issued toAmerican
                Eastern Securities, Inc. and its assigns, and expiring on March 31,
                2008,as
                partial consideration for acting as placement agent in connection
                with the
                foregoing offering in October of 2006 and if these warrants are fullyexercised
                (which we have been informally advised will occur),
                warrants to purchase an additional 50,000 shares of common stock
                will be
                issued to American Eastern Securities, Inc. (and its assigns), exercisable
                at $3.50 per share and expiring on October 10,
                2008,


·
            1,500,000
                shares of common stock issuable upon exercise of warrants at $2.00
                per
                share, issued toAmerican
                Eastern Group, Inc.as
                partial consideration for consulting and investment banking services,
                and
                to various other advisors in connection with our reverse merger in
                October
                2006, all of which expire July 31, 2009,






25




·
            239,165
                shares of common stock issuable upon exercise of remaining warrants
                at
                $3.50 per share (originally, 500,000 warrants, many of which have
                been
                exercised), expiring October 10, 2008, issued to certain investors
                in our
                private offering of securities in October of 2006,
                and


·
            Class
                A Warrants to purchase 750,000 additional shares of common stock,
                at an
                exercise price of $12.50 per share, issued to investors in connection
                with
                our private offering in January 2008, exercisable between July 31,
                2008
                and July 31, 2011.





The
      Company is required to register for re-sale all of the common stock issued
      in
      our January 2008 offering as well as all shares otherwise issuable upon exercise
      of certain of the above warrants. If a registration statement is not deemed
      effective many of the foregoing warrants will become exercisable via cashless
      exercise.





***Certain
      Protective Provisions Relating to 2,500,000 shares issued in our January 2008
      private offering may have an adverse effect on the price of our common stock.***




In
      addition to the above mentioned registration rights, holders of the 2,500,000
      shares of common stock sold in our recently completed private offering (January
      2008) have certain put rights and rights to receive additional shares from
      certain key shareholders in the event that certain earnings thresholds are
      not
      met. Specifically, these investors have:




·
            The
                right to receive additional shares from us in the event that we issue
                shares (or convertible securities or warrants convertible into or
                exercisable for common stock) prior to January 31, 2009 at per share
                price
                (or conversion or exercise price) of less than $10.00, in such amount
                so
                as to reduce the average price paid by such shareholder to the price
                per
                share being paid by the new investors,




·
            The
                right to receive up to 3,000,000 shares deposited into escrow by
                our
                principal shareholder, in the event that the Company fails to attain
                Earnings Per Share, as adjusted of at least (i) $1.05 per share for
                fiscal
                year ended December 31, 2007 based on fully diluted shares outstanding
                before the January 2008 offering (an aggregate of 13,907,696), and/or
                (ii)
                $1.75 per share for fiscal year ending December 31, 2008 based on
                fully
                diluted shares outstanding after the January 2008 Offering (an aggregate
                of 16,907,696 shares). While the Company has satisfied the criterion
                of
                (i) above for 2007, no assurance can be made that we will satisfy
                our
                earnings goal next year.





The
      occurrence of either of the above would result in the issuance of additional
      shares to these investors and would have a material adverse effect on the market
      price or liquidity of our common stock.





**Item
      2. Properties.**





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” above, the provisions of which
      are incorporated herein).  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.





Additional
      details of these facilities is contained in the “Production and other
      Facilities” subsection of “Item 1. Description of Business,” above, the
      provisions of which are incorporated by reference herein.





**Item
      3. Legal Proceedings.**





We
      are
      not a party to any material pending legal proceedings, and to the best of our
      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, 2007, there were no matters submitted to a vote
      of our stockholders.




26





**PART
      II**





**ITEM
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.**





**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.





Year
                Ended December 31, 2007
            
            Year
                Ended December 31, 2006High
            
            Low
            
            High
            
            Low1st
                Quarter
            
            $
            10.00
            
            $
            7.00
            
            $
            5.50
            
            $
            1.812nd
                Quarter
            
            $
            14.20
            
            $
            6.00
            
            $
            3.50
            
            $
            3.503rd
                Quarter
            
            $
            14.35
            
            $
            10.00
            
            $
            7.55
            
            $
            3.404th
                Quarter
            
            $
            15.50
            
            $
            9.00
            
            $
            8.50
            
            $
            4.25




As
      of
      March 26, 2008, the closing bid price for our Common Stock was $10.20.





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
      20, 2008, there were approximately 431 holders of record of the Company's Common
      Stock, with 14,852,214 shares outstanding.





**Sales
      of Unregistered Securities**





On
      January 31, 2008 China Sky One entered into a Securities Purchase Agreement
      (the
“Purchase Agreement”) with certain accredited investors, for the purchase and
      sale of units consisting of: (i) one (1) share of the Company’s common stock,
      $.001 par value per share (“Common Stock”); and (ii) 750,000 Class A Warrants
      exercisable at $12.50 per share, and expiring on July 31, 2011 (the “Class A
      Warrants”), for a purchase price of $10.00 per Unit (the “January 2008
      Offering”), and gross offering proceeds of $25,000,000.




Holders
      of the 2,500,000 shares of common stock sold in our January 2008 Offering have
      certain put rights and rights to receive additional shares from certain key
      shareholders in the event that certain thresholds are not met in addition to
      registration rights. Specifically, these investors have:




·
            The
                right to receive additional shares from China Sky One in the vent
                that we
                sell shares (or convertible securities or warrants convertible into
                or
                exercisable for common stock) prior to January 31, 2009 at per share
                price
                (or exercise or conversion price) of less than $10.00, in such amount
                so
                as to reduce the average price paid by such shareholder to the price
                per
                share being paid by the new investors,




·
            The
                right to receive up to 3,000,000 shares deposited into escrow by
                our
                principal shareholder, in the event that the Company fails to attain
                Earnings Per Share, as adjusted (“Adjusted EPS”) of at least (i) $1.05 per
                share for fiscal year ended December 31, 2007 based on fully diluted
                shares outstanding before the January 2008 offering (an aggregate
                of
                13,907,696), and/or (ii) $1.75 per share for fiscal year ending December
                31, 2008 based on fully diluted shares outstanding after the January
                2008
                Offering (an aggregate of 16,907,696 shares). While the Company has
                satisfied the criterion of (i) above for 2007, no assurance can be
                made
                that we will satisfy our earnings goal next year.





The
      Class
      A Warrants represent the right to purchase an aggregate of 750,000 shares of
      Common Stock, at an exercise price of $12.50 per share, and have the following
      additional characteristics:




·
            The
                Class A Warrants are exercisable beginning on the six-month anniversary
                of
                the closing of the January 2008 Offering and will expire July 31,
2011.




27




·
            Commencing
                on one-year anniversary of the Closing Date, in the event the Warrant
                Shares may not be freely sold by the holders of the Class A
                Warrants due to the Company’s failure to satisfy its registration
                requirements, and an exemption for such sale is not otherwise available
                to
                the Warrant-holders under Rule 144, the Class A Warrants will be
                exercisable on a cashless basis.




·
            The
                Exercise Price and number of Warrant Shares will be subject to adjustment
                for standard dilutive events, including the issuance of Common Stock,
                or
                securities convertible into or exercisable for shares of Common Stock,
                at
                a price per share, or conversion or exercise price per share less
                than the
                Class A Warrant exercise price of $12.50 per
                share.




·
            At
                anytime following the date a Registration Statement covering the
                Warrant
                Shares is declared effective, we will have the ability to call the
                Class A
                Warrants at a price of $0.01 per Class A Warrant, upon thirty (30)
                days
                prior written notice to the holders of the Class A Warrants, provided
                (i)
                the closing price of the Common Stock exceeded $18.75 for each of
                the ten
                (10) consecutive trading days immediately preceding the date that
                the call
                notice is given by the Company, and (ii) the Company has attained
                an
                Adjusted EPS of at least $1.75 per share for the fiscal year ending
                December 31, 2008, as set forth in our audited financial statements
                of the
                Company.




·
            If,
                among other things, we fail to cause a Registration Statement covering
                the
                Warrant Shares to be declared effective prior to the applicable dates
                set
                forth in the Registration Rights Agreement, the expiration date of
                the
                Class A Warrants shall be extended one day for each day beyond the
                Effectiveness Deadlines.




·
            If
                a Warrant-holder exercises its Put Right under the Put Agreement
                (defined
                in Item 1.01 above), such Warrant-holder’s right to exercise the Class A
                Warrants shall be suspended, pending the satisfaction of our obligations
                to pay the Warrant-holder the applicable Repurchase Price. Upon receipt
                of
                the Repurchase Price in full by the Warrant-holder, the Warrant-holder’s
                right to exercise the Class A Warrants shall automatically and permanently
                terminate and expire, and the Class A Warrants shall be immediately
                cancelled on the books of the
                Company.





**Item 6.
      Management’s Discussion and Analysis **or
      Plan of Operation****.****




**FORWARD
      LOOKING STATEMENTS**




The
      following discussion should be read in conjunction with the information
      contained in the consolidated financial statements of the Company and the notes
      thereto appearing elsewhere herein and in the risk factors and “Forward Looking
      Statements” summary set forth in the forepart of this Annual Report as well as
      the “Risk Factors” section above and are afforded the safe harbor provisions of
      Section 27A of the Securities Act and Section 21E of the Securities
      Exchange Act of 1934, as amended. Readers should carefully review the risk
      factors disclosed in this Annual Report and other documents filed by us with
      the
      SEC.





**DISCUSSION**





We
      primarily generate revenues and income and generate cash from sales by our
      PRC
      based subsidiaries, of products in the areas of external-Chinese medicine and
      over-the counter non-prescription health care products in the PRC.  Our
      principal products include spray, ointment, powder, patch, cream, and
      miscellaneous health and beauty products. Our principal products are categorized
      as external use Traditional Chinese Herbal Remedies/ Medicines commonly referred
      to in the industry as “TCM.” We have evolved into an integrated manufacturer,
      marketer and distributor of external use Chinese medicine products sold
      primarily in China and through PRC domestic pharmaceutical chains and have
      been
      expanding our worldwide sales effort as well.  We sell both our own
      manufactured products, as well as medicinal and pharmaceutical products
      manufactured by others in the PRC.





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, 2007, total
      revenue was $49,318,308, a 148% increased over 2006, and 2007 net income
      was $15,332,945,
      or $1.15 per share on a diluted basis compared to net income of $624,415, or
      $0.05 per share on a diluted basis in 2006.




28





All
      of
      our business is conducted through our wholly-owned subsidiary, ACPG which,
      in
      turn, wholly owns Harbin Tian Di Ren Medical Science and Technology Company
      (referred to herein as “TDR”) a company organized in the PRC and TDR’s
      subsidiaries, described above and below.





On
      May
      11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
      Agreement”) with the shareholders of China Sky One (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. As
      a
      result of this 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 PRC operating subsidiary,
      TDR.




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 PRC. TDR was reorganized and incorporated as
      a
      limited liability company on December 29, 2000, under the “Corporation Laws and
      Regulations” of the PRC. At the time of the TDR Acquisition by ACPG in December
      of 2005, TDR had two wholly-owned subsidiaries, Harbin First Bio-Engineering
      Company Limited and Kangxi Medical Care Product Factory, until July, 2006,
      when
      the two were merged, with Harbin First Bio-Engineering Company Limited as the
      surviving subsidiary of TDR.




We
      have
      also recently organized Harbin Tian Qing Biotech Application Company as a
      wholly-owned PRC subsidiary of TDR, to conduct research and development in
      the
      areas of tissue and stem cell banks, which is described in more detail below.





On
      February 22, 2008, TDR entered into an Equity Transfer Agreement with
      Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
      laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
      external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
      sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
      Agreement, TDR acquired 100% of the issued and outstanding capital stock of
      Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
      aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
      stock of the parent company, China Sky One with a dollar value of $300,000.
      The
      acquisition, which is subject to the our due diligence review of Heilongjiang,
      as well as approval by the appropriate regulatory authorities in the PRC, is
      expected to close on or before March 31, 2008. While we have not completed
      this
      acquisition, we have begun oversight of its operations pending completion.





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.





We
      currently conduct all of our research and development (“R&D”) activities,
      either internally or through collaborative arrangements with universities and
      research institutions in the PRC. We have our own research, development and
      laboratory facilities located at TRD’s principal headquarters in the city of
      Harbin, Heilongjiang Province. In all, our internal R&D team currently
      consists of approximately 35 people, of which 25 are full time researchers
      and
      10 are part time technical experts. Many of our team members are professors
      affiliated with universities in the PRC.





Additionally,
      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. Under our partnership arrangements
      with other universities and research institutions, we will generally hold the
      intellectual property rights to any developed technology. As a result of one
      of
      these collaborations with Harbin Medical University, a product known as
“Endothelin-1” is currently under development as a cancer suppressing product.
      Additional information relating to this product and other products being
      developed is set forth under “Products Under Development” below and under the
      general product descriptions in the “Description of Business” section above,
      which is incorporated by reference herein .




29





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 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, as described under
“Item
      1. Description of Business.”





We
      currently have eight biological products under development:   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.  We are also working to establish two sales networks and
      cell banks covering domestic and international markets.





In
      addition, we also have three products: AMI Diagnostic Kit, Human Urinary Albumin
      Elisa Kit and Early Pregnancy Diagnostic Kit that have passed the final stages
      of national inspection in 2006 or 2007. These diagnostic kits are being 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. (See “Item 1.
      Description of Business - Biological Products - Examination and Diagnosis
      Kits”)





Our
      AMI
      Diagnostic Kit, which entered markets in 2007, 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.





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. 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.




30





During
      the second quarter of 2007, TDR entered into an agreement with the Development
      and Construction Administration Committee of Harbin Song Bei New Development
      district to purchase the land use rights for 50 years for development of a
      new
      biotech engineering project. Terms of the agreement called for a deposit of
      30%
      of the total land price within 15 days after signing the agreement, 40% payment
      7 days prior to the start of construction and the balance 7 days after getting
      the formal land use right.





The
      project consists of two phases:





(1)
            Main
                workshop, R&D center and office using land area of 30,000 square
                meters, construction started in May 2007 projected to be completed
                by June
                2008.


(2)
            Second
                workshop and show room using land area of 20,000 square meters,
                Construction starting in September 2008 to be completed by December
                2009.





TDR
      has
      committed to the Development and Construction Administration Committee of Harbin
      Song Bei New Development District that the minimum investment per square meter
      will be $394.





**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.




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.




31





**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, 2007, the Company incurred $3,158,351 in research
        and
        development expenditures, and $2,026,788 for year 2006.




**RESULTS
      OF OPERATIONS**





***Year
      Ended December 31, 2007 as compared to Year Ended December 31,
      2006***





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.





December
                312007
            
            Variance
            
            2006REVENUESProduct
                Sales (net of sales allowance)
            
            $
            36,320,156
            
            
            171
            %
            $
            13,386,223Contract
                Sales
            
            
            12,998,152
            
            
            104
            %
            
            6,382,737Government
                Grant
            
            
            -
            
            
            
            
            
            112,755Total
                revenues
            
            $
            49,318,308
            
            
            148
            %
            
            19,881,715COST
                OF GOOD SOLDCost
                of good sold
            
            
            10,939,531
            
            
            116
            %
            
            5,063,084Gross
                Profit
            
            **$**
            **38,378,777**
            
            
            **159**
            **%**
            **$**
            **14,818,631**





Total
      sales increased by 148% in 2007 compared to 2006.  The $29,436,593 million
      increase in sales is attributable to strong performances from our sales
      distribution channel.





Product
      sales increased by 171% in the year ended December 31, 2007, to $36,320,156
      from
      $ 13,386,223 in 2006.
 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. A new series named
      Bio-Chemical Products were launched on 2007. It increased the sales amount
      by $3
      million for the year ended December 31, 2007. The company opened the overseas
      market on this year and the unit selling price is higher than local market.
      The
      overseas market generated sales amount of $12.4 million in this
      year.




32





***Contract
      and Other Revenue***





The
      following table summarizes the period over period changes in our contract and
      other revenues:





2007
            
            Change
            
            2006Contract
                and other revenue
            
            $
            12,998,152
            
            
            104
            %
            $
            6,382,737





Contract
      and other revenue was $12,998,152 in 2007, or a significant increase of $
      6,615,415 over sales of $6,382,737
      in 2006. In 2007, 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 22% of total
      sales in 2007.





***Cost
      of Goods Sold and Product Gross Margin***




**2007**
            
            **December****Variance**
            
            **2006**Total
                sales
            
            $
            49,318,308
            
            
            148
            %
            $
            19,881,715Cost
                of goods sold
            
            $
            10,939,531
            
            
            116
            %
            $
            5,063,084Product
                gross margin
            
            
            **78**
            **%**
            ****
            
            
            
            **75**
            **%**





Our
      product’s gross margin for 2007 was 78%, compared to 75% for 2006. The increased
      gross margin was primarily due to the overseas sales that had a profit margin
      around 80%. The profit margin of local sales was stable compared to last
      year’s.





***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
                312007
            
            Variance
            
            2006Operating
                ExpensesR&D
                Expenses
            
            $
            3,158,351
            
            
            56
            %
            $
            2,026,788General,
                administrative and selling expenses
            
            
            16,163,577
            
            
            51
            %
            
            10,738,285Depreciation
                and amortization
            
            
            443,063
            
            
            265
            %
            
            121,522Total
                operating expenses
            
            
            19,764,991
            
            
            53
            %
            
            12,886,595Other
                (Income) ExpensesOther
                income
            
            
            (48,889
            )
            
            
            
            
            -Interest
                expense
            
            
            10,557
            
            
            
            
            
            (227,857
            )Total
                other ( income) expenses
            
            $
            (38,332
            )
            
            
            
            $
            (227,857
            )





Gross
      sales increased approximately $29,436,593 million in 2007 and corresponding,
      selling, general and administrative expenses (“SG&A”) for 2007 increased by
      $5,425,292over 2006. Selling expenses increased significantly due to the increase
      of sales. Advertising expenses increased by $2,808,264 to $4,385,045, or 178%,
      in 2007 from $1,576,781 in 2006. Salaries, commissions, and incentives paid
      to
      sales persons increased 122% in 2007 compared to 2006. General and
      administrative expenses increased 50% compare to 2006.




Research
      and development (“R&D”) expenses were $3,158,351 for 2007 compared to
      $2,026,788 for 2006.  We anticipate R&D expenses will increase as we
      conduct additional clinical trials and seek out additional patents and claims
      for our products.




33





Finance
      costs decreased by $217,300 from 2006, primary due to the paid off of the short
      term notes in 2007.





**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:




2007
            
            
            2006As
                of December 31:Cash,
                cash equivalents and marketable securities
            
            $
            9,190,870
            
            $
            6,586,800Working
                capital
            
            $
            15,447,162
            
            
            7,797,928Year
                Ended December 31:Cash
                provided by (used in):Operating
                activities
            
            $
            11,601,480
            
            $
            5,182,539Investing
                activities
            
            $
            (10,260,933)
            
            $
            (4,596,507
            )Financing
                activities
            
            $
            (32,516)
            
            $
            2,930,832





As
      of
      December 31, 2007, cash and cash equivalents were $9,190,870, an increase
      of 40% over December 31, 2006. The increase of $2,604,070 in 2007 was
      primarily due to: an increase net income of $14.7 million, and increase of
      accounts payable balance of $2.0 million and effect of the foreign currency
      translation of $1.3 million. The increase was partially offset by an increase
      of
      accounts receivable of $7.5 million and land deposit prepayment of $8.0 million.





The
      Company’s current ratio at December 31 was 4.06, and quick ratio was 3.99.
 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, 2007. Therefore, the
      Company did not have to maintain any minimum balance in the relevant deposit
      account as security.





Cash
      flows provided by operating activities were $11.6 million for the year ended
      December 31, 2007 compared to cash provided by operating activities of
      $5.18 million for the comparable 2006 period. The increase in cash provided
      by operating activities of $6.74 million was attributable primarily to the
      longer accounts receivable collection period compared to year ended December
      31,
      2006.





Working
      capital at December 31, 2007 was $15.4 million, compared to $7.8 million at
      December 31, 2006. Significant factors that resulted in an increase in 2007
      working capital were: a $2.6 million increase in cash, cash equivalents,
      and a $7.5 million increase in accounts receivable primarily due to increased
      sales of $40.5 million in 2007.





These
      increases were partially offset by:  a $ 1.0 million increase in income
      taxes payable primarily due to higher profitability; a $2.0 million increase
      in
      accounts payable, and other accrued liabilities including increases in accruals
      in wages.





Inventories
      increased by $93,110 to $371,672 as of December 31, 2007, from $278,562 as
      of
      December 31, 2006.  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.




***Year
      Ended December 31, 2006 as compared to Year Ended December 31,
      2005***




34





December
                31**2006**
            
            **Variance**
            
            **2005**REVENUESProduct
                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
            %
            
            2,213,667**Gross
                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.




35




***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
                31****2006**
            
            **Variance**
            
            **2005**Operating
                ExpensesR&D
                Expenses
            
            2,026,788
            
            3079
            %
            63,749General,
                administrative and selling expenses
            
            $
            10,738,285
            
            
            268
            %
            $
            2,914,190Depreciation
                and amortization
            
            
            121,522
            
            
            111
            %
            
            57,563Total
                operating expenses
            
            
            12,886,595
            
            
            
            
            
            3,035,502Other
                (Income) ExpensesInterest
                expense
            
            
            227,857
            
            
            1197
            %
            
            17,563**Total
                other ( income) expenses**
            
            **$**
            **227,857**
            ****
            ****
            ****
            ****
            **$**
            **17,563**




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**
            
            **2005**As
                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





36


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.




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.





**QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





As
      of
      December 31, 2007, 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.




37





Our 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.




**Currency
      Exchange Fluctuations**




All
      of
      Company’s revenues and majority of the expenses in 2007 were denominated
      primarily in Renminbi (“RMB”), the currency of China, and was converted into US
      dollars at the exchange rate of 7.006 RMB to 1 U.S. Dollar. In the third quarter
      of 2005, the Renminbi began to rise against the US dollar. There could be no
      assurance that RMB-to-U.S. dollar exchange rates will remain stable. A
      devaluation of RMB relative to the U.S. dollar would adversely affect our
      business, financial condition and results of operations. We do not engage in
      currency hedging.





**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.





**Item
      7.** **Financial
      Statements and Supplementary Data.**




The
      information required by Item 7 appears below prior to the
      signature page to this report.




**Item
      8. Changes In And Disagreements With Accountants On Accounting And Financial
      Disclosures.**





As
      reported in a Current Report on Form 8-K dated April 16, 2007, and incorporated
      herein by reference, effective April 12, 2007, e-Fang Accountancy Corp.
      (“e-Fang”), the firm that audited the financial statements of China Sky One
      Medical, Inc. and its subsidiaries (the “Company”) for the year ended December
      31, 2007, was dismissed by the Company as its independent registered accounting
      firm, due to the engagement of the new auditors, as described below.





Effective
      April 12, 2007, we engaged Murrell, Hall, McIntosh & Co., PLLP (“Murrell”),
      as our independent registered accounting firm to audit the financial statements
      of the Company and our subsidiaries for the fiscal year ended December 31,
      2007.
 The decision to change the Company’s independent accountants was made by
      the Company’s board of directors.




As
      reported in a Current Report on Form 8-K dated December 18, 2007, and
      incorporated herein by reference, effective as of December 18, 2007, the Company
      dismissed Murrell, Hall, McIntosh & Co., PLLP as our independent registered
      public accounting firm. Murrell, Hall, McIntosh & Co., PLLP had not audited
      any of the Company’s consolidated financial statements, having replaced our
      previous independent registered public accounting firm, e-Fang Accountancy
      Corp.
& CPA, on April 12, 2007. The decision to change accountants was approved by
      the Company’s Board of Directors on December 17, 2007.




38




Prior
      to
      the dismissal of Murrell, Hall, McIntosh & Co., PLLP, the firm reviewed the
      Company’s unaudited interim reports for the fiscal quarters ended March 31,
      2007, June 30, 2007 and September 30, 2007. In connection with such review,
      there were no disagreements with Murrell, Hall, McIntosh & Co., PLLP on any
      matter of accounting principles or practices, financial statement disclosure,
      or
      auditing scope or procedure which, if not resolved to the satisfaction of
      Murrell, Hall, McIntosh & Co., PLLP, would have caused it to make reference
      to the matter in connection with its reports. In addition, there were no
“reportable events” as that term is described in Item 304(a)(1)(v) of Regulation
      S-B.




As
      of
      December 18, 2007, Sherb & Co., LLP was engaged as the Company’s new
      independent registered public accountants. During the Company’s two most recent
      fiscal years, and the subsequent interim periods through December 18, 2007
      (the
      date of engagement of Sherb & Co., LLP), the Company did not consult Sherb
& Co., LLP regarding either: (a) the application of accounting principles to
      a specific completed or contemplated transaction, or the type of audit opinion
      that might be rendered on the Company’s financial statements; or (ii) any matter
      that was the subject of a disagreement as defined in Item 304(a)(1)(iv) of
      Regulation S-B.




**Item 8
      A. Controls and Procedures**




Our
      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.





Accordingly, we
      have
      made a self assessment of internal control over financial reporting in 2007.
      Our
      assessment has been focused on the controls in the following areas of our
      financial reporting:





·
            Entity
                Level Control


·
            Human
                Resources


·
            Revenues


·
            Expenditure


·
            Fixed
                Assets


·
            Inventory


·
            Income
                Taxes




Based
      on
      the result of our own assessment, which is as of the year ended December 31,
      2007, we have concluded that our controls over financial reporting during 2007
      were in place, and we were in compliance with the requirement under Section
      404
      of the Sarbanes-Oxley Act of 2002. We have not identified any, current material
      weaknesses considering the nature and extent of our current operations and
      any
      risks or errors in financial reporting under current operations.However, we
      haven’t started our tests on these controls. It is our plan that we will engage
      external accounting consultants to assess and test our controls in 2008.





We
      realize that effective internal controls are necessary for the Company to
      provide reliable financial reports, prevent fraud and operate successfully
      as a
      public company. Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is a
      process designed by, or under the supervision of, the Company’s principal
      executive and principal financial officers and implemented by the Company’s
      Board of Directors, management and other personnel, to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles and includes those policies and procedures that:
      (1) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the Company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company; and (3) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of the Company’s assets that could have a
      material effect on the financial statements.




39





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





This
      Annual Report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the SEC that permit the
      Company to provide only management’s report in this annual report.





*Changes
      in Internal Control Over Financial Reporting*




There
      was
      no change in our internal control over financial reporting that occurred during
      the fiscal quarter ended December 31, 2007, that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting.





**Item
      8B.  Other Information**





Not
      applicable.




40





**PART
      III**





**Item
      9. Directors, Executive Officers and Corporate Governance.**





**Directors
      and Officers**





As
      of
      February 22, 2008, the board of directors of the Company authorized an increase
      in the number of directors on the Board from three (3) to seven (7), and
      appointed Song Chun Fan, Jiang Qi Feng, Zhao Jie and Qian Xu Feng to fill the
      vacancies created thereby each of which newly appointed persons also serve
      on
      certain committees of the board, to serve until such time as their successors
      shall be duly elected, unless they resign, are removed from office, or are
      otherwise disqualified from serving as directors of the Company. The biographies
      of all directors are provided below. ****





The
      following table sets forth certain information regarding our directors and
      executive officers during the fiscal year ended December 31, 2007 and through
      March of 2008:


**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 DirectorSong
                  Chun Fan
              
              68
              
              DirectorJiang
                  Qi Feng
              
              25
              
              DirectorZhao
                  Jie
              
              45
              
              DirectorQian
                  Xu Feng
              
              40
              
              Director





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 our Harbin Bio-Engineering subsidiary.  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 earned
      an Executive Masters of Business.  Before establishing his own company, he
      had 8 years of experience as a reporter of Family Health Newspaper, and has
      10
      years of experience in drug marketing, research and development of new drugs
      and
      enterprise management.  Mr. Yan-qing 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
      Harbin Bio-Engineering.  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 Harbin
      Bio-Engineering.





**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.  Mr. Hai-feng 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 since such time.  He
      has been instrumental in the establishment of our 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, we have 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.





**Song
      Chun Fan** ,
      joined
      our board of directors on February 22, 2008. From 1964 to the present, Song
      Chun
      Fan has been employed by the First Clinical College of Harbin Medical University
      in Heilongjiang, China, where he has served as the Director of the Surgery
      Research Room and the Director of graduate students of the Surgery Department
      since 1996. From 1998 to the present, Song Chun Fan has been the acting Director
      of the Heilongjiang Professional Surgery Committee, the Commissary of the Degree
      Commission of China, the Director of the Key Laboratory of Cell Transplantation
      of the Ministry of Public Health of China, the Vice-Chairman of the Heilongjiang
      Medicine Association, the Vice-Chairman of the Heilongjiang Physician
      Association, and the Director of Heilongjiang (Special) Medical Treatment
      Application Administration Committee. Song Chun Fan received a Bachelor’s Degree
      in Medical Treatment from Harbin Medical University in 1964.




41





**Jiang
      Qi Feng** ,
      joined
      our board of directors on February 22, 2008. From September 2006 to the present,
      Jiang Qi Feng has served as a Teaching Assistant and a Research Assistant at
      Simon Fraser University in Canada, where he specializes in biology statistics,
      biology research and probability. Jiang Qi Feng received a Masters Degree in
      Computer Science from Simon Fraser University in 2006, and Bachelor’s Degrees in
      Bio-Statistics and Mathematics from the University of British Columbia in
      2005.





**Zhao
      Jie** ,
      joined
      our board of directors on February 22, 2008. From 1999 to the present, Zhao
      Jie
      has served as the Tissue Specialist of the Replant Department of Capital Health
      Transplant Services in Alberta, Canada, responsible for various aspects of
      tissue transplantation, including determining donee acceptability, processing
      and preserving tissue, performing surgical procedures, and quality control.
      In
      addition, Zhao Jie has written and published several books and articles
      regarding tissue transplantation. Zhao Jie has received awards from Capital
      Health for Quality and Safety (2006), Recognition of Excellence and Achievement
      (2002), and Teamwork (2002). Zhao Jie received a Bachelor’s Degree in Medicine
      from Harbin Medical University in 1988.





**Qian
      Xu Feng** ,
      joined
      our board of directors on February 22, 2008. From March 2005 to the present,
      Qian Xu Feng has been employed by Moody’s Investors Service; from May 2007 to
      the present, as the Vice President and Senior Analyst, from May 2006 to May
      2007, as the Assistant Vice President and Quantitative Analyst, and from March
      2005 to April 2006, as the Quantitative Analyst. Prior to that, from June 2004
      until February 2005, Qian Xu Feng was the Research Fellow of the Furman Center
      for Real Estate and Urban Policy of New York University, where she conducted
      empirical quantitative research in various aspects of commercial and residential
      properties. From September 1990 to July 1996, Qian Xu Feng was an Assistant
      Professor of Economics at the Beijing Normal University. Qian Xu Feng received
      a
      Ph.D. in Economics from Rutgers University in 2004, a Masters Degree in
      Economics from Rutgers University in 2001, a Masters Degree in Accounting from
      City University of New York in 1999, and a Bachelor’s Degree in Economics from
      Beijing Normal University in 1990





(b)Significant
      Employees **.**





**Wen
      Chao Zhang** has been
      the Director of Scientific and Technological Development of the Company since
      2005. Mr. Zhang graduated with a PhD in biology pharmaceuticals from South
      China
      University of Technology in 1997. Mr. Zhang has been employed in various R&D
      roles since his graduation. Mr. Zhang completed our gene recombination medicine
      independently and has been responsible for researching and developing various
      products that have been launched by the Company since 2005.




**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.




**Board
      of Directors**




We
      have 7
      members serving on our Board of Directors. Each board member is nominated for
      election at our annual meeting to serve until the next annual meeting of
      stockholders and until their successors are duly elected and qualified.




**Board
      Committees**




The
      Board
      of Directors has an Audit Committee, Nominating and Governance Committee,
      Executive Committee, a Finance Committee and a Compensation Committee, all
      of
      which were created on February 22, 2008. A description of each committee
      follows.





**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**





We
      have
      adopted a Code of Ethics that applies to our 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 appended as an exhibit to our
      Amended Report on Form 10-KSB for the year ended December 31, 2006. 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,




42





·
            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,





**Director
      Independence**





While
      our
      securities are not trading on a national securities exchange or Nasdaq, our
      Board believes in good faith that four of our directors, that Song Chun Fan,
      Jiang Qi Feng, Zhao Jie and Qian Xu Feng would all qualify as independent
      directors under the rules of the American Stock Exchange Company Guide (the
      “AMEX Company Guide”), because they (i) do not currently own a significant
      percentage of our shares, (ii) are not currently employed by us, (iii) have
      not
      been actively involved in the management of the Company, and (iv) do not fall
      into any of the enumerated categories of people who cannot be considered
      independent directors under the AMEX Company Guide.





**Audit
      Committee**





The
      Company has a separately designated standing Audit Committee and adopted an
      Audit Committee Charter on February 22, 2008. The purpose of the Audit Committee
      is to recommend to the board of directors the annual engagement of a firm of
      independent accountants and reviews with the independent accountants the scope
      and results of audits, our internal accounting controls and audit practices
      and
      professional services rendered to us by our independent accountants. The Audit
      Committee has been created after the appointment of the auditors however, have
      approved the inclusion of their report herewith. The Audit Committee also
      reviews and discusses with management and the board of directors, such matters
      as accounting policies, internal accounting controls and procedures for
      preparation of financial statements. The Audit Committee is required, at all
      times to be composed exclusively of directors who, in the opinion of our board
      of directors, are free from any relationship that would interfere with the
      exercise of independent judgment as a committee member and who posses an
      understanding of financial statements and generally accepted accounting
      principles. The Audit Committee is comprised
      of solely independent directors, Messrs. Jiang Qi Feng, Zhao Jie and Qian Xu
      Feng. Management believes, in good faith, that each
      of
      these members are considered “independent” under Section 303A.02 of the
      listing standards of American Stock Exchange, as determined by our board of
      directors. and that Jiang
      Qi
      Feng qualifies as an “audit committee financial expert” as defined under Item
      401(c) of Regulation S-B. A copy of the Audit Committee Charter is filed as
      an
      exhibit to this Annual Report and can be made available in print free of charge
      to any shareholder who requests it.





**Compensation
      Committee**




The
      Company has designated a Compensation Committee of Board of Directors and
      adopted a Compensation Committee Charter on February 22, 2008. The Compensation
      Committee is responsible for (a) reviewing and recommending to the board of
      directors on matters relating to employee compensation and benefit plans, and
      (b) assisting the board in determining the compensation of the CEO and
      other executives and make recommendations to the board with respect to the
      compensation of the CFO, other executive officers of the Company and independent
      directors. The Compensation Committee is comprised independent directors,
      Messrs. Jiang Qi Feng, Qian Xu Feng and Song Chun Fan.




**Nominating
      and Governance Committee**




We
      created a Nominating and Governance Committee and adopted a Nominating and
      Governance Committee Charter on February 22, 2008. The purpose of this committee
      is to assist the board of directors in identifying qualified individuals to
      become board members, in determining the composition of the board of directors
      and in monitoring the process to assess Board effectiveness. The Nominating
      and Governance Committee of the board of directors comprised of independent
      directors Zhao Jie, Qian Xu Feng and Song Chun Fan. A copy of
      the Nominating and Governance Committee Charter is filed as an exhibit to this
      Annual Report and can be made available in print free of charge to any
      shareholder who requests it.




**Executive
      Committee**




We
      have
      created an Executive Committee of the Board of Directors, comprised solely
      of
      independent directors. Song Chun Fan, Zhao Jie and Jiang Qi Feng serve as
      members of the Executive Committee.




43




**Finance
      Committee**




We
      have
      created a Finance Committee of the Board of directors, comprised solely of
      independent directors. Qian Xu Feng, Jiang Qi Feng and Song Chun Fan serve
      as
      members of the Finance Committee.





**Family
      Relationships**





There
      are no family relationships among our executive officers and directors.





**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, 2007 and December 31, 2006.





**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 Officer and Director
                
                
                2007
                  2006
                
                
                68,512
                  19,500
                
                
                —
                
                
                —
                
                
                —4,377
                
                (1)
                
                
                
                —
                      —
                
                
                —
                      —
                
                
                —
                      —
                
                
                
                
                
                23,877**Han
                    Xiao-Yan**
                  Principal
                    Financial Officer and Director
                
                
                2007
                  2006
                
                
                54,810
                  16,500
                
                
                —
                
                
                —
                
                
                —3,502
                
                (1)
                
                
                
                ——
                
                
                —
                      —
                
                
                —
                      —
                
                
                
                
                
                20,002**Wang
                    Hai-Feng**
                  Secretary/Treasurer
                
                
                2007
                  2006
                
                
                40,793
                  13,500
                
                
                —
                      —
                
                
                —
                      —
                
                
                1,124
                
                (1)
                
                
                
                --
                  --
                
                
                —
                      —
                
                
                —
                        —**Richard
                    B. Stuart**(2)
                  former
                    Principal Executive Officer and Director
                
                
                2007
                  2006
                
                
                N/A
                  —
                
                
                —
                    —
                
                
                —
                    
                    —
                
                
                —
                    
                    —
                
                
                
                
                
                —
                    
                    —
                
                
                —
                      —
                
                
                28,200
                
                (2)
                
                
                
                28,200**Jack
                    M. Gertino**(2)
                  former
                    Principal Financial Officer and Director
                
                
                2007
                  2006
                
                
                N/A
                  —
                
                
                —
                  —
                
                
                —
                  —
                
                
                —
                  —
                
                
                
                
                
                —
                  —
                
                
                —
                  —
                
                
                56,325
                
                (2)
                
                
                
                56,325**TOTAL**
                
                
                
                
                
                
                
                
                —
                
                
                —
                
                
                
                
                
                
                
                
                —
                
                
                —
                
                
                
                
                
                
                
                
                128,314




(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, 2007, which are attached hereto, beginning on Page F-1, and in
      the
      notes following the table below.




44




(2)
      Mr.
      Stuart and Mr. Gertino are former officers and directors of the publicly traded
      company, China Sky One, and have resigned from all positions and ceased
      receiving any form of compensation in May 2006 at the time of the reverse merger
      of ACPG into China Sky One. We recorded compensation expense for Richard B.
      Stuart and Jack M. Gertino, 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**




The
      Company does not have formal employment agreements with management at this
      time.




**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 Officer and Director
            
            
            0
            
            
            0
            
            
            10,000
            (1)
            $
            3.65
            
            
            October
                26, 2011
            
            
            0
            
            
            0
            
            
            0
            
            
            0Han
                Xiao-Yan
              Principal
                Financial Officer and 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.




45




**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 (which
      may be the Compensation Committee) 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, 2007.




**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
            
            
            None**Total**
            
            
            **113,500**
            
            
            
            
            
            **1,386,500**


**DIRECTOR
      COMPENSATION**





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


46




**Item
      11. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**




The
      following table sets forth as of March 20, 2008, 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. The below chart is based on 14,852,214
      shares issued and outstanding as of March 20, 2008. In computing the number
      of
      shares beneficially owned by a person or a group and the percentage ownership
      of
      that person or group, shares of our common stock subject to options or warrants
      currently exercisable or exercisable within 60 days after the date of this
      prospectus are deemed outstanding, but are not deemed outstanding for the
      purpose of computing the percentage of ownership of any other person. 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**Liu
                  Yan-qing (2)
              
              
              4,666,595
              (3)
              
              31.4
              %Han
                  Xiao-yan (2)
              
              
              1,407,707
              (4)
              
              9.4
              %Wang
                  Hai-feng (2)
              
              
              2,150
              (5)
              
              *Song
                  Chun Fan
              
              
              -0-
              
              
              *Jiang
                  Qi Feng
              
              
              -0-
              
              
              *Zhao
                  Jie
              
              
              -0-
              
              
              *Qian
                  Xu Feng
              
              
              -0-
              
              
              *All
                  Officers and Directors as a group (7 persons):
              
              
              6,076,452
              
              
              40.9
              %**Non
                  Executive Principal Shareholders:**Trang
                  Chong “Charles” Hung (6)
              
              
              107,685
              (4)
              
              *American
                  Eastern Group, Inc. (7)
              
              
              600,285
              
              
              4.0
              %American
                  Eastern Securities, Inc. (8)
              
              
              74,803
              (6)
              
              1.4
              %Charles
                  Hung, Jr. (9)
              
              
              94,803
              (7)


*
      Indicates under 1%.




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




(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) Includes
      6,000 shares issuable upon currently exercisable options at $3.65 per share
      issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
      October 26, 2011, but does not include 4,000 shares issuable upon exercise
      of
      options vesting on June 30, 2008. Also includes 3,000,000 shares deposited into
      escrow pursuant to the Make Good Agreement with investors in our January 2008
      Offering pursuant to which such shares may be distributed to such investors
      if
      the Company does not attain $1.75 earnings per share for the fiscal year ending
      in December 31, 2008, based on fully diluted shares outstanding (16,907,696)
      excluding warrants issued in such offering.




(4) Includes
      3,800 shares issuable upon currently exercisable options at $3.65 per share
      issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
      October 26,2011, but does not include 3,200 shares issuable upon exercise of
      options vesting on June 30, 2008.




(5)
      Includes 2,000 shares issuable upon currently exercisable options at $3.65
      per
      share issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
      October 26,2011, but does not include 2,000 shares issuable upon exercise of
      options vesting on December 31, 2008 or 1,000 options vesting on December 31,
      2009.




(6) The
      address for each of Mr. Hung and these two entities and for Mr. Charles Hung,
      Jr. 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. Includes 67,685 shares and 40,000 shares
      issuable upon exercise of warrants. Does not include shares of American Eastern
      Group, Inc., American Eastern Securities, Inc. and Charles Hung Jr. and EIC
      Investments, which shares are deemed owned as part of a group in which Mr.
      Hung
      is a part (see notes 5 and 6 below).




( 6 )
      Includes 100,285 shares and 500,000 shares of the Common Stock issuable upon
      exercise of warrants at $2.00 per share, expiring on July 31, 2009. Both Mr.
      Hung and Charles Hung Jr. are officers and control persons of this entity (See
      “Item 13. Certain Relationships and Related Transactions, and Director
      Independence”).




( 8 )
      Includes 54,803 shares and 20,000 shares of the common stock of the Company
      issuable upon exercise of warrants exercisable at $3.00, expiring March 31,
      2008, and 10,000 warrants exercisable at $3.50 , expiring on October 10, 2008.
      (See “Item 13. Certain Relationships and Related Transactions, and Director
      Independence”). Mr. Hung has indicated his intent to exercise all such warrants.




( 9 )
      Includes 40,000 shares of common stock issuable upon exercise of warrants held
      by Mr. Charles Hung Jr., as well as 54,803 shares of common stock held by EIC
      Investments, LLC, an entity in which Mr. Charles Hung Jr. is a manager.




47




**Item
        12. Certain Relationships and Related Transactions, and Director Independence.**
  Effective
        May 30, 2006, we acquired 100% of 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 and TDR, received 4,660,595 and
        1,402,907 shares, respectively, of the common stock of China Sky One 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 China Sky One 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 China Sky One
        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, China Sky One 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.
  China
        Sky
        One 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, we 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 our 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.
  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 in October
        2006, 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.
  On
        January 31, 2008, and in order to facilitate the January 2008 Offering, Liu
        Yan-qing deposited 3,000,000 shares into escrow pursuant to an Escrow Agreement.
        These shares may be released from escrow and issued to the investors in the
        January 2008 Offering in the event that the Company fails to attain Earnings
        Per
        Share, as adjusted of at least (i) $1.05 per share for fiscal year ended
        December 31, 2007 based on fully diluted shares outstanding before the January
        2008 offering (an aggregate of 13,907,696), and/or (ii) $1.75 per share for
        fiscal year ending December 31, 2008 based on fully diluted shares outstanding
        after the January 2008 Offering (an aggregate of 16,907,696 shares). While
        the
        Company has satisfied the criterion of (i) above for 2007, no assurance can
        be
        made that we will satisfy our earnings goal next year.




48




**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).3.3
                
                Finance
                    Committee Charter3.4
                
                Audit
                    Committee Charter3.5
                
                Compensation
                    Committee Charter3.6
                
                Nominating
                    and Governance Committee Charter3.7
                
                Executive
                    Committee Charter4.1
                    ***
                
                Form
                    of Class A Warrant exercisable at $12.50 per share issued to
                    investors in
                    connection with offering of 2,500,000 shares of common stock
                    and 750,000
                    Class A Warrants on January 31, 2008 (the “January 2008
                    Offering”).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).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,
                    2006.10.7***
                
                Form
                    of Securities Purchase Agreement between Company and investors,
                    dated as
                    of January 31, 2008, relating to January 2008 Offering.10.8***
                
                Form
                    of Registration Rights Agreement between Company and investors,
                    dated as
                    of January 31, 2008, relating to January 2008 Offering.10.9***
                
                Form
                    of Make Good Agreement between Pope Asset Management LLC, as
                    the
                    authorized agent of the investors, the Company and Liu
                    Yan-Qing.10.10***
                
                Form
                    of Make Good Escrow Agreement between Pope Asset Management LLC,
                    as the
                    authorized agent of the investors, the Company and Liu
                    Yan-Qing.10.11***
                
                Form
                    of Put Agreement between Company and investors, dated as of January
                    31,
                    2008, relating to January 2008 Offering.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.




*
            Incorporated
                by reference from exhibits filed with Annual Report on Form 10-KSB
                for
                year ended December 31, 2007,originally
                filed April 2, 2007.




**
            Incorporated
                by reference from exhibits filed with Annual Report of Form 10-KSB/A
                for
                year ended December 31, 2007,filed
                on November 8, 2007.




***
            Incorporated
                by reference from exhibits filed with Current Report on Form 8-K,
                Date of
                Event of January 31, 2008.




49


**Item
            14. Principal Accountant Fees and Services.**
  The
            aggregate fees billed by our principal accountants for fiscal years ended
            December 31, 2007 are as follows:
 
 **Accountant
                      Name**
                  
                  
                  **Audit
                      Fees**
                  
                  
                  **Audit**
                    **Related
                      Fees**
                  
                  
                  **Tax
                      Fees**
                  
                  
                  **All**
                    **Other
                      Fees**Sherb
                      & Co., Inc.
                  
                  $
                  65,000
                  
                  
                  
                  
                  
                  
                  
                  $Murrell,
                      Hall McIntosh & Co. LLP
                  
                  $
                  -0-
                  
                  $
                  43,119
                  
                  $
                  6,195e-Fang
                      Accountancy Corp. & CPA (Year End December 2006 Audit)
                  
                  $
                  30,000
  50


**ITEM
        7. FINANCIAL STATEMENTS**
  **China
        Sky One Medical, Inc.**
  **Table
        of contents**
  PageIndependent
                  Auditors’ Report
              
              
              F-2Consolidated
                  Balance Sheets
              
              
              F-3Consolidated
                  Statements of Operations
              
              
              F-4Consolidated
                  Statements of Shareholders’ Equity
              
              
              F-5Consolidated
                    Statements of Cash Flows
              
              
              F-6Notes
                  to the Consolidated Financial Statements
              
              
              F-7
                  to F-20
 
 F-1




REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Shareholders
        and Directors
 China
        Sky One Medical, Inc.
 
 We
        have audited the accompanying consolidated balance sheets of China Sky One
        Medical, Inc.
 and
        its Subsidiaries as of December 31, 2007 and the related consolidated statements
        of operations, stockholders’ equity and cash flows for the year ended December
        31, 2007. These consolidated financial statements are the responsibility
        of the
        company’s management. Our responsibility is to express an opinion on these
        consolidated financial statements based on our audit.
 
 We
        conducted our audit in accordance with generally accepted auditing standards
        as
        established by the Auditing Standards Board (United States) and in accordance
        with the auditing standards of the Public Company Accounting Oversight Board
        (United States). Those standards require that we plan and perform the audit
        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, and 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 purposes of expressing an opinion on the effectiveness of
        the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
        We believe that our audit provides a reasonable basis for our
        opinion.
 
 In
        our opinion, the financial statements referred to above present fairly, in
        all
        material respects, the financial position of China Sky One Medical, Inc.
        as of
        December 31, 2007 and the results of its operations and its cash flows for
        the
        year ended December 31, 2007 in conformity with accounting principles generally
        accepted in the United States.
 /s/
                Sherb & Co., LLPCertified
                Public AccountantsBoca
                  Raton, Florida
                March
                  25, 2008
 F-2
 **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 18, 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 18 with respect to correction of errors)
  The
          independent auditing firm of e-Fang Accountancy Corp & CPA. has audited the financial
          statements of China Sky One Medical, Inc. for the fiscal years ended December 31,
          2006. e-Fang Accountancy Corp & CPA’s reports on China Sky One Medical
          Inc.’s financial
          statements for the fiscal years ended December 31, 2006 did not contain
          an adverse
          opinion or a disclaimer of opinion; nor were such reports qualified or
          modified
          as to
          uncertainty, audit scope or accounting principles. During China Sky One Medical,
          Inc.’s most recent fiscal year and subsequent interim periods preceding the
          date of
          this report, there were no disagreements with e-Fang Accountancy Corp & CPA.
          on any
          matter of financial statement disclosure, or auditing scope or procedure
          except
          some minor
          accounting issues that have already been resolved.
  Dated:
          March 31, 2008
  /s/
          e-Fang Accountancy Corp., & CPA
 
 e-Fang
          Accountancy Corp., & CPA
  F-2B




China
      Sky
      One Medical, Inc. and Subsidiaries


Consolidated
        Balance Sheet
 December
        31, 2007
 
 **ASSETS**Current
                  AssetsCash
                  and cash equivalents
              
              $
              9,190,870Accounts
                  receivable
              
              
              10,867,106Other
                  receivables
              
              
              40,200Inventories
              
              
              371,672Prepaid
                  expenses
              
              
              17,707Total
                  current assets
              
              
              20,487,555Property
                  and equipment, net
              
              
              6,861,432Land
                  Deposit
              
              
              8,003,205Intangible
                  assets, net
              
              
              1,933,014$
              37,285,206**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable and accrued expenses
              
              $
              2,845,308Wages
                  payable
              
              
              381,482Welfare
                  payable
              
              
              221,911Taxes
                  payable
              
              
              1,567,188Deferred
                  revenues
              
              
              24,504Total
                  current liabilities
              
              
              **5,040,393**Stockholders'
                  EquityPreferred
                  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, 12,228,363
                  issued
                  and outstanding)
              
              
              12,228Additional
                  paid-in capital
              
              
              9,572,608Accumulated
                  other comprehensive income
              
              
              2,271,843Retained
                  earnings
              
              
              20,388,134**Total
                  stockholders' equity**
              
              
              **32,244,813**
              ********
              ****
              ****
              ****
              ********
              ****
              **$**
              **37,285,206**
 
 See
        accompanying summary of accounting policies and notes to the consolidated
        financial statements.
  F-3
 
 China
        Sky
        One Medical, Inc. and Subsidiaries
 Consolidated
        Statements of Operations
 
 Years
                  Ended December 31,2007
              
              2006Revenues
              
              $
              49,318,308
              
              $
              19,881,715Cost
                  of Goods Sold
              
              
              10,939,531
              
              
              5,063,084Gross
                  Profit
              
              
              38,378,777
              
              
              14,818,631Operating
                  ExpensesSelling,
                  general and administrative
              
              
              16,163,577
              
              
              10,738,285Depreciation
                  and amortization
              
              
              443,063
              
              
              121,522Research
                  and development
              
              
              3,158,351
              
              
              2,026,788**Total
                  operating expenses**
              ****
              ****
              **19,764,991**
              ****
              ****
              **12,886,595**Other
                  Income (Expense)Other
                  income
              
              
              48,889
              
              
              -Interest
                  expense
              
              
              (10,557
              )
              
              (227,857
              )Total
                  other income (expense)
              
              
              38,332
              
              
              (227,857
              )Net
                  Income Before Provision for Income Tax
              
              
              18,652,118
              
              
              1,704,179Provision
                  for Income TaxesCurrent
              
              
              3,319,173
              
              
              764,462Deferred
              
              
              -
              
              
              315,3023,319,173
              
              
              1,079,764**Net
                  Income**
              ****
              **$**
              **15,332,945**
              ****
              **$**
              **624,415**Basic
                  Earnings Per Share
              
              $
              1.27
              
              $
              0.05Diluted
                  Earnings Per Share
              
              $
              1.15
              
              $
              0.05Basic
                  Weighted Average Shares Outstanding
              
              
              12,094,949
              
              
              12,031,536Diluted
                  Weighted Average Shares Outstanding
              
              
              13,370,528
              
              
              12,941,283The
                  Components of Other Comprehensive IncomeNet
                  Income
              
              $
              15,332,945
              
              $
              624,415Foreign
                  currency translation adjustment
              
              
              1,849,724
              
              
              364,565**Comprehensive
                  Income**
              ****
              **$**
              **17,182,669**
              ****
              **$**
              **988,980**
 
 See
        accompanying summary of accounting policies and notes to the consolidated
        financial statements.
  F-4
 China
          Sky
          One Medical, Inc. and Subsidiaries
 Consolidated
          Statements of Stockholders' Equity
 For
          the
          Years Ended December 31, 2007 and 2006
 
 Common
                    Stock
                
                
                
                
                
                AccumulatedNumber
                
                
                
                Additional
                
                
                
                Other
                
                Totalof
                
                Par
                
                Paid-In
                
                Retained
                
                Comprehensive
                
                Stockholders'Shares
                
                Value
                
                Capital
                
                Earnings
                
                Income
                
                EquityBalance
                    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
                
                
                -
                
                
                -
                
                
                2,979,853Compensation
                    expense for warrants
                
                
                -
                
                
                -
                
                
                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
                
                
                -
                
                
                -
                
                
                -
                
                
                624,415
                
                
                -
                
                
                624,415Balance
                    at December 31, 2006
                
                
                12,031,536
                
                
                12,032
                
                
                8,821,502
                
                
                5,055,189
                
                
                422,119
                
                
                14,310,842Issuance
                    of common stock for services
                
                
                30,000
                
                
                30
                
                
                194,970
                
                
                -
                
                
                -
                
                
                195,000Warrants
                    exercised
                
                
                166,827
                
                
                167
                
                
                515,667
                
                
                -
                
                
                -
                
                
                515,834Employee
                    stock options
                
                
                -
                
                
                -
                
                
                40,468
                
                
                -
                
                
                -
                
                
                40,468Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,849,724
                
                
                1,849,724Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                15,332,945
                
                
                -
                
                
                15,332,94512,228,363
                
                $
                12,229
                
                $
                9,572,607
                
                $
                20,388,134
                
                $
                2,271,843
                
                $
                32,244,813
 F-5
 See
          accompanying summary of accounting policies and notes to the consolidated
          financial statements.
 China
          Sky
          One Medical, Inc. and Subsidiaries
 Consolidated
          Statements of Cash Flows
 
 **Years
                    Ended December 31,**
                ********
                ****
                **2007**
                ****
                **2006**Cash
                    flows from operating activitiesNet
                    Income
                
                $
                15,332,945
                
                $
                624,415Adjustments
                    to reconcile net cash provided by operating activitiesDepreciation
                    and amortization
                
                
                443,063
                
                
                246,556Share-based
                    compensation expense
                
                
                235,468
                
                
                2,878,031Preferential
                    conversion feature of note
                
                
                -
                
                
                177,803Net
                    change in assets and liabilitiesAccounts
                    receivables and other receivables
                
                
                (7,478,964
                )
                
                (1,994,678
                )Inventories
                
                
                (73,142
                )
                
                105,655Construction
                    in progress
                
                
                -
                
                
                2,517,215Prepaid
                    expenses and other
                
                
                93,463
                
                
                (87,979
                )Accounts
                    payable and accrued liabilities
                
                
                1,963,542
                
                
                101,698Related
                    party payable
                
                
                -
                
                
                (18,540
                )Wages
                    payable
                
                
                102,534
                
                
                141,776Welfare
                    payable
                
                
                70,280
                
                
                45,056Taxes
                    payable
                
                
                960,170
                
                
                433,419Deferred
                    revenue
                
                
                (47,879
                )
                
                12,112Net
                    cash provided by operating activities
                
                
                11,601,480
                
                
                5,182,539Cash
                    flows from investing activitiesPurchases
                    of fixed assets
                
                
                (2,222,448
                )
                
                (3,022,448
                )Land
                    deposit
                
                
                (8,003,205
                )
                
                -Purchase
                    of intangible assets
                
                
                (35,280
                )
                
                (1,574,059
                )Net
                    cash used in investing activities
                
                
                (10,260,933
                )
                
                (4,596,507
                )Cash
                    flows from financing activitiesSale
                    of common stock for cash
                
                
                -
                
                
                2,715,000Issuance
                    of convertiable notes
                
                
                -
                
                
                200,000Proceeds
                    from short-term loan
                
                
                -
                
                
                15,832Proceeds
                    from warrants conversion
                
                
                515,834
                
                
                -Payment
                    to short-term loan
                
                
                (548,350
                )
                
                -Net
                    cash provided by (used in) financing activities
                
                
                (32,516
                )
                
                2,930,832Effect
                    of exchange rate
                
                
                1,296,039
                
                
                132,603Net
                    increase in cash
                
                
                2,604,070
                
                
                3,649,467Cash
                    and cash equivalents at beginning of year
                
                
                6,586,800
                
                
                2,937,333Cash
                    and cash equivalents at end of year
                
                $
                9,190,870
                
                $
                6,586,800Supplemental
                    disclosure of cash flow informationInterest
                    paid
                
                $
                10,457
                
                $
                36,429Taxes
                    paid
                
                $
                2,359,003
                
                $
                767,701Non-cash
                    Investing and financing activities:Cashless
                    exercise of warrants
                
                $
                5
                
                $
                -
 
 See
          accompanying summary of accounting policies and notes to the consolidated
          financial statements.
 F-6
  **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  **1.**
                **Description
                    of Business**
 
 China
          Sky
          One Medical, Inc. ("China Sky One" or the “Company”), 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 then 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.
 
 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.
  TDR
          and
          First are a 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.
 
 Certain
          reclassifications have been made to the prior year to conform to the current
          year presentation.
 
 Restatement
          of financial statements
 
 During
          the process of preparing the financial statements for the quarter ended
          March
          31, 2007, management determined that certain significant accounting errors
          had
          been made in prior quarters. These financial statements for the year ended
          December 31, 2006 have been restated to account for these changes These
          changes
          have been reflected in a Form 10-KSB/A filed with the Securities and Exchange
          Commission in November 2007.
 
 F-7
  **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  The
          corrections of errors included in these financials are:
 
 Effect
                    onDecember 31,2006 Earnings
                
                Effect
                    onprior yearsearnings
                
                Cumulativeeffect
                    onRetainedEarningsCapitalization
                    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**
                **)**
 
 Components
          of the effect of this change on the consolidated statements of operations
          are as
          follows:
 
 As Filed Year
                  ended
                  December 31,
                  2006
                
                
                Adjustment to
                  Restate
                
                
                Restated
                  Year ended
                  December
                  31, 2006Gross
                    Profit
                
                $
                14,818,631
                
                $
                -
                
                $
                14,818,631Operating
                    expensesSelling
                    General and administrative
                
                
                9,556,811
                
                
                1,181,474
                
                
                10,738,285Depreciation
                    and amortization
                
                
                -
                
                
                121,522
                
                
                121,522Research
                    and development
                
                
                146,903
                
                
                1,879,885
                
                
                2,026,7889,703,714
                
                
                3,182,881
                
                
                12,886,595Other
                    expense (income)Interest
                    expense
                
                
                52,032
                
                
                175,825
                
                
                227,857Currency
                    exchange adjustment
                
                
                (1,978
                )
                
                1,978
                
                
                -50,054
                
                
                177,803
                
                
                227,857Net
                    income before provision for income tax
                
                
                5,064,863
                
                
                (3,360,684
                )
                
                1,704,179Provision
                    for income tax:Current
                
                
                764,462
                
                
                -
                
                
                764,462Deferred
                
                
                -
                
                
                315,302
                
                
                315,302764,462
                
                
                315,302
                
                
                1,079,764Net
                    income
                
                $
                4,300,401
                
                $
                (3,675,986
                )
                $
                624,415Basic
                    Earnings per share
                
                $
                0.36
                
                $
                (0.31
                )
                $
                0.05Diluted
                    earnings per share
                
                $
                0.31
                
                $
                (0.28
                )
                $
                0.05Basic
                    weighted average shares outstanding
                
                
                12,031,536
                
                
                12,031,536
                
                
                12,031,536Diluted
                    weighted average shares outstanding
                
                
                13,845,036
                
                
                13,843,036
                
                
                13,843,036
 
 F-8
  China
            Sky
            One Medical, Inc. and Subsidiaries
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  **2.**
                **Basis
                    of Preparation of Financial
                    Statements**
 
 The
          accompanying financial statements differ from the financial statements
          used for
          statutory purposes in PRC in that they reflect certain adjustments, recorded
          on
          the entities’ books, which are appropriate to present the financial position,
          results of operations and cash flows in accordance with US GAAP. Such
          differences are immaterial.
 
 Principles
          of Consolidation – The consolidated financial statements include the
          accounts of the Company and its subsidiaries, ACPG, TDR, and First. 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.
 
 Significant
          estimates included values and lives assigned to acquired intangible assets,
          reserves for customer returns and allowances, uncollectible accounts receivable,
          valuation of equity issuances such as shares of the Company’s common stock and
          stock options to purchase shares of the Company’s common stock, and slow moving
          and/or obsolete/damaged inventory. Actual results may differ from these
          estimates.
  **Earnings
          per share -** Basic
          net
          earnings per common share is computed by dividing net earnings applicable
          to
          common shareholders by the weighted-average number of common shares outstanding
          during the period. Diluted net earnings per common share is determined
          using the
          weighted-average number of common shares outstanding during the period,
          adjusted
          for the dilutive effect of common stock equivalents, consisting of shares
          that
          might be issued upon exercise of common stock options and warrants.
 
 **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. At December 31, 2007, the Company had no allowance for
          doubtful accounts. Total accounts receivable at December 31, 2007 was
          $10,867,106
 
 **Inventories** –
          Inventories include finished goods, raw materials, freight-in, packing
          materials, labor, and overhead costs accounted for using the weighted average
          method. Provisions are 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. There was no provision provided at December 31,
          2007.
 
 **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
  F-9
  **China
            Sky One Medical, Inc. and Subsidiaries**
 Notes
            to
            the Consolidated Financial Statements
 **As
            of December 31, 2007**
  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.
 
 **Intangible
          assets –** Intangible
          assets consists of patents, distribution rights and customer lists. Patent
          costs
          are being amortized over a total life of ten years. 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.
          There were no impairments as of December 31, 2007.
 
 **Foreign
          Currency** -
          The
          Company’s principal country of operations is in The People’s Republic of China.
          The financial position and results of operations of the Company are recorded
          in
          RMB as the functional currency. The results of operations denominated in
          foreign
          currency are translated at the average rate of exchange during the reporting
          period.
 
 Assets
          and liabilities denominated in foreign currencies at the balance sheet
          date are
          translated at the market rate of exchange ruling at that date. The registered
          equity capital denominated in the functional currency is translated at
          the
          historical rate of exchange at the time of capital contribution. All translation
          adjustments resulting from the translation of the financial statements
          into the
          reporting currency (“US Dollars”) are dealt with as a separate component within
          shareholders’ equity.
 
 **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.
 
 F-10
  China
            Sky
            One Medical, Inc. and Subsidiaries
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  **Deferred
          revenues -** The
          Company recognizes revenues as earned. Amounts billed in advance of the
          period
          in which goods are delivered are recorded as a liability under “Deferred
          revenue.” As of December 31, 2007 the Company has $24,504 in deferred
          revenue.
 
 **Shipping
          and Handling costs -** Shipping
          and handling costs are included in selling, general and administrative
          expenses
          and totaled $297,728 and $181,010 for the years ended December 31, 2007
          and
          2006, respectively.
 
 **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, 2007, the Company incurred $ 3,158,351 in
          research and development expenditures, and $2,026,788 for the year ended
          December 31, 2006.
 
 **Advertising** —The
          Company expensed advertising and promotion expenses as they are incurred.
           The total advertising expenses incurred for the year ended December 31,
          2007 and 2006 was $4,385,045 and $1,576,781, 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 were $777,217.
          No
          slotting fees were paid during 2007.
 
 **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.
 
 Provision
          for the PRC enterprise income tax is calculated at the prevailing rate
          based on
          the estimated assessable profits less available tax relief for losses brought
          forward **.** The
          Company does not accrue taxes on unremitted earnings from foreign operations
          as
          it is the Company’s intention to invest these earnings in the foreign operations
          indefinitely **.**
 
 F-11
  China
            Sky
            One Medical, Inc. and Subsidiaries
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  ***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.
 
 ***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.
 
 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.
  **Accounting
          for Uncertainty in Income Taxes**  **–** In June 2006,
          the Financial Accounting Standards Board (FASB) issued Interpretation No.
          48, *Accounting
          for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
          109* (FIN
          48). FIN 48 is intended to clarify the accounting for uncertainty in income
          taxes recognized in a company’s financial statements and prescribes the
          recognition and measurement of a tax position taken or expected to be taken
          in a
          tax return. FIN 48 also provides guidance on de-recognition, classification,
          interest and penalties, accounting in interim periods, disclosure and
          transition.
  Under
          FIN
          48, evaluation of a tax position is a two-step process. The first step
          is to
          determine whether it is more-likely-than-not that a tax position will be
          sustained upon examination, including the resolution of any related appeals
          or
          litigation based on the technical merits of that position. The second step
          is to
          measure a tax position that meets the more-likely-than-not threshold to
          determine the amount of benefit to be recognized in the financial statements.
          A
          tax position is measured at the largest amount of benefit that is greater
          than
          50% likely of being realized upon ultimate settlement.
  Tax
          positions that previously failed to meet the more-likely-than-not recognition
          threshold should be recognized in the first subsequent period in which
          the
          threshold is met. Previously recognized tax positions that no longer meet
          the
          more-likely-than-not criteria should be de-recognized in the first subsequent
          financial reporting period in which the threshold is no longer met.
  The
          adoption of FIN 48 at January 1, 2007 did not have a material effect on
          the
          Company’s financial position
 
 **Comprehensive
          Income –** Comprehensive
          income consists of net income and other gains and losses affecting shareholders’
equity that, under generally accepted accounting principles are excluded
          from
          net income. For the Company, such items consist entirely of foreign currency
          translation gains and losses
 
 **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 between
          2% to 8% to the pension plan, and the Company contributes the balance
          contribution of from 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.
 
 F-12
  China
            Sky
            One Medical, Inc. and Subsidiaries
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  **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, 2007 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 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.
  -
                In
                    February 2007, the FASB issued Statement No. 159 “The Fair Value Option
                    for Financial Assets and Financial Liabilities” (SFAS 159). This statement
                    permits companies to choose to measure many financial assets
                    and
                    liabilities at fair value. Unrealized gains and losses on items
                    for which
                    the fair value option has been elected are reported in earnings.
                    SFAS 159
                    is effective for fiscal years beginning after November 15, 2007. The
                    Company is currently assessing the impact of SFAS 159 on its
                    consolidated
                    financial statements.
  -
                In
                    December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
                    Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
                    business combinations. Under SFAS No. 141(R), an acquiring entity
                    will be required to recognize all the assets acquired and liabilities
                    assumed in a transaction at the acquisition-date fair value with
                    limited
                    exceptions. SFAS No. 141(R) will change the accounting treatment and
                    disclosure for certain specific items in a business combination.
                    SFAS
                    No. 141(R) applies prospectively to business combinations for which
                    the acquisition date is on or after the beginning of the first
                    annual
                    reporting period beginning on or after December 15, 2008. SFAS 141(R)
                    will impact the Company in the event of any future
                    acquisition.
  -
                In
                    December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
                    Consolidated Financial Statements—an amendment of Accounting Research
                    Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and
                    reporting standards for the non-controlling interest in a subsidiary
                    and
                    for the deconsolidation of a subsidiary. SFAS No. 160 is effective
                    for fiscal years beginning on or after December 15, 2008. The Company
                    does not believe that SFAS 160 will have a material impact on
                    its
                    consolidated financial statements.
  **4.**
                **Concentrations
                    of Business and Credit
                    risk**
 
 The
          Company maintains certain bank accounts in the PRC which are not protected
          by
          FDIC insurance or other insurance. As of December 31, 2007 the Company
          held
          $583,495 of cash balances within the United States of which $432,798 was
          in
          excess of FDIC insurance limits. At December 31, 2007, the Company had
          approximately $8,605,000, in China bank deposits, which may not be insured.
          The
          Company has not experienced any losses in such accounts through December
          31,
          2007.
  F-13
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 Geographic
          Concentration; Fluctuations in Regional Economic Conditions. Nearly all
          of the
          Company’s sales are concentrated in China. Accordingly, the Company is
          susceptible to fluctuations in its business caused by adverse economic
          conditions in this country. Difficult economic conditions in other geographic
          areas into which the Company may expand may also adversely affect its business,
          operations and finances.
  The
          Company provides credit in the normal course of business. Substantially
          all
          customers are located in The People's Republic of China. The Company performs
          ongoing credit evaluations of its customers and maintains allowances for
          doubtful accounts based on factors surrounding the credit risk of specific
          customers, historical trends, and other information.
 
 Substantially
          all of the Company's fixed assets and operations are located in the Peoples
          Republic of China.
 
 The
          Company is self-insured for all risks and carries no liability or property
          insurance coverage of any kind.
 
 Substantially
          all of the Company's profits are generated from operations in mainland
          China.
 
 Major
          Customers
 
 During
          the years ended December 31, 2007 and 2006, Ningbo Yuehua Trading Co. and
          Guangzhou Xinghe Trading Co. accounted for approximately 14 % and 11%,
          respectively, of the Company’s sales. One Customer accounted for 11% of all
          accounts receivable as of December 31, 2007.
 
 Major
          Supplier
 
 Purchases
          from Harbin Yongheng Printing Ltd. for the year ended December 31, 2007
          and 2006
          represented approximately 23.17% and 27.36% respectively, of
          purchases.
 
 Payments
          of dividends may be subject to some restrictions due to the Company’s operating
          subsidiaries all being located in the PRC.
 
 **5.**
                **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 1,617,483 shares of common stock, all were
          exercisable during the year ended December 31, 2007, were included in
          the computation of diluted earnings per share because the average market
          price
          of our common stock were less than the option exercise prices during these
          periods.
 
 The
          dilutive potential common shares on warrants and options is calculated
          in
          accordance with the treasury stock method, which assumes that proceeds
          from the
          exercise of all warrants and options are used to repurchase common stock
          at
          market value. The amount of shares remaining after the proceeds are exhausted
          represent s the potential dilutive effect of the securities.
  F-14
 **China
            Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 The
          following table sets forth our computation of basic and diluted net income
          (loss) per share:
  **Years
                      ended December 31,****2007**
                  
                  **2006**Numerator:Net
                      income (loss) used in calculation of basic earnings (loss)
                      per
                      share
                  
                  $
                  15,332,945
                  
                  $
                  624,415Net
                      income (loss) used in calculation of diluted earnings (loss)
                      per
                      share
                  
                  $
                  15,332,945
                  
                  $
                  624,415Denominator:Weighted-average
                      common shares outstanding used in calculation of basic earnings
                      (loss) per
                      share
                  
                  
                  12,094,949
                  
                  
                  12,031,536Effect
                      of dilutive securities:Stock
                      options and equivalents
                  
                  
                  1,275,579
                  
                  
                  909,747Weighted-average
                      common shares used in calculation of diluted earnings (loss)
                      per
                      share
                  
                  
                  13,370,528
                  
                  
                  12,941,283Net
                      income (loss) per share:Basic
                  
                  $
                  1.27
                  
                  $
                  0.05Diluted
                  
                  $
                  1.15
                  
                  $
                  0.05
 ****
 **6.**
                  **Equity
                      and 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. Under SFAS 123R, the company remeasures the
          intrinsic value of the options at the end of each reporting period until
          the
          options are exercised, cancelled or expire unexercised.
  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 December 31,
          2007, non-qualified options to purchase a total of 113,500 shares have
          been
          granted under the 2006 Stock Incentive Plan. All options were granted in
          October
          2006. An additional 50, 000 shares registered under the 2006 plan were
          issued
          outright to employees of the company. All options have an exercise price
          of
          $3.65 per share, the weighted fair market value on the date of grant was
          $4.25
          per share. Of these 113,500 options a total of 60,500 were granted to employees
          and a total of 53,000 were granted to consultants. These options were valued
          under the following Black-Scholes assumptions: no dividends; risk-free
          interest
          rate of 4%; a contractual life of 5 years and volatility of 39%. All 113,500
          options vest over various periods for the various options granted to employees
          and consultants. There were no options granted in the year ended December
          31,
          2007. As of December 31, 2007, these options have a remaining life of
          approximately 4 years, and remain outstanding and continue to be remeasured
          at
          the intrinsic value over their remaining vesting period ranging from 6
          months to
          2 years. Compensation expense in any given period is calculated as the
          difference between total earned compensation at the end of the period,
          less
          total earned compensation at the beginning of the period. Compensation
          earned is
          calculated on a straight line basis over the requisite service period for
          any
          give option award. The effect of adoption of the new standard for the year
          ended
          December 31, 2007 and 2006 related to stock options to employees were
          additional non-cash expenses of $40,468 and $65,604, respectively.
 
 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 the reverse merger
          in July
          2006, 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
          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 weighted 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 ******
  F-15
 **China
        Sky One Medical, Inc. and Subsidiaries**
 **Notes
          to the Consolidated Financial Statements**
 **As
          of December 31, 2007**
  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 purchase 2,500 shares at $3.50 per share. In this offering the Company
        issued at 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’s common at $2.00 per share. These warrants expire
        on July 31, 2009. The fair value of above warrants were computed as $916,622
  During
        the year ended December 31, 2006 the Company converted notes payable and
        accrued
        interest of $204,332 into 102,166 shares of common stock at $2.00 per
        share.
  One
        January 3, 2007, the holder of 50,000 warrants dated March 11, 1999, granted
        prior to the May 30, 2006 company reorganization, stock exchange exercised the
        warrants by electing to use cashless conversion provision of the warrants
        and
        acquired 5,160 shares of the Company common stock (after giving effect to
        the
        8-to 1 reverse stock split effected after the warrant was issued). These
        warrants are not included in the schedule below.
  On
        April
        3, 2007 the Company awarded 30,000 shares of restricted common stock to numerous
        key employees of the Company at price of $6.50 per share, total compensation
        expenses $195,000 under the Company’s 2006 Incentive Stock Plan.
  A
        various
        times during the year ended December 31, 2007 warrant holder exercised their
        warrants, at various exercise prices, for total proceeds of $515,834 and
        a total
        of 161,667 shares of common stock being issued.
 Shares
                  Underlying
                  Warrants
                
                Weighted
                  average
                  Exercise
                  Price
                  Warrants
                
                Shares
                  underlying
                  Options
                
                Weighted
                  average
                  Exercise
                  Price
                  OptionsOutstanding as of January 1, 2006
                
                
                25,000
                
                $
                1.50
                
                
                -Granted
                
                
                1,650,000
                
                
                2.58
                
                
                163,500
                
                $
                3.45Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Expired
                    or cancelled
                
                
                -
                
                
                -
                
                
                -
                
                
                -Outstanding as of December 31, 2006
                
                
                1,675,000
                
                
                2.57
                
                
                163,500
                
                $
                3.45Granted
                
                
                -
                
                
                -
                
                
                -
                
                
                -Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Expired
                    or cancelled
                
                
                (161,667
                )
                
                3.19
                
                
                -
                
                
                -Outstanding
                    as of December 31, 2007
                
                
                1,513,333
                
                $
                2.48
                
                
                163,500
                
                $
                3.45
 The
        following table summarizes information about stock warrants outstanding and
        exercisable as of December 31, 2007.
 
 ExercisePrice
              
              OutstandingDecember 31,2007
              
              WeightedAverageRemainingLife
                  inYears
              
              Numberexercisable$        2.00
              
              
              1,000,000
              
              
              1.58
              
              
              1,000,000$        3.00
              
              
              100,000
              
              
              .78
              
              
              100,000$        3.50
              
              
              413,333
              
              
              .78
              
              
              413.333**1,513,333**
              ****
              ****
              ****
              ****
              ****
              **1,513,000**
 
 The
        following table summarizes information about stock options outstanding as
        of
        December 31, 2007.
 
 ExercisePrice
              
              OutstandingDecember
                  31,2007
              
              WeightedAverageRemainingLife
                  inYears
              
              ExercisableOptions
              
              UnvestedOptions$        3.00
              
              
              50,000
              
              
              .97
              
              
              50,000
              
              
              -$        3.65
              
              
              113,500
              
              
              3.50
              
              
              54,150
              
              
              59,350163,500
              
              
              
              
              
              104,150
              
              
              59,350
 F-16
 **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 **7.**
              **Cash
                  and Cash Equivalents**
 
 As
        of
        December 31, 2007, Cash and Cash Equivalents consist of the
        following:
 
 Cash
                  on Hand
              
              $
              2,598Bank
                  Deposits
              
              
              9,188,272**Total
                  Cash and Cash Equivalents**
              ****
              **$**
              **9,190,870**
  There
        is
        no restricted cash at the year ended December 31, 2007. Restricted cash at
        the
        year ended December 31, 2006 was $1,640,015 and had been released by the
        end of
        March, 2007.
  **8.**
              **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, 2007, inventories consist of the following:
 
 Raw
                  Material
              
              $
              252,318Supplemental
                  Material
              
              
              32,296Work-in-Process
              
              
              57,337Finished
                  Products
              
              
              29,721**Total
                  Inventory**
              ****
              **$**
              **371,672**
 
 **9.**
              **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, 2007, Property and Equipment
        consist of the following:
 
 Buildings
              
              $
              2,861,011Machinery
                  and equipment
              
              
              1,568,958Land
                  use rights
              
              
              563,469Automobiles
              
              
              318,779Furniture
                  and Equipments
              
              
              96,501Construction
                  in progress
              
              
              2,113,957Total
                  Property and Equipment
              
              
              7,522,675Less:
                  Accumulated Depreciation
              
              
              (661,243
              )**Property
                  and Equipment, Net**
              ****
              **$**
              **6,861,432**
 
 For
        the
        year ended December 31, 2007 and 2006, depreciation expenses totaled $187,231
        and $125,034 respectively.
  **10.**
              **Intangible
                  Assets**
 
 As
        of
        December 31, 2007, the Company’s unamortized intangible assets consist
        of:
 
 Patents
              
              $
              1,599,814Distribution
                  rights and customer lists
              
              
              333,200**Total
                  Intangible Assets, net**
              ****
              **$**
              **1,933,014**
  F-17
 **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
  Amortization
        expense for the year ended December 31, 2007 and 2006 was $255,832 and $
        121,522
        respectively.   Future
        amortizations of intangible assets are as follows:
 
 **Year
                  ended December 31,**2008
              
              $
              239,5812009
              
              
              239,5812010
              
              
              239,5812011
              
              
              239,5812012
              
              
              239,581Thereafter
              
              $
              735,109**1,933,014**
 
 Patents
        are amortized over the life of the patent of ten years and the distribution
        rights and customer lists are amortized over ten years.
  **11.**
              **Taxes
                  Payable**
 
 As
        of
        December 31, 2007, taxes payable consists of the following:
 
 Value
                  Added Tax, net
              
              $
              612,602Enterprise
                  Income Tax
              
              
              940,819City
                  Tax
              
              
              4,789Payroll
                  Tax
              
              
              8,978**Total
                  Taxes Payable**
              ****
              **$**
              **1,567,188**
  **12.**
              **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% PRC 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.
 
 As
        of
        December 31, 2007, TDR as a foreign enterprise continues to enjoy a preferential
        enterprise income tax rate at 15%. In 2007, regular PRC tax rate of 33% was
        applied to First.
 
 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.
 
 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.
        As of December 31, 2007, the Company has US net operating loss carryforward’s of
        approximately $2,591,000 which will begin to expire in 2027. Accordingly,
        as
        mentioned above, any deferred tax asset that would result form these
        carryforwards have been fully reserved as of December 31, 2007.
 
 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.
  F-18
 **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 Provision
        for the PRC enterprise income tax is calculated at the prevailing rate based
        on
        the estimated assessable profits less available tax relief for losses brought
        forward **.** The
        Company does not accrue taxes on unremitted earnings from foreign operations
        as
        it is the Company’s intention to invest these earnings in the foreign operations
        indefinitely **.**
 
 Net
        deferred tax assets consist of the following components as of December 31,
        2007:
 
 **Deferred
                  tax assets:**NOL
                  Carryover from China Sky One (formerly known as Comet)
              
              $
              246,000Share-based
                  compensation expenses based on 123R
              
              
              639,000885,000Valuation
                  allowance
              
              
              (885,000
              )Net
                  deferred tax asset
              
              $
              -
 
 A
        reconciliation of the provision (benefit) for income taxes with amounts
        determined by applying the statutory U.S. federal income tax rate to income
        before income taxes is as follows:
  2007
              
              2006Computed
                  tax at the federal statutory rate of 34%
              
              $
              6,342,000
              
              $
              579,000Tax
                  effect of US losses not utilized
              
              
              170,000
              
              
              715,000Benefit
                  from tax of reduced tax rate inThe
                  Peoples Republic of China
              
              
              (3,192,827
              )
              
              (529,541
              )Write
                  off of deferred income tax asset forFinancial
                  reporting purposes
              
              
              -
              
              
              315,305Provision
                  (benefit) for income taxes
              
              $
              3,319,173
              
              $
              1,079,764Effective
                  income tax rate
              
              
              18%
              
              
              63%
 
 As
        of
        December 31, 2007, the Company has US net operating loss carryforward’s of
        approximately $724,000 which will begin to expire in 2027
 
 In
        2006,
        the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
        the application of SFAS 109 by defining a criterion that an individual income
        tax position must meet for any part of the benefit of that position to be
        recognized in an enterprise’s financial statements and provides guidance on
        measurement, derecognition, classification, accounting for interest and
        penalties, accounting in interim periods, disclosure and transition. In
        accordance with the transition provisions, the company adopted FIN 48 effective
        January 1, 2007.
 
 The
        Company recognizes that virtually all tax positions in the PRC are not free
        of
        some degree of uncertainty due to tax law and policy changes by the state.
        However, the Company cannot reasonably quantify political risk factors and
        thus
        must depend on guidance issued by current state officials.
 
 Based
        on
        all known facts and circumstances and current tax law, the company believes
        that
        the total amount of unrecognized tax benefits as of December 31, 2007, is
        not
        material to its results of operations, financial condition or cash flows.
        The
        company also believes that the total amount of unrecognized tax benefits
        as of
        December 31, 2007, if recognized, would not have a material effect on its
        effective tax rate. The Company further believes that there are no tax positions
        for which it is reasonably possible, based on current Chinese tax law and
        policy, that the unrecognized tax benefits will significantly increase or
        decrease over the next 12 months producing, individually or in the aggregate,
        a
        material effect on the company’s results of operations, financial condition or
        cash flows.
  F-19
 **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 **13.**
              **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.
  **14.**
              **Land
                  Purchase Agreement**
 
 During
        the second quarter TDR entered into an agreement with the Development
        and Construction Administration Committee of Harbin Song Bei New Development
        district to purchase the land use rights for 50 years for development of
        a new
        biotech engineering project. Terms of the agreement called for a deposit
        of 30%
        of the total land price within 15 days after signing the agreement, 40% payment
        7 days prior to the start of construction and the balance 7 days after getting
        the formal land use right.
 
 The
        project consists of two phases:
 
 (1)
              Main
                  workshop, R&D center and office using land area of 30,000 square
                  meters, construction started in May 2007 projected to be completed
                  by June
                  2008.
 (2)
              Second
                  workshop and show room using land area of 20,000 square meters,
                  Construction starting in September 2008 to be completed by December
                  2009.
 
 TDR
        has
        committed to the Development and Construction Administration Committee of
        Harbin
        Song Bei New Development District that the minimum investment per square
        meter
        will be $394.
 
 As
        of December 31 ,
        2007,
        the Company had made deposits totaling $ 8,003,205 related
        to the acquisition of these land use rights.
  **15.**
              **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-20
 **China
          Sky One Medical, Inc. and Subsidiaries**
 **Notes
            to the Consolidated Financial Statements**
 **As
            of December 31, 2007**
 **16.**
              **Subsequent
                  Event**
 
 On
        January 31, 2008 (the “Closing Date”), China Sky One Medical, Inc. (the
“Company”) entered into a Securities Purchase Agreement (the “Purchase
        Agreement”) with certain accredited investors (the “Investors”), for the
        purchase and sale, in one or more closings to occur on or prior to February
        15,
        2007 (each, a “Closing”), of units of securities of the Company aggregating a
        minimum of $25,000,000 and a maximum of $30,000,000 (the “Units”), each Unit to
        consist of: (i) one (1) share of the Company’s common stock, $.001 par value per
        share (“Common Stock”); and (ii) warrants to purchase that number of shares of
        the Company’s Common Stock equal to thirty (30%) percent of the principal dollar
        amount of the Units purchased, divided by the Unit Purchase Price (rounded
        to
        the nearest whole share) and expiring on July 31, 2011, (the “Class A
        Warrants”), for a purchase price of $10.00 per Unit (the “Unit Purchase Price”)
        (the “Offering”). As of the Closing Date, the Company sold an aggregate of
        2,500,000 Units to the Investors, consisting of (i) 2,500,000 shares of
        Common Stock (the “Purchased Shares”), and (ii) Class A Warrants to purchase
        750,000 additional shares of Common Stock, at an exercise price of $12.50
        per
        share (the “Purchased Warrants”), for an aggregate purchase price of $25,000,000
        (the “Offering Proceeds”) (the “Private Placement”).
 
 On
        February 22, 2008, Harbin Tian Di Ren Medical Science and Technology Company,
        a
        limited liability company organized under the laws of the People’s Republic of
        China (“Harbin”), which is a wholly-owned subsidiary of American California
        Pharmaceutical Group, Inc., a California corporation wholly-owned by China
        Sky
        One Medical, Inc., a Nevada corporation (the “Registrant”), entered into an
        Equity Transfer Agreement (the “Equity Transfer Agreement”) with Heilongjiang
        Tianlong Pharmaceutical, Inc., a corporation organized under the laws of
        the
        People’s Republic of China (Heilongjiang”), which is in the business of
        manufacturing external-use pharmaceuticals. Pursuant to the Equity Transfer
        Agreement, Harbin shall acquire 100% of the issued and outstanding capital
        stock
        of Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
        aggregate of approximately (i) $8,000,000 in cash, and (ii) $300,000 of shares
        of common stock of the Registrant. The acquisition, which is subject to the
        Registrant’s due diligence review of Heilongjiang, as well as approval by the
        appropriate regulatory authorities in the People’s Republic of China, is
        expected to close on or before March 31, 2008.
  As
        of
        February 22, 2008 (the “Effective Date”), the board of directors of the Company
        (the “Board”) authorized an increase in the number of directors on the Board
        from three (3) to seven (7), and appointed Song Chun Fan, Jiang Qi Feng,
        Zhao
        Jie and Qian Xu Feng to fill the vacancies created as a result of such increase,
        to serve until such time as their successors shall be duly elected, unless
        they
        resign, are removed from office, or are otherwise disqualified from serving
        as
        directors of the Corporation.
  F-21
 **SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this Annual Report on Form 10-KSB to be signed on its behalf by the undersigned
      thereunto duly authorized.


****


**CHINA
                SKY ONE MEDICAL, INC.**Date:
               March 31, 2008
            By:
            /s/
                Liu Yan-QingLiu
                Yan-Qing, President, CEO




Date:
               March 31, 2008
            By:
            /s/
                Han Xiao-YanHan
                Xiao-Yan, 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:
                  March 31, 2008
              
              /s/
                    Liu Yan-Qing
                
                Liu
                  Yan-Qing, President, CEO and Director(Principal
                  Executive Officer)Date:
                  March 31,
                  2008
              
              /s/
                    Han Xiao-Yan
                Han
                    Xiao-Yan, CFO and Director(Principal
                  Accounting Officer)Date:
                  March 31,
                  2008
              
              /s/
                    Wang Hai-Feng
                
                Wang
                  Hai-FengSecretary/Treasurer
                  and DirectorDate:
                  March 31,
                  2008
              
              /s/
                    Song Chun Fan
                
                Song
                  Chun FanDirectorDate:
                  March 31,
                  2008
              
              /s/
                    Jiang Qi Feng
                
                Jiang
                  Qi FengDirectorDate:
                  March 31,
                  2008
              
              /s/
                    Zhao Jie
                
                Zhao
                  JieDirectorDate:
                  March 31,
                  2008
              
              /s/
                    Qian Xu Feng
                
                Qian
                  Xu FengDirector


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