UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K


x
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2008





OR


o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the transition period from
________________to
________________





Commission
file number: 001-15643










SKYSTAR
BIO-PHARMACEUTICAL COMPANY


(Exact
name of registrant as specified in its charter)


Nevada
            
            33-0901534(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)Rm.
      10601, Jiezuo Plaza, No.4, Fenghui Road South,
              Gaoxin District, Xian
      Province, P.R. China
            
            N/A(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number: (8629)
8819-3188




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


Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par
value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o No þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o No þ





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained herein, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o





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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes o No þ





As of
June 25, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $9.4 million based on a
closing price of $1.05 per share of common stock as reported on the
Over-the-Counter Bulletin Board on such date.





On March
25, 2009, we had 18,665,189 shares of common stock issued and
outstanding.











TABLE OF CONTENTS


TO
ANNUAL REPORT ON FORM 10-K


FOR
YEAR ENDED DECEMBER 31, 2008





PART
      I
              
              PageItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              7Item
      1B.
              Unresolved
      Staff Comments
              20Item
      2.
              Properties
              21Item
      3.
              Legal
      Proceedings
              22Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              22PART
      IIItem
      5.
              Market
      for Registrant's Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
              22Item
      6.
              Selected
      Financial Data
              23Item
      7.
              Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations
              23Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              30Item
      8.
              Financial
      Statements and Supplementary Data
              30Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              30Item
      9A(T).
              Controls
      and Procedures
              30Item
      9B.
              Other
      Information
              32PART
      III
              
              32Item
      10.
              Directors,
      Executive Officers and Corporate Governance
              32Item
      11.
              Executive
      Compensation
              35Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              39Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              41Item
      14.
              Principal
      Accounting Fees and Services
              43PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              43Signatures
              
              47











CAUTION
REGARDING FORWARD-LOOKING INFORMATION





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





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





We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
annual report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.





PART
I





ITEM
1.  BUSINESS





Overview





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





Corporate
Organization and History





We were
originally incorporated in Nevada under the name “Hollywood Entertainment
Network, Inc.” on September 24, 1998 with a principal business objective to
operate as an independent film company in the business of motion picture
production and distribution. On May 23, 2000, we underwent a reverse merger and
became a developer of computer security software and hardware and changed our
name to “The Cyber Group Network Corporation” to reflect this change in
business. Effective February 15, 2006, in connection with the share exchange
transaction described below, we changed our name to our present name “Skystar
Bio-Pharmaceutical Company.”




1





On
September 20, 2005, we executed a Share Exchange Agreement (“Exchange
Agreement”) by and among R. Scott Cramer, Steve Lowe, David Wassung (all
hereinafter collectively referred to as the “CGPN Shareholders”) and the Company
on the one hand, and Skystar Cayman, and the shareholders of 100% of Skystar
Cayman’s common stock (the “Skystar Cayman Shareholders”), on the other hand.
(This transaction is referred to hereinafter as the “Share Exchange
Transaction”). Under the Exchange Agreement, on the closing date, we issued
shares of the our series B preferred stock (the “CGPN Shares”) to the Skystar
Cayman Shareholders in exchange for 100% of the common stock of Skystar Cayman.
The CGPN Shares were convertible, in the aggregate, into a number of shares of
our common stock that would equal 89.5% of our outstanding common shares if the
CGPN Shares were to be converted on the closing date of the Share Exchange
Transaction. In addition, on the closing date, Skystar Cayman was to pay the
Company an amount equal to $120,000, which was used to pay liabilities of the
Company.





The Share
Exchange Transaction closed on November 7, 2005.  From and after the
closing date, our primary operations consist of the operations of Skystar
Cayman. The Share Exchange Transaction was accounted for as a reverse merger
(recapitalization) with Skystar Cayman deemed to be the accounting acquirer, and
us as the legal acquirer. Accordingly, the historical financial information
presented in the financial statements are those of Skystar Cayman as adjusted to
give effect to any difference in the par value of ours and Skystar Cayman’s
stock with an offset to capital in excess of par value. The basis of the assets,
liabilities and retained earnings of Skystar Cayman, the accounting acquirer,
have been carried over in the recapitalization.





Skystar
Cayman was incorporated under the laws of the Cayman Islands on January 24,
2005. Since incorporation, Skystar Cayman has not conducted any substantive
operations of its own and has conducted its primary business operations through
its VIE, Xian Tianxing. Xian Tianxing holds the licenses and approvals necessary
to operate our bio-pharmaceutical business in China. We have contractual
arrangements with Xian Tianxing and its stockholders pursuant to which we
provide technology consulting and other general business operation services to
Xian Tianxing. Through these contractual arrangements, we also have the ability
to substantially influence Xian Tianxing’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
stockholder approval. As a result of these contractual arrangements, which
enable us to control Xian Tianxing, we are considered the primary beneficiary of
Xian Tianxing. Accordingly, we consolidate Xian Tianxing’s results, assets and
liabilities in our financial statements. For a description of these contractual
arrangements, see “Contractual Arrangements with Xian Tianxing and its
Stockholders” below.





Xian
Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
company without shares, but restructured as a joint stock company limited by
shares on December 31, 2003. The paid-in capital of Xian Tianxing was funded by
individuals who were majority stockholders of Skystar Cayman immediately prior
to the closing of the Share Exchange Transaction. All of our veterinary products
are developed and produced, and marketed and distributed, by Xian Tianxing.
On August 21, 2007, Xian Tianxing invested $66,700 (RMB 500,000) to establish
Shanghai Siqiang. Shanghai Siqiang was established in Putuo District, Shanghai,
with a registered capital of $66,700 (RMB 500,000) and Xian Tianxing is the 100%
shareholder. We established Shanghai Siqiang as a research and development
center for Xian Tianxing to engage in research, development, production and
sales of feed additives and veterinary disease diagnosis
equipments.





On
October 16, 2007, all of the issued and outstanding capital stock of Fortunate
Time, a Hong Kong company, was acquired from one of our directors, R. Scott
Cramer, and Fortunate Time became Skystar Cayman’s wholly owned subsidiary.
Fortunate Time has a wholly owned subsidiary, Sida, a PRC limited liability
company with registered capital of $5,000,000. $2,000,000 of the registered
capital has been paid through funding from Skystar Cayman, with the remaining
balance of $3,000,000 due by July 9, 2009. For a description of these companies’
activities as of the date of this annual report, see “Recent Developments with
Respect to the Contractual Arrangements with Xian Tianxing and its Shareholders”
below.





Name
Change and Changes in Authorized Shares of Common Stock





On
December 19, 2005, our board of directors and the majority holders of the
Company’s capital stock jointly approved amendments to our Articles of
Incorporation by written consent, including: (1) a change of our corporate name
to our current name, Skystar Bio-Pharmaceutical Company, (2) a 1-for-397 reverse
stock split; and a (3) decrease in the authorized common stock of the Company
from 500,000,000 to 50,000,000 shares. The Certificate of Amendment and
Certificate of Change to our Articles of Incorporation to effect the name
change, reverse split and decrease of authorized shares was filed with Nevada’s
Secretary of State on February 15, 2006.





On July
11, 2008, we filed another Certificate of Amendment to our Articles of
Incorporation with Nevada’s Secretary of State after stockholders approved a
proposal at a special meeting of the stockholders held on June 30, 2008, to
increase the number of authorized shares of common stock from 50,000,000 to
200,000,000.





Contractual
Arrangements with Xian Tianxing and Its Stockholders





Our
relationships with Xian Tianxing and its stockholders are governed by a series
of contractual arrangements, as we (including our direct and indirect
subsidiaries) do not own any equity interests in Xian Tianxing. PRC law
currently has limits on foreign ownership of certain companies. To comply with
these restrictions, Skystar Cayman entered into the following contractual
arrangements with Xian Tianxing and its owners on October 28, 2005:




2




Consulting Services
Agreement. Pursuant to the consulting services agreement with Xian
Tianxing, Skystar Cayman has the exclusive right to provide to Xian Tianxing
general services related to veterinary healthcare and medical care products
business operations as well as consulting services related to the technological
research, development, design and manufacturing of veterinary healthcare and
medical care products (the “Services”). Skystar Cayman also sends employees to
Xian Tianxing for whom Xian Tianxing bears the costs and expenses. Under this
agreement, Skystar Cayman owns the intellectual property rights developed or
discovered through research and development providing the Services for Xian
Tianxing. Xian Tianxing pays a quarterly consulting service fees in Renminbi
(“RMB”) to Skystar Cayman that is equal to all of Xian Tianxing’s revenue for
such quarter. The consulting services agreement is in effect unless and until
terminated by written notice of either party in the event that: (a) the other
party causes a material breach of this agreement, provided that if the breach
does not relate to a financial obligation of the breaching party, that party may
attempt to remedy the breach within 14 days following the receipt of the written
notice; (b) the other party becomes bankrupt, insolvent, is the subject of
proceedings or arrangements for liquidation or dissolution, ceases to carry on
business, or becomes unable to pay its debts as they become due; (c) Skystar
Cayman terminates its operations; (d) Xian Tianxing’s business license or any
other license or approval for its business operations is terminated, cancelled
or revoked; or (e) circumstances arise which would materially and adversely
affect the performance or the objectives of the consulting services agreement.
Additionally, Skystar Cayman may terminate the consulting services agreement
without cause.





Operating Agreement.
Pursuant to the operating agreement with Xian Tianxing and the stockholders of
Xian Tianxing who collectively hold the majority of the outstanding shares of
Xian Tianxing (collectively “Tianxing Majority Stockholders”), Skystar Cayman
provides guidance and instructions on Xian Tianxing’s daily operations,
financial management and employment issues. The Tianxing Majority Stockholders
must designate the candidates recommended by Skystar Cayman as their
representatives on Xian Tianxing’s board of directors. Skystar Cayman has the
right to appoint senior executives of Xian Tianxing. In addition, Skystar Cayman
agrees to guarantee Xian Tianxing’s performance under any agreements or
arrangements relating to Xian Tianxing’s business arrangements with any third
party. Xian Tianxing, in return, agrees to pledge its accounts receivable and
all of its assets to Skystar Cayman. Moreover, Xian Tianxing agrees that without
the prior consent of Skystar Cayman, Xian Tianxing will not engage in any
transactions that could materially affect the assets, liabilities, rights or
operations of Xian Tianxing, including, without limitation, incurrence or
assumption of any indebtedness, sale or purchase of any assets or rights,
incurrence of any encumbrance on any of its assets or intellectual property
rights in favor of a third party or transfer of any agreements relating to its
business operation to any third party. The term of this agreement is ten (10)
years from October 28, 2005 and may be extended only upon Skystar Cayman’s
written confirmation prior to the expiration of the this agreement, with the
extended term to be mutually agreed upon by the parties.





Equity Pledge
Agreement.Under
the equity pledge agreement with the Tianxing Majority Stockholders, the
Tianxing Majority Stockholders pledged all of their equity interests in Xian
Tianxing to Skystar Cayman to guarantee Xian Tianxing’s performance of its
obligations under the consulting services agreement. If Xian Tianxing or the
Tianxing Majority Stockholders breaches their respective contractual
obligations, Skystar Cayman, as pledgee, will be entitled to certain rights,
including but not limited to the right to sell the pledged equity interests, the
right to vote and control the pledged assets. The Xian Majority Stockholders
also agreed that upon occurrence of any event of default, Skystar Cayman shall
be granted an exclusive, irrevocable power of attorney to take actions in the
place and stead of the Tianxing Majority Stockholders to carry out the security
provisions of the equity pledge agreement and take any action and execute any
instrument that Skystar Cayman may deem necessary or advisable to accomplish the
purposes of the equity pledge agreement. The Tianxing Majority Stockholders
agreed not to dispose of the pledged equity interests or take any actions that
would prejudice Skystar Cayman’s interest. The equity pledge agreement will
expire two (2) years after Xian Tianxing obligations under the exclusive
consulting services agreement have been fulfilled.





Option Agreement. Under the option
agreement with the Tianxing Majority Stockholders, the Tianxing Majority
Stockholders irrevocably granted Skystar Cayman or its designee an exclusive
option to purchase, to the extent permitted under Chinese law, all or part of
the equity interests in Xian Tianxing for the cost of the initial contributions
to the registered capital or the minimum amount of consideration permitted by
applicable Chinese law. Skystar Cayman or its designee has sole discretion to
decide when to exercise the option, whether in part or in full. The term of this
agreement is ten (10) years from October 28, 2005 and may be extended prior to
its expiration by written agreement of the parties.





Proxy Agreement. Pursuant to the proxy
agreement with the Tianxing Majority Stockholders and Xian Tianxing, the
Tianxing Majority Stockholders agreed to irrevocably grant a designee of Skystar
Cayman with the right to exercise their voting and other rights, including the
rights to attend and vote at stockholder’s meetings (or by written consent in
lieu of such meetings) in accordance with applicable laws and Xian Tianxing’s
Article of Association, as well as the rights to sell or transfer all or any of
their equity interests of the Company. The term of this Proxy Agreement is ten
(10) years from October 28, 2005 and may be extended prior to its expiration by
written agreement of the parties.




3




Recent
Developments with Respect to the Contractual Arrangements with Xian Tianxing and
its Shareholders





On March
10, 2008, we were made a party to a series of agreements (collectively the
“Transfer Agreements”) transferring the contractual arrangements governing the
relationship among Skystar Cayman, Xian Tianxing and the Tianxing Majority
Stockholders. Pursuant to the Transfer Agreements, from and after March 10,
2008, all of the rights and obligations of Skystar Cayman under the contractual
arrangements were transferred to Sida. We were made a party to the Transfer
Agreements for the sole purpose of acknowledging the Transfer Agreements. In
effect, Skystar Cayman assigned the contractual rights it had with Xian Tianxing
to an indirectly wholly-owned subsidiary, Sida.





Under our
corporate structure with the contractual arrangements, the ability to transfer
funds to and from Xian Tianxing expeditiously through a foreign currency bank
account is necessary for the running of our business operations. Under current
applicable Chinese law, only a company that is classified as either a wholly
foreign owned enterprise (WFOE) or a Sino-foreign joint venture may maintain a
foreign currency bank account. Because Sida is wholly owned by Fortunate Time, a
Hong Kong company, Sida is deemed a WFOE and may therefore maintain a foreign
currency account. The Transfer Agreements amend the contractual arrangements so
that funds are required to be transferred to and from Xian Tianxing through
Sida’s foreign currency account and, through Sida, allow the Company to continue
to control Xian Tianxing and its business operations.





The
Transfer Agreements have transferred all of the rights and obligations of
Skystar Cayman under the contractual arrangements to Sida. Thus, pursuant to the
Amendment to Consulting Services Agreement, Sida now provides exclusive
technology and general business consulting services to Xian Tianxing in exchange
of a consulting fee equivalent to all of Xian Tianxing’s revenue; pursuant to
the Amendment to Equity Pledge Agreement, the Tianxing Majority Stockholders now
pledge their equity interests in Xian Tianxing to Sida; pursuant to the
Agreement to Transfer of Operating Agreement, Sida now provides guidance and
instructions on Xian Tianxing’s daily operations, financial management and
employment issues; pursuant to the Designation Agreement, the Tianxing Majority
Stockholders have entrusted all the rights to exercise their voting power to
appointee(s) of Sida; and pursuant to the Agreement to Transfer of Option
Agreement, the Tianxing Majority Stockholders have irrevocably granted Sida an
exclusive option to purchase, to the extent permitted under PRC law, all or part
of their equity interests in Xian Tianxing.





The
Transfer Agreements and the transfer of the rights and obligations of Skystar
Cayman under the contractual arrangements to Sida comply with applicable PRC law
and do not in any way affect our business operations. Additionally, we believe
that Xian Tianxing’s status as a VIE under FASB Interpretation No. 46R (“FIN
46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51,” is unaffected by the Transfer Agreements. Under the contractual
arrangements, we viewed Xian Tianxing as a VIE of Skystar Cayman because the
contractual arrangements obligated Skystar Cayman to absorb a majority of the
risk of loss from Xian Tianxing’s activities and enabled Skystar Cayman to
receive a majority of its expected residual returns. The Transfer Agreements
merely substitute Skystar Cayman with Sida, an indirect wholly owned subsidiary
of Skystar Cayman, such that the equity investors of Xian Tianxing continue to
not have the characteristics of a controlling financial interest (just as under
the contractual arrangements) and we continue to be the primary beneficiary of
Xian Tianxing. Accordingly, we continue to consolidate Xian Tianxing’s results,
assets and liabilities in the financial statements accompanying this annual
report.




4




Current
Corporate Structure





As a
result of the Contractual Arrangements and the Transfer Agreements, our current
organizational structure is as follows (the percentages depict the current
equity interests):











Our
Business





As
discussed above, we conduct our business through Xian Tianxing. After nine (9)
years of development, we have become a high-tech enterprise with registered
capital of RMB 42,000,000 (approximately $5,758,200), and are engaged in
research, development, production, marketing and sales of bio-pharmaceutical and
veterinary products. Our business divisions currently include a
bio-pharmaceutical products division, a veterinary drugs division, a fodder and
feed additive division, and a microorganism preparation division.





Our
Products





As of
December 31, 2008:




1.
              Our
      bio-pharmaceutical veterinary vaccine line included over 10 products and
      accounted for 3.9% of our total revenues in
  2008;
   2.
              Our
      veterinary medicine line for poultry and livestock included over 140
      products and accounted for 68.5% of our total revenues in
      2008;
 
 3.
              Our
      fodder and feed additives line included over 10 products and accounted for
      4.6% of our total revenues in 2008;
and
 
 4.
              Our
      micro-organism products line included over 13 products and accounted for
      22.9% of our total revenues in
2008.




5




Distribution
Methods of Our Products and Our Customers




As of
December 31, 2008, we had over 1,412 customers in 29 provinces in China,
including 1,036 distributors and 376 direct customers. Of the 1,036 distribution
agents, 336 are physical stores which have outer signage with our logo and sell
products in our four product lines exclusively (“Franchise Distributors”). We
intend to enter into agreements with additional distributors in order to
strengthen our distribution network and convert some of these distributors to
Franchise Distributors.





We
recognize the importance of branding as well as packaging. All of our products
have uniform branding while being specifically designed to differentiate our
four product lines.





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




1.
              publishing
      advertisements and articles in national as well as specialized and
      provincial newspapers, magazines, and in other media, including the
      Internet;
 
 2.
              participating
      in national meetings, seminars, symposiums, exhibitions for
      bio-pharmaceutical and other related
industries;
  3.
              organizing
      cooperative promotional activities with distributors;
  and
  4.
              direct
      mail campaigns to major livestock
farms.





None of
our customers accounted for 10% or more of our total revenues in
2008.





Competition





We have
three major competitors in China: Jielin Bio-Tech Production Co., Ltd., Qilu
Animal Health Production Co., Ltd., and Zhongmu Industrial Joint Stock Co., Ltd.
These companies have more assets and have a larger market share. Nevertheless,
we believe we are able to compete with these competitors because of our location
in northwestern China, a full range of product offerings, and lower prices.
Other than these three competitors, most of our other competitors produce only
one or two products.




Sources
and Availability of Raw Materials and Our Principal Suppliers




Xi’an
Yanghua Chemical Co., Ltd.,Xi’an Nanchen
Trading Co., Ltd. and Xi’an Fandike Chemical Technology Co., Ltd. collectively
supplied over 53.60% of the raw materials we used to manufacture our products.
Our principal raw materials include both chemical ingredients and Chinese herbs.
The prices for these raw materials are subject to market forces largely beyond
our control, including our supplier’s energy costs, organic chemical feedstock,
market demand, and freight costs. The prices for these raw materials have varied
significantly in the past and may vary significantly in the future.





As a
result of our R&D efforts in 2007 we now also internally produce microbial
strains, which are key components of our micro-organism products. Our ability to
produce microbial strains has translated into a significant cost reduction for
these raw materials.





Intellectual
Properties and Licenses





We rely
on a combination of trademark, copyright and trade secret protection laws in
China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our
brand.





We intend
to seek other licenses or apply for exclusivity as necessary in order to protect
our rights, and we also enter into confidentiality, non-compete and invention
assignment agreements with our employees and consultants and nondisclosure
agreements with third parties. The Chinese characters which transliterate as
“Jia Teng Jun”, “Liao Xiao Wang”, “An Jian”, “Hao Shou Yi” and “Xing Ge” are our
registered trademarks in China.




Bio-pharmaceutical
companies are at times involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore,
the application of laws governing intellectual property rights in China and
abroad is uncertain and evolving and could involve substantial risks to
us.




6




Government
Approval and Regulation of Our Principal Products or Services





Government
approval is required for the production of bio-pharmaceutical products. The
Chinese Ministry of Agriculture has granted the Company three government permits
to produce the following products: Forage Additive Products, Additive and Mixed
Forage Products and Veterinary Medicine Products. For the production of the
veterinary medicine, there is a national standard known as the Good
Manufacturing Practice (“GMP”) standard. A company must establish its facility
according to GMP standards, including both the facility and the production
process. After establishing such facility, the Company files an application to
operate the facility with the PRC Ministry of Agriculture, which then sends a
team of specialists to conduct an on-site inspection of the facility. A company
cannot start production at the facility until it receives approval from the
Ministry of Agriculture to begin operations. Xian Tianxing currently
has the requisite approval and licenses from the Ministry of Agriculture in
order to operate our production facilities.





Research
and Development





We place
great emphasis on product research and development (“R&D”).





In July
2005, we entered into a cooperation agreement with Shaanxi Microbial Institute
pursuant to which we established a R&D center at our Huxian plant to
facilitate opportunities for us to develop commercially viable products based on
the Institute’s research conducted at our research center. Under the cooperation
agreement, we provide for the running and operation of the research center,
including research equipment and materials. In exchange, we have exclusive
rights to any technology derived from any research project that we solely fund.
The cooperation agreement also provides for our mutual staffing of research
personnel at, and joint-appointment of the director for, the research center.
The Institute, however, is not obligated to us with respect to a specific amount
of time or a specific project under the cooperation agreement. Currently, we are
undertaking the following projects at this research center:





1.
            Development of protein
      technology and enzyme
mechanism





2.
            Development of non-pathogenic
      micro-organisms





At the
Skystar Research and Development Center in Shanghai, we have an arrangement with
Shanghai Poultry Verminosis Institution, which is a part of the Chinese Academy
of Agricultural Sciences, that is similar to our agreement with Shaanxi
Microbial Institute, although we have not entered into any written agreement
with the Institution. Currently, we are undertaking the following projects at
this research center:





1.
            Development of new products
      for animal immunization by employing new technologies in micro-organism
      and bacterium





2.
            Development of veterinary
      medicines for pets




In 2008,
we entered into an agreement with Northwestern Agricultural Technology
University on a joint R&D project concerning the application of
nano-technology in the prevention of major milk cow disease.





In 2008,
we spent approximately $549,000, or approximately 2.1%, of our revenue on
R&D. In 2007, we spent approximately $268,000, or approximately 1.8%, of our
revenue on R&D.





Employees





In 2008,
we had approximately 229 employees, of which 226 were full time employees. In
2007, we had 196 employees, of which 193 were full time employees. None of these
employees are represented by any collective bargaining agreements. We have not
experienced a work stoppage. Management believes that our relations with our
employees are good.





ITEM
1A.  RISK FACTORS





RISK FACTORS





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




7




Risks
Relating to Our Business





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





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




·
              offer
      new and innovative products to attract and retain a larger customer
      base;


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




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





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




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




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




Our
business will be materially and adversely affected if our collaborative
partners, licensees and other third parties over whom we are very dependent fail
to perform as expected.





Due to
the complexity of the process of developing bio-pharmaceuticals, our core
business depends on arrangements with bio-pharmaceutical institutes, corporate
and academic collaborators, licensors, licensees and others for the research,
development, clinical testing, technology rights, manufacturing, marketing and
commercialization of our products.  We are currently collaborating
with Shanghai Poultry Verminosis Institution, Shaanxi Microbial Institute and
Northwestern Agricultural Technology University on joint R&D projects.
However, we do not have any written agreement with Shanghai Poultry Verminosis
Institution regarding ongoing collaborations, and under our cooperation
agreement with Shaanxi Microbial Institute, the Institute is not obligated to us
with respect to any specific period of time or research projects. There are no
assurances that we will be able to maintain our present collaborations or
establish new ones in the future. We could enter into collaborative arrangements
for the development of particular products that may lead to our relinquishing
some or all rights to the related technology or products. Moreover, product
development and commercialization efforts could be adversely affected if any
collaborative partner:




8




·
              terminates
      or suspends its agreement with us;
 
 ·
              causes
      delays;
  ·
              fails
      to timely develop or manufacture in adequate quantities a substance needed
      in order to conduct clinical
trials;
  ·
              fails
      to adequately perform clinical
trials;
  ·
              determines
      not to develop, manufacture or commercialize a product to which it has
      rights;
  ·
              pursue
      other technologies or develop alternative products that compete with the
      products we are developing; or
 
 ·
              otherwise
      fails to meet its contractual
obligations.




Our
collaborative partners could pursue other technologies or develop alternative
products that could compete with the products we are developing.




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




The
profitability of our products will depend in part on our ability to obtain and
maintain protection for our intellectual property rights and the period our
intellectual property remains exclusive. We must also operate without infringing
on the proprietary rights of third parties and without third parties
circumventing our rights. The proprietary rights of enterprises such as ours are
uncertain and involve complex legal and factual questions for which important
legal principles are largely unresolved. For example, no consistent policy has
emerged regarding the breadth of biotechnology patent claims that are granted by
the U.S. Patent and Trademark Office or enforced by the U.S. federal courts. In
addition, the scope of the originally claimed subject matter in a patent
application can be significantly reduced before a patent is issued. The
biotechnology patent situation outside the U.S. is even more uncertain, is
currently undergoing review and revision in many countries, and may not protect
our intellectual property rights to the same extent as the laws of the U.S.
Because applications for exclusive rights are maintained in secrecy in some
cases, we cannot be certain that we or our licensors are the first creators of
inventions to which we claim proprietary rights, or the first to seek
exclusivity for such inventions.





Additionally,
the length of time that our intellectual property may remain exclusive is at
times beyond our control. For example, we have exclusive rights to the DLV
chicken vaccine only until such time that the vaccine is formally listed on the
Chinese Pharmacopoeia by the Chinese Pharmacopoeia Commission (“CPC”), after
which other companies may apply to the Chinese Ministry of Agriculture for
approval to manufacture and distribute the vaccine. Thus, while we remain the
only company in China legally permitted to produce and sell the vaccine until
the listing occurs, we cannot prevent the CPC from proceeding with such listing
or deter other companies from seeking approval from the Chinese Ministry of
Agriculture after such listing. Moreover, other companies may independently
develop similar products and design around any proprietary products we develop.
We cannot assure you that:




·
              any
      of our applications for exclusivity will result in their
      issuance;
 
 ·
              we
      will develop additional proprietary
products;
 
 ·
              the
      exclusive rights we have been issued will provide us with any competitive
      advantages;
 
 ·
              the
      exclusive rights of others will not impede our ability to do business;
      or
 
 ·
              third
      parties will not be able to circumvent our proprietary
    rights.





A number
of pharmaceutical, biotechnology, research and academic companies and
institutions have developed technologies, filed applications for exclusivity or
received proprietary rights on technologies that may relate to our business. If
these technologies, applications or rights conflict with ours, the scope of our
current or future proprietary rights could be limited or our applications for
exclusivity could be denied. Our business may be adversely affected if
competitors independently develop competing technologies, especially if we do
not obtain, or obtain only narrow, proprietary rights protection. If proprietary
rights that cover our activities are issued to other companies, we may not be
able to obtain licenses at a reasonable cost, or at all; develop our technology;
or introduce, manufacture or sell the products we have planned.




9




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





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





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





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




Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including China’s Good Manufacturing Practice (GMP), production
and quality control regulations.  If we cannot arrange for or maintain
commercial-scale manufacturing on acceptable terms, or if there are delays or
difficulties in the manufacturing process, we may not be able to conduct
clinical trials, obtain regulatory approval or meet demand for our
products.





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





While our
current products use raw materials that are readily available presently, we
cannot give assurance that these raw materials will not become scarce in the
future. Additionally, we may produce products in the future that require raw
materials which are scarce or which can be obtained only from a limited number
of sources. If we are unable to obtain adequate supplies of such raw materials,
the development, regulatory approval and marketing of our products could be
delayed.





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





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




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





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




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




10


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




·
              the
      commercialization of our products could be adversely
    affected;
 
 ·
              any
      competitive advantages of the products could be diminished;
      and
 
 ·
              revenues
      or collaborative milestones from the products could be reduced or
      delayed.




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




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




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


Competitors
may develop and market bio-pharmaceutical products that are less expensive, more
effective or safer, making our products obsolete or uncompetitive.




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





Our
revenue will be materially and adversely affected if our products are unable to
gain market acceptance.




Our
products may not gain market acceptance in the agricultural
community.  The degree of market acceptance of any product depends on
a number of factors, including establishment and demonstration of clinical
efficacy and safety, cost-effectiveness, clinical advantages over alternative
products, and marketing and distribution support for the
products.  Limited information regarding these factors is available in
connection with our products or products that may compete with
ours.




To
directly market and distribute our bio-pharmaceutical products, we or our
collaborators require a marketing and sales force with appropriate technical
expertise and supporting distribution capabilities.  We may not be
able to further establish sales, marketing and distribution capabilities or
enter into arrangements with third parties on acceptable terms.  If we
or our partners cannot successfully market and sell our products, our ability to
generate revenue will be limited.




11


Our
operations and the use of our products could subject us to damages relating to
injuries or accidental contamination and thus reduce our earnings or increase
our losses.




Our
research and development processes involve the controlled use of hazardous
materials.  We are subject to national, provincial and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products.  The risk of accidental
contamination or injury from handling and disposing of such materials cannot be
completely eliminated. In the event of an accident involving hazardous
materials, we could be held liable for resulting damages.  We are not
insured with respect to this liability. Such liability could exceed our
resources.  In the future we could incur significant costs to comply
with environmental laws and regulations.





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




We may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of agricultural and bio-pharmaceutical products. We currently do not
have product liability insurance. If we cannot obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims, the commercialization of products that we develop may be
prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets, whether or not we are
successful.





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





The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.





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




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




Downturn
in the global economy may slow domestic growth in China, which in turn may
affect our business.





Due to
the global downturn in the financial markets, China may not be able to maintain
its recent growth rates mainly due to the lack of demand of exports to countries
that are in recessions. Although we do not presently export any of our products,
our earnings may become unstable if China’s domestic growth slows significantly
and the demand for meats and poultry declines.





Risks
Related to Our Corporate Structure




Chinese
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such Chinese laws and
regulations may materially and adversely affect our business.




There are
substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including, but not limited to, the laws and
regulations governing our business, or the enforcement and performance of our
contractual arrangements with our affiliated Chinese entity, Xian Tianxing, and
its stockholders. We are considered a foreign person or foreign invested
enterprise under Chinese law. As a result, we are subject to Chinese law
limitations on foreign ownership of Chinese companies. These laws and
regulations are relatively new and may be subject to change, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively.





The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.




12




We
may be adversely affected by complexity, uncertainties and changes in Chinese
regulation of bio-pharmaceutical business and companies, including limitations
on our ability to own key assets.





The
Chinese government regulates the bio-pharmaceutical industry including foreign
ownership of, and the licensing and permit requirements pertaining to, companies
in the bio-pharmaceutical industry. These laws and regulations are relatively
new and evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to
Chinese government regulation of the bio-pharmaceutical industry include the
following:




·
              we
      only have contractual control over Xian Tianxing. We do not own it due to
      the restriction of foreign investment in Chinese businesses;
      and
 
 ·
              uncertainties
      relating to the regulation of the bio-pharmaceutical business in China,
      including evolving licensing practices, means that permits, licenses or
      operations at our company may be subject to challenge. This may disrupt
      our business, or subject us to sanctions, requirements to increase capital
      or other conditions or enforcement, or compromise enforceability of
      related contractual arrangements, or have other harmful effects on
      us.




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




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




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





Although we believe we comply with current Chinese regulations,
and have been advised by our PRC counsel that in their opinion, the structure
for operating our business in China (including our corporate structure and
contractual arrangements with Xian Tianxing) complies with all applicable PRC
laws, rules and regulations, and does not violate, breach, contravene or
otherwise conflict with any applicable PRC laws, rules or regulations, we cannot
assure you that the Chinese government would agree that these operating
arrangements comply with Chinese licensing, registration or other regulatory
requirements, with existing policies or with requirements or policies that may
be adopted in the future. If the Chinese government determines that we do not
comply with applicable law, it could revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right to
collect revenues, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business.




Our
contractual arrangements with Xian Tianxing and its stockholders may not be as
effective in providing control over it as direct ownership.




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




13




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





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Sida and Xian Tianxing. As a
result, we currently rely entirely for our revenues on dividends payments from
Sida after it receives payments from Xian Tianxing pursuant to the consulting
services agreement which forms a part of the contractual arrangements between
Sida and Xian Tianxing. The consulting services agreement may be terminated by
written notice of Sida or Xian Tianxing in the event that: (a) one party causes
a material breach of the agreement, provided that if the breach does not relate
to a financial obligation of the breaching party, that party may attempt to
remedy the breach within 14 days following the receipt of the written notice;
(b) one party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or
becomes unable to pay its debts as they become due; (c) Sida terminates its
operations; (d) Xian Tianxing’s business license or any other license or
approval for its business operations is terminated, cancelled or revoked; or (e)
circumstances arise which would materially and adversely affect the performance
or the objectives of the agreement. Additionally,
Sida may terminate the consulting services agreement without cause.




Because
neither we nor our direct and indirect subsidiaries own equity interests of Xian
Tianxing, the termination of the consulting services agreement would sever our
ability to continue receiving payments from Xian Tianxing under our current
holding company structure. While we are currently not aware of any event or
reason that may cause the consulting services agreement to terminate, we cannot
assure you that such an event or reason will not occur in the future. In the
event that the consulting services agreement is terminated, this may have a
severe and detrimental effect on our continuing business viability under our
current corporate structure, which in turn may affect the value of your
investment.





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





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





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





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





Risks
Related to Doing Business in China




Adverse
changes in economic and political policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
adversely affect our business.





Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the Chinese economy has experienced significant growth in the
past 20 years, growth has been uneven across different regions and among various
economic sectors of China. The Chinese government has implemented various
measures to encourage economic development and guide the allocation of
resources. Some of these measures benefit the overall Chinese economy, but may
also have a negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us.
Since early 2004, the Chinese government has implemented certain measures to
control the pace of economic growth. Such measures may cause a decrease in the
level of economic activity in China, which in turn could adversely affect our
results of operations and financial condition.




14





If
Chinese law were to phase out the preferential tax benefits currently being
extended to foreign invested enterprises and “new or high-technology
enterprises” located in a high-tech zone, we would have to pay more taxes, which
could have a material and adverse effect on our financial condition and results
of operations.




Under
Chinese laws and regulations, a foreign invested enterprise may enjoy
preferential tax benefits if it is registered in a high-tech zone and also
qualifies as “new or high-technology enterprise”. As a foreign invested
enterprise as well as a certified “new or high-technology enterprise” located in
a high-tech zone in Xian, we have been approved as a new technology
enterprise and under Chinese Income Tax Laws and are entitled to a preferential
tax rate of 15%. If Chinese law were to phase out preferential tax benefits
currently granted to “new or high-technology enterprises”, we would be subject
to the standard statutory tax rate, which currently is 25%, and we would be
unable to obtain business tax refunds for our provision of technology consulting
services. Loss of these preferential tax treatments could have a material and
adverse effect on our financial condition and results of
operations.




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




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




Uncertainties
with respect to the Chinese legal system could adversely affect us.




We
conduct our business primarily through our affiliated Chinese entity, Xian
Tianxing. Our operations in China are governed by Chinese laws and regulations.
We are generally subject to laws and regulations applicable to foreign
investments in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The Chinese legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.




Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are not
published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.




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




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




15




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




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




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




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




We
face risks related to health epidemics and other outbreaks.




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





Risks
Related to an Investment in Our Securities





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




There are
a total of 1,545,500 warrants outstanding with a weighted average exercise price
of $1.13, including 570,500 warrants with an exercise price of $1.00 per share
and 975,000 warrants with an exercise price of $1.20 per share. In the event of
exercise of these securities, such as when their exercise prices become less
than the then current market price for our common shares, a stockholder could
suffer substantial dilution of his, her or its investment in terms of the
percentage ownership in us as well as the book value of the common shares held.
Full exercise of the warrants would increase the outstanding common shares as of
March 25, 2009 by approximately 8.2% to approximately 20,210,689
shares.




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





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




16





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





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





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





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





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





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




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




17




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





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





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




As of
March 25, 2009, our principal stockholders and their affiliated entities own
approximately 30% of our outstanding common shares, representing approximately
30% of our voting power. These stockholders, acting individually or as a group,
could exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal stockholders and their affiliated entities, elections of our board of
directors will generally be within the control of these stockholders and their
affiliated entities. While all of our stockholders are entitled to vote on
matters submitted to our stockholders for approval, the concentration of shares
and voting control presently lies with these principal stockholders and their
affiliated entities. As such, it would be difficult for stockholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as stockholders will be viewed favorably by all stockholders of the
company.





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





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





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





There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
likely to increase general and administrative costs and expenses. Additionally,
the premiums for our directors and officers insurance (“D&O Insurance”),
which we are contractually obligated to maintain, are considerable in light of
the high claims rates in recent years. Additionally, there could be changes in
certain accounting rules. These and other potential changes could materially
increase the expenses we report under generally accepted accounting principles,
and adversely affect our operating results.





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





Prior to
the share exchange transaction with Skystar Cayman in September 2005, we were
engaged in businesses unrelated to our current operations. Although the prior
business owners provided certain indemnifications against any loss, liability,
claim, damage or expense arising out of or based on any breach of or inaccuracy
in any of their representations and warranties made regarding such acquisition,
any liabilities relating to such prior business against which Skystar is not
completely indemnified may have a material adverse effect on us.




18




The
market price for our stock may be volatile.




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




·
              actual
      or anticipated fluctuations in our quarterly operating
      results;
 
 ·
              changes
      in financial estimates by securities research
  analysts;
 
 ·
              conditions
      in veterinary healthcare and medical care and agricultural
      markets;
 
 ·
              changes
      in the economic performance or market valuations of other veterinary
      healthcare and medical care products
companies;
 
 ·
              announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;
 
 ·
              addition
      or departure of key personnel;
 
 ·
              fluctuations
      of exchange rates between RMB and the U.S.
  dollar;
 
 ·
              intellectual
      property litigation; and
 
 ·
              general
      economic or political conditions in
China.




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




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




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




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




We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, beginning with our annual report for fiscal
2009, an independent registered public accounting firm must attest to and report
on management’s assessment of the effectiveness of our internal controls over
financial reporting. In this annual report and in our annual report on Form 10-K
for the year ended December 31, 2007, we reported certain material weaknesses
involving control activities, specifically (1) accounting and finance personnel
weaknesses in that the current staff in the accounting department is relatively
inexperienced and requires substantial training; (2) lack of internal audit
function in that we lack qualified resources to perform the internal audit
functions properly, and the scope and effectiveness of internal audit function
are yet been fully developed; and (3) lack of internal audit system in that we
do not have an internal audit department to prevent and detect control lapses
and errors in the accounting of certain key areas in accordance with the
appropriate costing method used by us.





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




19




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





Shares
eligible for future sale may adversely affect the market.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 18.7 million shares of our common stock outstanding as of March
25, 2009, approximately 10.4 million shares are, or will be, freely tradable
without restriction, as of March 25, 2009. Any substantial sale of our common
stock pursuant to Rule 144 may have a material adverse effect on the market
price of our common stock.





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





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





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





ITEM 1B. UNRESOLVED STAFF COMMENTS





Not
applicable.




20




ITEM
2. PROPERTIES





The Company’s administrative
headquarters is currently located in approximately 3,700 square feet of office
space at Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin District,
Xi’an, Shaanxi Province, China. This property belongs to Mr. Weibing Lu, our
chairman and chief executive officer. This property was provided free for the
use of the Company’s administrative department in 2006 and 2005. In January
2007, we entered into a 5-year lease agreement with Mr. Lu for the premises on
term of RMB 165,600 (approximately $24,000) per year.





Shanghai
Siqiang, wholly owned subsidiary of Xian Tianxing, leases its office and
facility space in Shanghai from Mr. Lu pursuant to a 10-year lease agreement
entered into in August 2007 on terms of RMB 144,000 (approximately $21,000) per
year.





Production
Facilities





Currently,
Xian Tianxing has two manufacturing sites located in Xi’an, Shaanxi Province:
one in the town of Sanqiao and the other in the town of Huxian.





The
Sanqiao Plant





Xian
Tianxing is leasing the site for its Sanqiao plant pursuant to a tenancy
agreement for a period of ten years from October 1, 2004 to September 30, 2014.
The annual rent for the plant premises is $13,563 (RMB94,600) and is also
subject to a 10% increase every four subsequent years. Currently, the Sanqiao
plant is comprised of the following:





1.
            Microorganism
      factory. This production plant occupies an area of approximately
      21,500 square feet.





2.
            Feed additive
      factory. This production facility occupies an area of approximately
      10,700 square feet.





The
Huxian Plant





In 2003,
Xian Tianxing received approval from the State Council of China to expand its
production facilities and construct a new GMP standard plant. In connection with
the approval, Xian Tianxing acquired a long-term land use right for the current
site of its Huxian plant. The Company's total investment in this project thus
far is estimated at RMB 82,000,000 (US$10,501,000). Because Xian Tianxing has
been accredited as a high-tech enterprise, its Huaxian plant has the full
support of both the Shaanxi provincial government and the Xi’an municipal
government.





Construction
of the Huxian plant commenced in 2005 and parts of the plant has been fully
operational since the end of the second quarter of 2007. Remaining construction
work is expected to be completed in the latter part of 2009, depending upon the
Company's ability to raise addition capital. When fully completed, the Huxian
plant will occupy approximately 7.7 acres and have a total area of approximately
151,700 square feet. The table below lists the primary facilities at the plant
and their status as of the date of this annual report:





Description
            
            Approximate
      Size
            
            StatusGMP
      standard veterinary medicine facility
            
            4,200
      square meters
            
            CompletedQuality
      control, research and development, and administration
    building
            
            3,400
      square meters
            
            CompletedGMP
      standard bio-pharmaceutical facility with three production lines for
      active bacteria, inactivated vaccines, and coccidiosis
      vaccines
            
            4,500
      square meters
            
            Anticipated
      completion by the end of 2009Animal
      laboratory complying with Animal Bio-safety Level 2 (ABSL-2)
      requirements
            
            1,000
      square meters
            
            Anticipated
      completion by the end of 2009





We
believe that the general physical condition of our plants and production
facilities can completely satisfy our current production needs in terms of
quantity and production quality. We believe that these facilities after
construction is completed will be able to meet our operational needs for three
to five years.




21




ITEM 3. LEGAL PROCEEDINGS





The following discusses all known or
anticipated material legal proceedings commenced by or against
us.  Occasionally we may be named as a party in claims and legal
proceedings arising out of the normal course of our business. These claims and
legal proceedings may relate to contractual rights and obligations, employment
matters, or to other matters relating to our business and operations. In the
opinion of management, the ultimate outcome of claims and litigation of which
management is aware will not have a material adverse effect on our consolidated
financial position or results of operation.





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





Andrew Chien v. Skystar
Bio-Pharmaceutical Company, et. al. (US District Court, District of
Connecticut, Case No. 3:2007cv00781). Andrew Chien filed suit against the
Company, R. Scott Cramer, Steve Lowe, David Wassung and Weibing Lu in United
States District Court for the District of Connecticut, alleging causes of action
for violation of Sections 10(b) and 20(a) of the Exchange Act. In or around
November 2007, the defendants filed motions to dismiss the complaint for failure
to state a claim and for lack of personal jurisdiction. Mr. Chien agreed to
voluntarily amend the complaint after the motions were filed, and an amended
complaint was subsequently filed on or around January 4, 2008. The amended
complaint dropped Weibing Lu (who is a resident of China and was never served)
as a defendant. The remaining defendants contended that the amended complaint
failed to correct the deficiencies of the original complaint, and filed a
renewed motion to dismiss for failure to state a claim, also preserving their
challenge to personal jurisdiction. The defendants denied all claims and moved
the Court to dismiss the amended complaint in its entirety in their motion to
dismiss. The motion to dismiss also requested that the Court award sanctions
against Mr. Chien under Federal Rule of Civil Procedure Rule 11 ("Rule 11") and
the Private Securities Litigation Reform Act ("PSLRA"). On July 17, 2008, in a
decision that is now published, the Court granted defendants' motion and
subsequently dismissed the lawsuit, entering judgment on behalf of the
defendants.  Mr. Chien filed a Notice of Appeal of the Court's
dismissal of his lawsuit, opposed by the defendants, which remains
pending.  Defendants were invited by Judge Kravitz to bring a
post-judgment motion for sanctions pursuant to Rule 11 and the PSLRA, which they
did.  On February 5, 2009, Judge Kravitz issued a ruling on
defendants' Motion for Sanctions.  He found the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Rule 11, and imposed significant monetary sanctions on both Mr.
Chien and his former attorney.  As part of the basis for imposing
sanctions on Mr. Chien personally, the Court specifically found that Mr. Chien
had knowledge of facts directly contradicting the allegations of his complaint,
as evident in internet postings he made on online message boards.  Mr.
Chien subsequently filed motions seeking to "re-open" this case, and to recuse
Judge Kravitz, but both motions were denied.





Andrew Chien v. Skystar
Bio-Pharmaceutical Company, et. al. (formerly Superior Court, State of
Connecticut, Case No. NNH-CV-09-5025938-S, now U.S. District Court, District of
Connecticut, Case No. 3:09-CV-00149 (MRK)). Andrew Chien, proceeding pro se,
filed another lawsuit against the Company, Scott Cramer, Steve Lowe, David
Wassung and Weibing Lu in Connecticut Superior Court, alleging causes of action
similar to those alleged in his federal complaint described above as well as
state law causes of action. The Company contends that the new complaint is just
as frivolous as Mr. Chien's earlier federal action, which the new complaint
substantially duplicates.  The earlier federal action, described
above, was found to be totally frivolous and dismissed in its entirety, with
substantial monetary sanctions awarded by the judge against both Mr. Chien and
his former attorney. A Notice of Removal to the U.S. District Court, District of
Connecticut was filed in the state case on January 27, 2009, and the case has
been assigned to Judge Kravitz, the same federal judge in the related federal
case already dismissed, which is described below.  The Company has
filed a motion to dismiss this new action which remains pending.  In
the motion to dismiss, Defendants indicate their intention to again seek
sanctions against Mr. Chien under Rule 11and the PSLRA in the event the motion
is granted.





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





We did
not submit any matters to a vote of security holders during the fourth quarter
of the fiscal year covered by this annual report.





PART II





ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES





Market
Information





Our
common stock, par value $0.001 per share, is traded on the Over-The-Counter
Bulletin Board (“OTCBB”) under the symbol “SKBI.” There was no active trading
market for the Common Stock before May 22, 2000. The following table sets forth,
for the periods indicated, the reported high and low closing bid quotations for
our common stock as reported on the OTCBB. The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.




22




Common
Stock





Quarter
      Ended
            
            High
      Bid
            
            
            Low
      BidDecember
      31, 2008
            
            
            1.01
            
            
            
            0.40September
      30, 2008
            
            
            1.10
            
            
            
            0.50June
      30, 2008
            
            
            1.17
            
            
            
            0.95March
      31, 2008
            
            
            1.40
            
            
            
            0.90December
      31, 2007
            
            
            1.85
            
            
            
            1.05September
      30, 2007
            
            
            1.85
            
            
            
            1.05June
      30, 2007
            
            
            1.69
            
            
            
            0.95March
      31, 2007
            
            
            1.84
            
            
            
            1.30




As of
March 25, 2009, we had approximately 18,665,189 shares of common stock issued
and outstanding and 2,000,000 shares of series “A” preferred stock issued and
outstanding.





We also
have outstanding warrants that were issued in conjunction the private placement
of our convertible debentures on February 27, 2007. These warrants, if
exercised, would permit their holders to purchase approximately an additional
1,545,500 shares of our common stock.





Assuming
exercise of all warrants, we would have approximately 20,210,689 shares of
common stock outstanding.





Holders





As of
March 25, 2009, we had 431 record holders of our common stock and one record
holder of our Series A preferred stock.





Dividends





While
there are no restrictions that limit our ability to pay dividends, we have not
paid, and do not currently intend to pay cash dividends on our common stock in
the foreseeable future. Our policy is to retain all earnings, if any, to provide
funds for operation and expansion of our business. The declaration of dividends,
if any, will be subject to the discretion of our board of directors, which may
consider such factors as our results of operations, financial condition, capital
needs and acquisition strategy, among others.





Securities
Authorized for Issuance under Equity Compensation Plans





Please
see the discussion in Item 12 titled “Equity Compensation Plan Information”
below.





Sales
of Unregistered Securities





On
December 4, 2008, we issued 26,086 shares of our restricted common stock to
Bennet P. Tchaikovsky as compensation, pursuant to the terms of the agreement
under which we engaged Mr. Tchaikovsky’s services as our chief financial
officer.





Other
sales of securities within the past three years which were not registered under
the Securities Act were previously disclosed in our current reports on Form 8-K
filed on March 5, 2007, December 11, 2007 and April 23, 2008, and in our annual
report on Form 10-K for the year ended December 31, 2007 filed on April 2,
2008.





ITEM 6. SELECTED FINANCIAL DATA





Not
applicable.





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




The following discussion and
analysis of our results of operations and financial condition
for  the  fiscal years ended December 31, 2008 and 2007
should be read in conjunction with Selected Consolidated Financial Data and our
financial statements and the notes to those financial statements that are
included elsewhere in this report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking
Statements” and “Description of Business” sections and elsewhere in this report.
We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,”
“predict,” and similar expressions to identify forward-looking
statements. Although we
believe the expectations expressed in these forward-looking statements are based
on reasonable assumptions within the bound of our knowledge of our business, our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include, but are not limited
to, those discussed in the “Risk Factors” section of this report. We undertake
no obligation to update publicly any forward-looking statements for any reason
even if new information becomes available or other events occur in the
future.




23




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





Overview





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





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





Having no
substantive operation of its own, Skystar Cayman, through its VIE, Xian
Tianxing, engages in research, development, production, marketing and sales of
bio-pharmaceutical and veterinary products in China. Please see “Contractual
Arrangements with Xian Tianxing and its Stockholders” and “Recent Developments
with Respect to the Contractual Arrangements with Xian Tianxing and its
Shareholders” in Item 1 above and Note 1 to our consolidated financial
statements included in this annual report for the contractual arrangements
between Skystar Cayman and Xian Tianxing and their subsequent transfer to Sida
in March 2008, and their impact on our consolidated financial
statements.





Critical Accounting Policies





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




·
              Revenue
      recognition: Revenues of the Company include sales of bio-pharmaceutical
      and veterinary products in China. Sales are recognized when the following
      four revenue criteria are met: persuasive evidence of an arrangement
      exists, delivery has occurred, the selling price is fixed or determinable,
      and collectibility is reasonably assured. Sales are recorded net of value
      added tax (VAT). No return allowance is made as product returns are
      insignificant based on historical
experience.
 
 (a)
              Credit sales: Revenue
      is recognized when the products have been delivered to the
      customers.
 
 (b)
              Full payment before
      delivery: Revenue is recognized when the products have been
      delivered to customers.
 
 ·
              Accounts
      receivable: We perform ongoing credit evaluations of our customers and
      adjust credit limits based upon payment history and the customers’ current
      credit worthiness, as determined by a review of their current credit
      information. We continuously monitor collections and payments from our
      customers and maintain a provision for estimated credit losses based upon
      historical experience and any specific customer collection issues that
      have been identified. While such credit losses have historically been
      within our expectations and the provisions established, we cannot
      guarantee that we will continue to experience the same credit loss rates
      that have been experienced in the
past.
 
 ·
              Convertible
      debentures and warrants: We have adopted APB No. 14, “Accounting for
      Convertible Debt and Debt Issued with Stock Purchase Warrants”, FAS
      No.133, “Accounting for Derivatives and Hedging Activities,” EITF 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios,” and EITF 00-27,
      “Application of Issue No. 98-5 to Certain Convertible Instruments,” for
      valuation and accounting treatment of our outstanding convertible
      debentures and warrants.
  24
 
 ·
              Liquidated
      damages: We have adopted SFAS No. 5, “Accounting for Contingencies” and
      EITF 00-19-2, “Accounting for Derivative Financial Instruments Indexed to,
      and Potentially Settled in, a Company’s own Stock,” in connection with the
      liquidated damages we accrued pursuant to the terms of our Registration
      Rights Agreement with certain investors dated February 27,
      2007.





Recently
Accounting Pronouncements





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" (“SFAS 161”). SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company does not anticipate that the adoption of SFAS 161 will
have a material impact on its consolidated results of operations or consolidated
financial position.





In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3 “Determination of the
useful life of Intangible Assets,” which amends the factors a company should
consider when developing renewal assumptions used to determine the useful life
of an intangible asset under SFAS 142. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. SFAS 142 requires companies to
consider whether renewal can be completed without substantial cost or material
modification of the existing terms and conditions associated with the asset. FSP
142-3 replaces the previous useful life criteria with a new requirement—that an
entity consider its own historical experience in renewing similar arrangements.
If historical experience does not exist, then the Company would consider market
participant assumptions regarding renewal including 1) highest and best use of
the asset by a market participant, and 2) adjustments for other entity-specific
factors included in SFAS 142. The Company is currently evaluating the impact
that adopting FSP 142-3 will have on its consolidated financial
statements.





On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)."  FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP
APB14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact that FSP APB 14-1 will have on its
consolidated results of operations or consolidated financial
position.





On June
16, 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards
that contain rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the requirements of
FSP EITF 03-6-1 and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.





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





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




25




In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable
Interest Entities.” The changes proposed include a removal of the scope
exemption from FIN 46R for QSPEs, a revision of the current risks and
rewards-based FIN 46R consolidation model to a qualitative model based on
control and a requirement that consolidation of VIEs be re-evaluated on an
ongoing basis. Although the revised standards have not yet been finalized, these
changes may have a significant impact on the Company’s consolidated financial
statements as the Company may be required to deconsolidate certain assets and
liabilities due to the ongoing evaluation of its primary beneficiary status. In
addition, the Company may also be required to consolidate other VIEs that are
not currently consolidated based an analysis under the current FIN 46R
consolidation model. The proposed revisions would be effective for fiscal years
that begin after November 15, 2009.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s consolidated results of operations or
consolidated financial position.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the
Company’s consolidated financial statements.




Results
of Operations – Comparison of Two Years Ended December 31, 2008 and
2007.





The
      following table summarizes our results of operations for the years
      ended December 31, 2008 and 2007.
            
            Years
      Ended December 31,2008
            
            
            2007Amount
            
            
            Percentage
      of
              total
      revenue
            
            
            Amount
            
            
            Percentage
      of
              total
      revenueRevenues
            
            $
            25,584,446
            
            
            
            100.0
            %
            
            $
            15,056,828
            
            
            
            100.0
            %Gross
      Profit
            
            $
            12,775,550
            
            
            
            49.9
            %
            
            $
            8,344,463
            
            
            
            55.4
            %Operating
      Expense
            
            $
            4,594,563
            
            
            
            18.0
            %
            
            $
            3,446,737
            
            
            
            22.9
            %Income
      from Operations
            
            $
            8,180,987
            
            
            
            32.0
            %
            
            $
            4,897,726
            
            
            
            32.5
            %Other
      Expenses
            
            $
            1,055,116
            
            
            
            4.1
            %
            
            $
            5,827,530
            
            
            
            38.7
            %Income
      Tax Expenses
            
            $
            1,529,688
            
            
            
            6.0
            %
            
            $
            1,027,172
            
            
            
            6.8
            %Net
      Income (loss)
            
            $
            5,596,183
            
            
            
            21.9
            %
            
            $
            (1,956,976
            )
            
            
            (13.0
            )
      %





Revenues.  All of
our revenues are derived from the sale of veterinary healthcare and medical care
products in the PRC. For the year ended December 31, 2008, we had revenues of
$25,584,446 as compared to revenues of $ 15,056,828 for the year ended December
31, 2007, an increase of approximately 69.9%.





Revenues—Veterinary
Medications.  Revenues from sales of our veterinary medications
product line increased from $9,003,400 for the year ended December 31, 2007 to
$17,535,757 for the year ended December 31, 2008 for an increase of $8,532,357
or 94.8%. The increase in the sale of veterinary medications was primarily
responsible for the growth of overall revenue between the two years ended
December 31, 2008 and 2007. The increase in veterinary medication sales was
primarily attributable to our 100% veterinary medicine plant expansion that was
completed in 2007, additional product offerings, and increased use by our
customers of products for the treatment of livestock and poultry diseases in
2008.




26




Revenues—Micro-Organism.  Revenues
from sales of our micro-organism product line increased from $4,271,139 for
the year ended December 31, 2007 to $5,868,623 for the year ended December
31, 2008 for an increase of $ 1,597,484 or 37.4%. The increase
of $1,597,484 was a result of increased customer demand for our new
probiotics micro-organism products and enhanced sales efforts for the year ended
December 31, 2008.





Revenues—Feed
Additives.  Revenues from sales of our feed additives product
line increased from $971,019 for the year ended December 31, 2007 to
$1,189,108 for the year ended December 31, 2008 for an increase of
$ 218,089 or 22.5%. The increase of $ 218,089 was a result of
increased customer demand for our multi-enzyme feed additive products for the
year ended December 31, 2008.





Revenues—Vaccines.  Revenues
from sales of our vaccines product line increased from $ 811,270 for the
year ended December 31, 2007 to $ 990,958 for the year ended December 31,
2008 or an increase of $ 179,688 or 22.1%. This increase was a result of an
increase in customer demand of our vaccine products for the year ended December
31, 2008. We are presently operating at full production capacity for our vaccine
product line and therefore cannot significantly increase sales until we expand
our production capabilities.





Cost
of Revenue





Cost of revenue.  For the year
ended December 31, 2008, we had cost of revenues, which consists of raw
materials, direct labor, and manufacturing overhead, of $12,808,896 as compared
to cost of sales of $ 6,712,365 for the year ended December 31, 2007, an
increase of approximately 90.8%. Our cost of sales consists of four product
lines: veterinary medications, micro-organism, feed additives, and vaccines.
During the year ended December 31, 2008, we incurred higher raw material prices
caused by higher shipping costs as a result of restricted railway shipments
during the period of the Beijing Olympics in August 2008 and the powerful
earthquake in Sichuan Province in May 2008. However, management has
noticed that since September 2008, raw materials prices have steadily
declined.





Cost ofRevenue—Veterinary
Medications.  Cost of sales of our veterinary medications
product line increased from $4,654,347 for the year ended December 31, 2007 to
$10,389,726 for the year ended December 31, 2008, for an increase of
$5,735,379 or approximately 123.2%. This increase was mainly due to the
corresponding increase in veterinary medications sales. However, the gross
margin for veterinary medications declined from approximately 48.3% for the year
ended December 31, 2007 to approximately 40.8% for the year ended December 31,
2008 due to higher price of raw materials.





Cost ofRevenue—Micro-Organism.  Cost of
sales of our micro-organism product line increased from $1,416,550 for the
year ended December 31, 2007 to $1,781,598 for the year ended December 31,
2008 for an increase of $365,048 or approximately 25.8%. Gross margin for micro
organism products increased slightly from 66.8% for the year ended December
31, 2007 to 69.6% for the year ended December 31, 2008, as a result of
improved manufacturing techniques and product sales with better margins, which
offset the increase in raw material prices for the year ended December 31,
2008.





Cost ofRevenue— Feed
Additives.  Cost of sales of our feed additives product
line decreased from $549,714 for the year ended December 31, 2007 to
$525,653 for the year ended December 31, 2008 for a decrease of $24,061 or 4.4%.
The decrease of $24,061 was a result of certain products not being produced
during the year of 2008 due to significant increases in raw material prices for
those products. However, the gross margins for feed additives improved from
43.4% for the year ended December 31, 2007 to 55.8% for the year ended December
31, 2008 as a result of product sales with better margins and improved
manufacturing techniques which offset the increase in raw materials prices
during year ended December 31, 2008.





Cost ofRevenue—Vaccines.  Cost of
sales of our vaccines product line increased from $91,754 for the year
ended December 31, 2007 to $111,919 for the year ended December 31, 2008,
for an increase of $20,165 or 22.0%. This slight increase was a result of
increase in vaccine product sales for which the Company is presently running at
full capacity.




27




Operating
Expenses





Years
      Ended December 31,2008
            
            
            2007Amount
            
            
            Percentage
      of
              total
      revenue
            
            
            Amount
            
            
            Percentage
      of
              total
      revenueGross
      Profit
            
            $
            12,775,550
            
            
            
            49.9
            %
            
            $
            8,344,463
            
            
            
            55.4
            %Operating
      Expenses
            
            $
            4,594,563
            
            
            
            18.0
            %
            
            $
            3,446,737
            
            
            
            22.9
            %Selling
      Expenses
            
            $
            1,381,807
            
            
            
            5.4
            %
            
            $
            739,422
            
            
            
            4.9
            %General
      and Administrative Expenses
            
            $
            2,663,520
            
            
            
            10.4
            %
            
            $
            2,438,995
            
            
            
            16.2
            %Research
      and Development Costs
            
            $
            549,236
            
            
            
            2.1
            %
            
            $
            268,320
            
            
            
            1.8
            %Income
      from Operations
            
            $
            8,180,987
            
            
            
            32.0
            %
            
            $
            4,897,726
            
            
            
            32.5
            %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$1,381,807 for the year ended December 31, 2008 as compared to $739,422 for the
year ended December 31, 2007, an increase of approximately 86.9%. This increase
is primarily attributable to our expanding sales team and activities, which are,
in turn, reflected in our increased sales. We believe that our selling expenses
will continue to increase as our sales continue to grow.





General and Administrative
Expenses.  General and administrative expenses totaled
$2,663,520 for the year ended December 31, 2008, as compared to $2,438,995 for
the year ended December 31, 2007, an increase of approximately 9.2%. General and
administrative expenses are primarily legal, accounting and other professional
fees that we incurred as a U.S. public company. More professional expenses were
incurred in 2008 as a result of increased compliance costs for activities that
we undertook during the year. We anticipate, however, that our general and
administrative expenses will increase due to the increasing costs of being a
U.S. public company.





Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $549,236 for
the year ended December 31, 2008, as compared to $268,320 for the year ended
December 31, 2007, an increase of approximately 104.7%. This increase is
primarily attributable to increased research activities with certain outside
experts and institutions with whom we cooperate on research and development of
both existing and new products. We anticipate that our research and development
costs will continue to increase as we continue improve existing products and
develop new products.





Liquidity





For the
years ended December 31, 2008 and 2007, cash provided by operating activities
were $3,700,428 and $943,145, respectively. This increase is primarily
attributable to the increase in net income (excluding the non-cash adjustments
listed on the consolidated statements of cash flow) of $2,741,656, from
$4,864,481 for the year ended December 31, 2007 to $7,606,137 for the year ended
December 31, 2008, as a result of increased sales of our veterinary medicines
and micro-organism products. For the year ended December 31, 2008, net cash
provided by operating activities other than net income was mainly due to
increase of $404,642 in accounts payable, increase of $946,801 in accrued
expense and increase of $352,012 in deposit from customers during 2008. However,
this increase was offset by an increase of $674,486 in inventories, increase of
$1,068,391 in accounts receivable, $3,647,834 increase in deposits and prepaid
expenses towards future purchases of raw materials to take advantage of
favorable pricing and ensure the availability of certain raw materials, and
$389,081 decrease in taxes payable, which collectively increased cash provided
by operating activities by $2,757,283 for the year ended December 31, 2008
compared to the prior year.





We used
$5,076,346 in investing activities for the year ended December 31, 2008, as
compared to using $2,232,683 in investing activities for the year ended December
31, 2007. The net cash used in investing activities for the year ended December
31, 2008 was a result of $1,606,280 in payments and $1,729,079 in prepayments
made to construction in progress, and $2,666,775 of deposit paid for potential
acquisitions targets as further described in Note 11 to the financial
statements, and offset by the refund of prior prepayments of $562,185, as
compared to $383,322 in payments made to construction-in-progress, $658,350 of
intangible assets purchased and $1,171,863 of long-term deposit made for
construction-in-progress and potential acquisitions for the year ended December
31, 2007.





Cash
provided by financing activities was $1,136,127 for the year ended December 31,
2008 as compared to $1,839,352 generated for the year ended December 31, 2007.
We raised $3,737,250 from sales of our convertible debentures in the year ended
December 31, 2007, but did not undertake similar financing in the year ended
December 31, 2008. For the year ended December 31 2008, we had proceeds from
shareholder loans and one-year short term bank loans which amounted to
$1,037,880. These loans are further discussed in detail in Note 13 and Note 20,
respectively, of the footnotes accompanying the consolidated financial
statements.




28




As of
December 31, 2008, we had cash of $576,409. Our total current assets were
$11,778,573, and our total current liabilities were $4,134,999, which resulted
in a net working capital of $7,643,574. Management believes that we have the
ability to meet cash requirements for our operations in order to continue as a
going concern, including sufficient cash flows to meet our obligations on a
timely basis in the foreseeable future, provided that we can continue to
maintain profitable operations and our net working capital remains
liquid.





Capital
Resources





For the
year ended December 31, 2008 we borrowed $735,165 on a short term basis from a
bank, collected $315,472 on a loan
receivable, and received $302,715 from shareholder loans, the majority of which
was to continue construction on ongoing facilities projects. If we are to
acquire another business or further expand our operations, we will need
additional capital.





Plan of Operations





Over the
next 12 months, we plan to continue to market and sell our current products and
to develop new products.





In 2003,
we received approval from the State Council of China to expand our production
facilities and construct a new GMP standard plant. We have invested $10,501,000
(RMB 82,000,000) into this project, which is our Huxian plant, including
approximately $9,700,000 for the facilities and $800,000 for working capital.
The construction work commenced in 2005, and we completed the veterinary
medicine facility and the building that houses quality control, research and
development and administration during 2007, both of which are fully operational.
The remaining facilities of the Huxian plant are expected to be completed by the
latter part of 2009, depending upon the Company's ability to raise additional
capital. We anticipate that the new factory will generate sufficient cash flows;
thus, management has concluded that there is no impairment loss on the
construction in progress.





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





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations




Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      than
              1
      year
            
            
            1
      – 3 years
            
            3
      – 5 years
            
            
            More
      than
              5
      yearsR&D
      Project Obligation
            
            $
            253,017
            
            
            $
            253,017
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      Lease Obligations
            
            
            349,103
            
            
            
            60,684
            
            
            
            121,368
            
            
            
            74,562
            
            
            
            92,489Total
            
            $
            602,120
            
            
            $
            313,701
            
            
            $
            121,368
            
            
            $
            74,562
            
            
            $
            92,489





During
the first quarter of 2008, we entered into an agreement with Northwestern
Agricultural Technology University to jointly work on a research and development
project regarding the application of nano-technology in the prevention of a
major milk cow disease. The total projected budget for this project is
approximately $574,000 (RMB 4 million), which we would pay in installments as
the stages of the project are completed. We expect this project to be completed
in one year. The research and development expense for this project during 2008
was approximately $43,245 (RMB 0.3 million), and as of December 31, 2008, we
also made $289,773 (RMB 1,975,273) of prepayment for purchase of specific raw
materials for the project. We anticipate that the remaining $253,017 (RMB
1,724,727) will be spent during 2009.





Off-Balance
Sheet Arrangements





We do not
have any outstanding financial guarantees or commitments to guarantee the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.




29




ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM 8. FINANCIAL STATEMENTS





The
Consolidated Financial Statements and Financial Statement Schedule are included
in Part III, Item 15 (a) (1) and (2) of this Annual report on Form
10-K.




ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES




None.





ITEM 9A(T). CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.





As of
December 31, 2008, the end of the fiscal year covered by this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and our chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) were ineffective at the reasonable assurance level.





Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial
reporting is designed 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 in the
United States of America. The Company's internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) 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.





Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.





Our
management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated
Framework." Based on that evaluation, our management concluded that as of
December 31, 2008, and as of the date that the evaluation of the effectiveness
of our disclosure controls and procedures was completed, our disclosure controls
and procedures were not effective due to the following material
weaknesses:




30




1.
            Accounting
      and Finance Personnel Weaknesses- The
      current accounting staff are relatively inexperienced, and requires
      substantial training so as to meet with the higher demands necessary to
      fulfill the requirements of U.S. GAAP-based reporting and SEC rules and
      regulations.





2.
            Lack
      of Internal Audit Function - The Company lacks qualified resources
      to perform the internal audit functions properly. The Company
      lacked an internal audit department, which rendered the Company
      ineffective in preventing and detecting control lapses and errors in the
      accounting of certain key areas like revenue recognition, purchase
      approvals, inter-company transactions, cash receipt and cash disbursement
      authorizations, inventory safeguard and proper accumulation for cost of
      products, in accordance with the appropriate costing method used by the
      Company.





Remediation
of Material Weaknesses in Internal Control over Financial Reporting





The
Company’s management has identified the steps necessary to address the material
weaknesses described above, as follows:





1.
            Hiring
      additional accounting and operations personnel and engaging outside
      contractors with technical accounting expertise, as needed, and
      reorganizing the accounting and finance department to ensure that
      accounting personnel with adequate experience, skills and knowledge
      relating to complex, non-routine transactions are directly involved in the
      review and accounting evaluation of our complex, non-routine
      transactions





2.
            Involving
      both internal accounting and operations personnel and outside contractors
      with technical accounting expertise, as needed, early in the evaluation of
      a complex, non-routine transaction to obtain additional guidance as to the
      application of generally accepted accounting principles to such a proposed
      transaction;





3.
            Documenting
      to standards established by senior accounting personnel and the principal
      accounting officer the review, analysis and related conclusions with
      respect to complex, non-routine
transactions;





4.
            Requiring
      senior accounting personnel and the principal accounting officer to review
      complex, non-routine transactions to evaluate and approve the accounting
      treatment for such transactions;
and




5.
            Evaluating
      the internal audit function in relation to the Company’s financial
      resources and requirements.





We expect
that we will satisfactorily address the control deficiencies and material
weaknesses relating to these matters by the end of our fiscal year ending
December 31, 2009, although there can be no assurance that compliance will be
achieved in this time frame.





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





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





Changes
in Internal Controls





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the year ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, our international control over
financial reporting.




31





ITEM
9B. OTHER INFORMATION





None.




PART
III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE





Our
directors and executive officers, their ages, their respective offices and
positions, and their respective dates of election or appointment are as follows:





Name
            
            Age
            
            Position
            
            Date
      of AppointmentWeibing
      Lu
            
            46
            
            
            Chief
      Executive Officer and Chairman of the Board of Directors
            
            
            February
      2006Bennet
      P. Tchaikovsky
            
            39
            
            
            Chief
      Financial Officer and Director
            
            
            May
      2008Wei
      Wen
            
            43
            
            
            Secretary
      and Director
            
            
            February
      2006R.
      Scott Cramer
            
            45
            
            
            Director
            
            
            October
      2001Qiang
      Fan
            
            54
            
            
            Director
            
            
            July
      2008Chengtun  Qu
            
            45
            
            
            Director
            
            
            July
      2008Winston
      Yen
            
            40
            
            
            Director
            
            
            July
      2008Shouguo
      Zhao
            
            46
            
            
            Director
            
            
            July
      2008





Business
Experience Descriptions





Weibing
Lu, Chief Executive Officer and Chairman of the Board of Directors





Mr.
Weibing Lu received his bachelor’s degree in science from Wuhan University of
Mapping Science and Technology (now known as Wuhan University) in 1985. In 1986,
he was a teacher of College of Xian Geology. Mr. Lu received his Master’s degree
in Business Administration in 1999 from Xian University. Mr. Lu has vast
experience in the biotechnology field and in enterprise management. In 1992, he
set up the Xian Xingji Electronic Engineering Company and served as its Chairman
and President until 1997. In 2002, he was awarded as the title of “Outstanding
Enterpriser of Xian Feed Industry” and appointed as a director of Xian Institute
of Feed Industry. In July 1997, he set up Xian Tianxing Science and Technology
Development Co., Ltd. In December 2003, Xian Tianxing Science and Technology
Development Co., Ltd. was reorganized and became Xian Tianxing
Bio-pharmaceutical Co., Ltd. Since December 2003, Mr. Lu has served as Chairman
of the Board and President of Xian Tianxing Bio-Pharmaceutical Co.,
Ltd.





Bennet P. Tchaikovsky, Chief Financial Officer





Mr.
Bennet P. Tchaikovsky joined our company in May 2008. He is also currently
serving on the board of directors of Ever-Glory International Group, Inc., an
NYSE Alternext US listed company in the apparel industry, as chairman of the
audit committee and member of the compensation committee. He is also a member of
the board of directors of Sino Clean Energy Inc., an OTCBB company in the
alternative fuel industry, as chairman of the audit committee and member of both
the compensation and nominating committees. From July 2004 through October 2007,
Mr. Tchaikovsky served as the chief financial officer of Innovative Card
Technologies, Inc., an OTCBB listed company that researches, develops and
markets technology-based card enhancements for financial institutions and
enterprises that are designed to increase security for their customers. Mr.
Tchaikovsky acted as a consultant to Innovative Card Technologies from November
2007 until July 2008. From January 2003 through November 2003, Mr. Tchaikovsky
served as the Vice President, Finance of TJR Industries, Inc., a company that
produces trade shows for the woodworking industry. Mr. Tchaikovsky is a licensed
Certified Public Accountant and an inactive member of the California State Bar.
Mr. Tchaikovsky received a B.A. in Business Economics from the University of
California at Santa Barbara, and a J.D. from Southwestern University School of
Law.




32




Wei
Wen, Secretary and Director





Mr. Wei
Wen graduated from Xian University of Science and Industry in 1986. From 1990 to
1994, Mr. Wen was the manager of Sales Department of Xian Zhongtian Science and
Technology Development Co., Ltd. Then, from 1994 to 1997, Mr. Wen served as Vice
General Manager and Manager of Sales Department of Xian Xingji Electronic
Engineering Company. In 1997, Mr. Wen was appointed as the Vice General Manager
of Xian Tianxing Science and Technology Development Co., Ltd. which he served
until December 2003.  After the reorganization of the company in
December 2003, Mr. Wen was appointed and continues to serve as Vice General
Manager and the Secretary of the Board of Directors of Xian Tianxing
Bio-Pharmaceutical Co., Inc.





R.
Scott Cramer, Director





Mr. R.
Scott Cramer was previously the Chairman from November 2001 to November 2005,
Chief Executive Officer from March 2002 to November 2005, and Chief Financial
Officer from April 2003 to November 2005, of The Cyber Group. He is currently a
member of our Board of Directors. Mr. Cramer is the founder and President of
Cramer & Associates, a firm specializing in retirement management, estate
planning and investments. He has been a Registered Investment Advisor since
August 2001, a Securities Selling Representative since May 1999, and a General
Securities Representative (Registered Representative) since July 2002. Mr.
Cramer is a graduate of Seminole Community College with an Associate in Arts
degree. He received certification as a Chartered Retirement Planning Counselor
from the College of Financial Planning in 2001, as a Certified Estate Planning
Professional from the Abts Institute for Estate Preservation in 2001, and as a
Certified Senior Advisor from the Society of Senior Advisors in
2002.





Qiang
Fan, Director





Mr. Qiang
Fan also serves as chairman of our compensation committee and member of our
audit committee. Mr. Fan is the President and Founder of MIC Consulting Group,
U.S.A., which he established in 1992 to provide operational and financial
related problem solving services to privately owned companies. Since 2007, Mr.
Fan is the exclusive representative of North America operation for China Venture
Capital Research Institute since 2007, and the head analyst at Power Partner
Institute focusing on IT trends since 2001. From 2006 to 2007, Mr. Fan was a
Vice-president of Operation at Kantan Inc., a privately-held boutique technology
company focused on wireless solutions for device manufacturers. From 2005 to
2006, he was a Vice-president at Third Wave Ventures, which provides corporate
venturing-related advisory, consulting and management services. From 1998 to
2000, Mr. Fan was the exclusive representative in China for PowerQuest, a Utah
based international software company that focused on computer data storage
management, as well as for ChipCoolers, a U.S. CPU cooler manufacturer. Mr. Fan
received his B.A. degree from the Business School of California State University
at San Francisco.





Chengtun
Qu, Director





Dr.
Chengtun Qu is the Vice Dean of the College of Chemistry and Chemical
Engineering at Xi’an Shi You University, where he also teaches and heads the
environmental engineering department. Dr. Qu is a board member of both the
Shaanxi Province Environmental Protection Association and the Shaanxi Province
Chemical Engineering Association. As a principal researcher, Dr. Qu has
participated in various projects at both national and provincial levels,
including ones sponsored by the Chinese Ministry of Science and Technology, and
is the recipient of numerous accolades from the Shaanxi provincial government in
recognition of his contributions. Dr. Qu has three patents issued by the Chinese
State Intellectual Property Office. He has also been extensively published in
various scientific journals both in China and abroad. Dr. Qu has a B.S. degree
in chemistry from Northwest University in Xi’an, a master’s degree from
Southwest Petroleum University and a doctorate degree from Xi’an Jiaotong
University.





Winston
Yen, Director





Mr.
Winston Yen also serves as chairman of our audit committee and member of our
compensation committee. Mr. Yen is an independent director of Mega Joy Limited,
a private hotel management and development company based in China, a position he
has held since 2006. He previously served as Chief Financial Officer of Chilco
River Holdings, Inc. from 2005 to 2007. Mr. Yen is also a Certified Public
Accountant, and he has and continues to work in such capacity: as a partner of
Accellence LLP from 2006 to the present, as a partner of Harry C. Lin, CPA from
2002 to 2005, as a tax manager with Moss Adams LLP from 2000 to 2001, and as a
tax/audit supervising senior accountant with Parks, Palmer, Turner &
Yeminijian LLP (currently CBIZ Southern California, Inc.) from 1997 to 2000. Mr.
Yen received a Bachelor of Business Management degree from the National
Cheng-Chi University in Taiwan, and a Masters of Accounting Science from the
University of Illinois at Urbana-Champaign.




33




Shouguo
Zhao, Director





Dr.
Shouguo Zhao also serves as member of both our audit and the compensation
committees. Dr. Zhao is an independent director of Shaanxi International Trust
& Investment Corp., Ltd., a listed company on the Shenzhen Stock Exchange
(SZSE: SZ000563), chairing its Remuneration and Assessment Committee and serving
on its Strategy Committee. Dr. Zhao is also an independent non-executive
director of Sungreen International Holdings Limited, a listed company on the
Hong Kong Exchange (HKEX: HK8306), serving as a member of its audit committee.
He is additionally an independent director of Tian Di Yuan Co., Ltd., a listed
company on the Shenzhen Stock Exchange (SZSE: SH600665), chairing its Nominating
Committee and serving on its Strategy Committee. From June 2005 to June 2008,
Dr. Zhao was an independent director of IRICO Group Corporation, a listed
company on the Shenzhen Stock Exchange (SZSE: SH600707), chairing its
Remuneration and Assessment Committee and serving on its Strategy Committee. Dr.
Zhao is the Vice Dean of the School of Economics and Management at Northwest
University, where he also serves as a guide professor to doctorate candidates in
finance and national economics. He has led and participated in 18 research
programs sponsored by governments and the private sectors in areas of financial
investment, modern enterprise systems and development strategies, and regional
economic development strategies, and has more than 30 publications in various
academic journals. Dr. Zhao is a member of Shaanxi Provincial Decision-making
Consultative Committee, a member of the Executive Committee of the Tenth Session
of Shaanxi Provincial Industrial and Commercial Association, the chairman of the
Negotiable Securities Research Society of Shaanxi Province, and a consultant
with the Listed Companies Association of Shaanxi Province. Dr. Zhao received his
doctorate degree in economics from Northwest University.





Family
Relationships





There are
no family relationships between or among any of our current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and
directors and the officers and directors of our direct and indirect
subsidiaries.





Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:





(a)
            Had
      any bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer either at the time of
      the bankruptcy or within two years prior to that
  time;





(b)
            Been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;





(c)
            Been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction or any
      federal or state authority, permanently or temporarily enjoining, barring,
      suspending or otherwise limiting his involvement in any type of business,
      securities, futures, commodities or banking activities;
  and





(d)
            Been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.





Compliance
with Section 16(a) of the Exchange Act





Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports were required, the Company believes that
for the fiscal year ended December 31, 2008, our directors and executive
officers complied with Section 16(a) filing requirements applicable to them,
except that Mr. Tchaikovsky, Mr. Cramer, Mr. Fan, Mr. Qu, Mr. Fan and Mr. Zhao
did not file their Form 3s, Form 4s or Form 5s in connection with transactions
that occurred during 2008.





Code
of Ethics





We have adopted a code of ethics that
applies to our officers, directors and employees, including our chief executive
officer, senior executive officers, principal accounting officer, and other
senior financial officers. Our code of ethics is available on our website atwww.skystarbio-pharmaceutical.com. A copy of our code of ethics will
also be provided to any person without charge, upon written request sent to us
at our offices located at Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road
South,Gaoxin District, Xi’an, Shaanxi Province, People’s Republic of
China.





Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors





There
have been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors.




34




Audit Committee





Although
we are not a “listed company” under SEC rules and are therefore not required to
have an audit committee, we have an audit committee comprised of independent
directors. Our audit committee is comprised of three independent directors: Mr.
Qiang Fan, Mr. Winston Yen and Dr. Shouguo Zhao. Our board of directors has
determined, based on information furnished by Mr. Yen and other available
information, that Mr. Yen meets the requirements of an “audit committee
financial expert” as such term is defined in the rules promulgated under the
Securities Act of 1933 and the Exchange Act of 1934, as amended. On July 14
2008, Mr. Yen was appointed to serve as chairman of the audit committee, and to
serve as our audit committee financial expert.





ITEM 11. EXECUTIVE COMPENSATION





Summary
of Compensation





The
following summary compensation table indicates the cash and non-cash
compensation earned for years ended December 31, 2008 and 2007 by our Chief
Executive Officer and each of our other two highest paid executives, whose total
compensation exceeded $100,000 (if any) for the years ended December 31, 2008
and 2007.





Summary
Compensation





SUMMARY
      COMPENSATION TABLEName
      and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              (
      $)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            
            Nonqualified
              Deferred
              Compensation
      Earnings
              ($)
            
            All
      Other
              Compensation
              (
      $)
            
            Total
              ($)Weibing
      Lu,
            
            
            2008
            
            66,028
      (2)
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            66,028current
      CEO (1)
            
            
            2007
            
            8,400
      (3)
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            8,400





(1)
            Mr.
      Lu received no other form of compensation in the years shown, other than
      the salary set forth in this table.





(2)
            On
      May 5, 2008, we entered into an employment agreement with Mr. Lu pursuant
      to which he is entitled to an initial annual compensation of $100,000 as
      our Chief Executive Officer.





(3)
            Mr.
      Lu’s compensation for 2007 was paid in Chinese RMB which, for reporting
      purposes, has been converted to U.S. dollars at the conversion rate of 7.6
      RMB to one U.S. dollar.




Employment
Agreements, Termination of Employment and Change-in-Control Arrangements with
our Executive Officers





Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.





Employment
Agreement with Weibing Lu





On May 5,
2008, we entered into an Employment Agreement with Mr. Weibing Lu. Under the
terms of the Employment Agreement, we agreed to the continued employment of Mr.
Lu as our chief executive officer for a term of 5 years. Mr. Lu is to receive an
initial annual salary of $100,000, with an annual 5% increase of the prior
year’s salary thereafter during the term. Additionally, at the discretion of our
board of directors’ compensation committee, Mr. Lu may be eligible for an annual
bonus which amount, if any, and payment will be determined by the compensation
committee. Mr. Lu is entitled to medical, disability and life insurance, as well
as 4 weeks of vacation annually and reimbursement of all reasonable or
authorized business expenses.





During
its term, the Employment Agreement terminates upon Mr. Lu’s death, in which
event we are obligated to pay Mr. Lu’s estate his base salary amount through the
first anniversary of his death (or the expiration of the Employment Agreement if
earlier than the anniversary date), as well as pro rata allocation of any bonus
based on the days of service during the year of death, and all amounts owing to
Mr. Lu at the time of termination, including for previously accrued but unpaid
bonuses, expense reimbursements and accrued but unused vacation
pay.




35




If Mr. Lu
is unable to perform his obligations under the Employment Agreement for over 180
consecutive days during any consecutive 12 months period, we may terminate the
Employment Agreement by written notice to Mr. Lu delivered prior to the date
that he resumes his duties. Upon receipt of such written notice, Mr. Lu may
request a medical examination under which if he is certified to be incapable of
performing his obligations for over 2 additional months, the Employment
Agreement is terminated. We are obligated to pay Mr. Lu his base salary through
the second anniversary of our notice to him of his termination, less any amount
Mr. Lu may receive for such period from any Company-sponsored or Company-paid
for source of insurance, disability compensation or governmental program. We
will also pay Mr. Lu pro rata allocation of any bonus based on the days of
service during the year our notice is issued, and all amounts owing to Mr. Lu at
the time of termination, including for previously accrued but unpaid bonuses,
expense reimbursements and accrued but unused vacation pay.





We may
also terminate the Employment Agreement for cause, upon notice if at any time
Mr. Lu: (a) refuses in bad faith to carry out specific written directions of our
board of directors; (b) intentionally takes fraudulent or dishonest action in
his relations with us; (c) is convicted of a crime involving an act of
significant moral turpitude; or (d) knowingly commits an act or omits to act in
violation of our written policies, the Employment Agreement or any agreements
that we may have with third parties and that is materially damaging to our
business or reputation. However, termination for the cause described in (a), (b)
or (d) is predicated first on Mr. Lu receiving a 5-day written notice and a
reasonable opportunity to present his positions, then a subsequent written
notice of the termination, with the termination to take effect 20 business days
thereafter if Mr. Lu does not dispute the cause for the termination or fails to
take corrective actions in good faith. Thereafter, if Mr. Lu takes corrective
actions, he may be terminated for the same misconduct upon a 5-day written
notice.





On the
other hand, Mr. Lu may terminate the Employment Agreement upon written notice
if: (w) there is a material adverse change in the nature of his title, duties or
obligations; (x) we materially breach the Employment Agreement; (y) we fail to
make any payment to Mr. Lu (excepting any payment which is not material and
which we are contesting in good faith); or (z) there is a change of control of
the Company. However, termination for cause described in (w), (x) or (y) is
predicated on our receiving a written notice from Mr. Lu specifying the cause,
with the termination to take effect if we fail to take corrective action within
20 business days thereafter. If Mr. Lu terminates the Employment Agreement for
any one of these reasons, or if we terminate the Employment Agreement without
cause, we are obligated to pay to Mr. Lu (or in the case of his/her death, his
estate), his base salary and any bonus, without any offset, as well as all
amounts owing to Mr. Lu at the time of termination, including for previously
accrued but unpaid bonuses, expense reimbursements and accrued but unused
vacation pay.





The
Employment Agreement also contains restrictive covenants: (i) preventing the use
and/or disclosure of confidential information during or at any time after
termination; (ii) preventing competition with the Company during his employment
and for a period of 3 years after termination (including contact with or
solicitation of our customers, employees or suppliers), provided that Mr. Lu may
make investments of up to 2% in the publicly-traded equity securities of any
competitor; (iii) requiring Mr. Lu to refer any business opportunities to the
Company during his employment and for a period of 1 year after termination.
However, Mr. Lu shall have no further obligations with respect to competition
and business opportunities if his employment is terminated without cause or if
he terminates his employment for cause.





Lastly,
we are obligated under the Employment Agreement to indemnify Mr. Lu for any
claims made against him in his capacity as our chief executive officer and, in
connection to that obligation, we are required to include him under any director
and officer insurance policy that is in effect during his employment as our
officer, director or consultant.





Loanout
Agreement for the Services of Bennet P. Tchaikovsky





On May 5,
2008, we entered into a Loanout Agreement with Worldwide Officers, Inc., a
California corporation, pursuant to which we have retained the services of
Bennet P. Tchaikovsky to serve as our chief financial officer for a term of one
year. Under the terms of the Loanout Agreement, Mr. Tchaikovsky will perform his
duties from the United States on a part-time basis (90 hours per month), and we
agreed to pay an annual fee of $75,000 for Mr. Tchaikovsky’s services.
Additionally, Mr. Tchaikovsky will have the right to receive 52,173 shares of
our restricted Common Stock, to vest in four equal installments of 13,043 shares
each every 3 calendar months, and the first installment vested on August 5,
2008.





The
Loanout Agreement terminates upon Mr. Tchaikovsky’s death. If Mr. Tchaikovsky is
unable to perform his obligations under the Loanout Agreement for over 45
consecutive days during the term of the Loanout Agreement, we may terminate the
Loanout Agreement by 10-day written notice to Mr. Tchaikovsky thereafter. We may
also terminate the Loanout Agreement for cause, upon notice if at any time Mr.
Tchaikovsky: (a) willfully breaches or habitually neglects his duties; or (b)
commits acts of dishonesty, fraud, misrepresentation, gross negligence or
willful misconduct that would prevent the effective performance of his duties or
would result in material harm to us or our business. Lastly, we may terminate
the Loanout Agreement without cause upon a 30-day written notice to Mr.
Tchaikovsky.





On the
other hand, Mr. Tchaikovsky may terminate the Loanout Agreement upon 90-day
written notice to the Company.




36




The
Loanout Agreement also contains restrictive covenants: (i) preventing the use
and/or disclosure of confidential information during or at any time after
termination; (ii) preventing competition with the Company during the term of the
Loanout Agreement and for a period of 3 years after termination (including
contact with or solicitation of our customers, employees or suppliers), provided
that Mr. Tchaikovsky may make investments of up to 2% in the publicly-traded
equity securities of any competitor; (iii) requiring Mr. Tchaikovsky to refer
any business opportunities to the Company during the term of the Loanout
Agreement and for a period of 1 year after termination. However, Mr. Tchaikovsky
shall have no further obligations with respect to competition and business
opportunities if his employment is terminated without cause or if he terminates
his employment for cause.





Lastly,
we are obligated under the Loanout Agreement to indemnify Mr. Tchaikovsky for
any claims made against him in his capacity as our chief executive officer and,
in connection to that obligation, we are required to include him under any
director and officer insurance policy that is in effect during the term of the
Loanout Agreement.





Outstanding
Equity Awards at Fiscal Year-End





With the
exception of Mr. Bennet P. Tchaikovsky, our current Chief Financial Officer,
there are no unexercised options, unvested stock awards or equity incentive plan
awards for any of the above-named executive officers outstanding as of December
31, 2008. Pursuant to the terms of his employment under the Loanout Agreement,
Mr. Tchaikovsky is to receive 52,173 shares of our restricted common stock for
his service period from May 5, 2008 through May 4, 2009, which shares were not
issued pursuant to any equity incentive plans in effect. As of December 31,
2008, Mr. Tchaikovsky has received 26,086 shares, with the balance of 26,087
shares to vest during the remainder of his vesting period from January 1, 2009
through May 4, 2009.





Compensation
of Directors





The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the year ended December 31,
2008.





DIRECTOR COMPENSATION
      TABLEName
            
            Year
            
            Fees
              Earned
              or
              Paid
      in
              Cash
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            
            Nonqualified
              Deferred
              Compensation
      Earnings
              ($)
            
            All
      Other
              Compensation
              ($)
            
            Total
              ($)Weibing
      Lu (1)
            
            
            2008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-Wei
      Wen (1)
            
            
            2008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-Erna
      Gao (1) (2)
            
            
            2008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-Xinya
      Zhang (1) (2)
            
            
            2008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-R.
      Scott Cramer (3)
            
            
            2008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            195,104
            
            195,104Qiang
      Fan (3)
            
            
            2008
            
            14,055
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            14,055Chengtun
      Qu (3)
            
            
            2008
            
            1,368
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            1,368Winston
      Yen (3)
            
            
            2008
            
            18,271
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            18,271Shouguo
      Zhao (3)
            
            
            2008
            
            3,420
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            3,420




(1)
                In
      connection with the share exchange transaction (described in the
      Description of Business above under the heading "Corporate Organization
      and History"), these persons became our directors on November 7, 2005.
      After the change in control that occurred as a result of the share
      exchange transaction, we do not have any compensation arrangements with
      our directors.
 
 (2)
                  Ms.
      Erna Gao and Mr. Xinya Zhang resigned from our board of directors
      effective July 14, 2008.
 (3)
                Mr.
      Cramer was an officer of the Company prior to the share exchange
      transaction and has stayed on as a director thereafter.Mr.
      Cramer’s compensation for 2008 was for services provided during the year
      unrelated to his duties as a director, and includes 90,000 shares of the
      Company’s restricted common stock already issued to him as well as 110,000
      restricted common shares to be issued to him, none of which is pursuant to
      any equity incentive plan in
effect.
 
 (4)
                Mr.
      Qiang Fan was appointed to our board of directors effective July 14, 2008,
      and is entitled to receive annual compensation of $30,000 for his services
      rendered as a director, as well as chairman of the compensation and member
      of the audit committee.
 
 (5)
                Dr.
      Chengtun Qu was appointed to our board of directors effective July 14,
      2008, and is entitled to receive annual compensation of RMB 20,000 for his
      services rendered as a director.
  37
  (6)
                Mr.
      Winston Yen was appointed to our board of directors effective July 14,
      2008, and is entitled to receive annual compensation of $39,000 for his
      services rendered as a director, as well as chairman of the audit
      committee and member of the compensation
  committee.
 
 (7)
                Dr.
      Shouguo Zhao was appointed to our board of directors effective July 14,
      2008, and is entitled to an annual compensation of RMB 50,000 for his
      services rendered as a director, as well as a member of both the audit
      committee and the compensation
committee.
 
 (8)
                For
      reporting purposes in this table, compensations in RMB have been converted
      to U.S. Dollars at the conversion rate of 6.85 RMB to one U.S.
      Dollar.





There
were no option awards issued to any directors and outstanding as of December 31,
2008.





Director
Agreements





In
connection with the appointments of Mr. Fan, Dr. Qu, Mr. Yen and Dr. Zhao to our
board, we entered into agreements with each of them as follows:





Under our
agreement with Mr. Fan, he will be entitled to receive annual compensation of
$30,000 for his services rendered as a member of the board, as well as the
chairman of the compensation committee and member of the audit committee. Mr.
Fan’s annual compensation will be paid in cash, although at the discretion of
the Board, up to $8,000 of his annual compensation may be paid in the form of a
number of shares of the Company’s common stock under the Company’s Stock
Incentive Plan #2 (the “Plan”). During his term as a director, we agree to
include Mr. Fan as an insured under an officers and directors insurance policy
which we will obtain within a reasonable time (the “D&O Insurance”). In
addition, the Company has agreed to reimburse Mr. Fan for reasonable expenses
incurred in connection with the performance of duties as a director of the
Company, including travel expenses.





Under our
agreement with Dr. Qu, he will be entitled to receive annual compensation of RMB
20,000 for his services rendered as a member of the board. In addition, the
Company has agreed to reimburse Mr. Qu for reasonable expenses incurred in
connection with the performance of duties as a director of the Company,
including travel expenses.





Under our
agreement with Mr. Yen, he will be entitled to receive annual compensation of
$39,000 for his services rendered as a member of the board, as well as the
chairman of the audit committee and member of the compensation committee. Mr.
Yen’s annual compensation will be paid in cash, although at the discretion of
the Board, up to $13,000 of his annual compensation may be paid in the form of a
number of shares of the Company’s common stock under the Plan. During his term
as a director, we agree to include Mr. Yen as an insured under the D&O
Insurance. In addition, the Company has agreed to reimburse Mr. Yen for
reasonable expenses incurred in connection with the performance of duties as a
director of the Company, including travel expenses.





Under our
agreement with Dr. Zhao, he will be entitled to receive annual compensation of
RMB 50,000 for his services rendered as a member of the board, as well as a
member of both the audit committee and the compensation committee. In addition,
the Company has agreed to reimburse Mr. Zhao for reasonable expenses incurred in
connection with the performance of duties as a director of the Company,
including travel expenses.





Indemnification
of Officers and Directors





We are a
Nevada corporation, and accordingly, we are subject to the corporate laws under
the Nevada Revised Statutes. Pursuant to Article 7 of our articles of
incorporation and Nevada’s Revised Business Statutes, our bylaws contain the
following indemnification provisions for our directors and
officers:





“Section
8.1. Indemnification. No officer or director shall be personally liable for any
obligations arising out of any acts or conduct of said officer or director
performed for or on behalf of the Corporation. The Corporation shall and does
hereby indemnify and hold harmless each person and his heirs and administrators
who shall serve at any time hereafter as a director or officer of the
Corporation from and against any and all claims, judgments and liabilities to
which such persons shall become subject by reason of any action alleged to have
been heretofore or hereafter taken or omitted to have been taken by him as such
director or officer, and shall reimburse each such person for all legal and
other expenses reasonably incurred by him in connection with any such claim of
liability; including power to defend such person from all suits as provided for
under the provisions of the Nevada Corporation Laws; provided, however that no
such person shall be indemnified against, or be reimbursed for, any expense
incurred in connection with any claim or liability arising out of his own gross
negligence or willful misconduct. The rights accruing to any person under the
foregoing provisions of this section shall not exclude any other right to which
he may lawfully be entitled, nor shall anything herein contained restrict the
right of the Corporation to indemnify or reimburse such person in any proper
case, even though not specifically herein provided for. The Corporation, its
directors, officers, employees and agents shall be fully protected in taking any
action or making any payment or in refusing so to do in reliance upon the advice
of counsel.




38





Section
8.2. Other Indemnification. The indemnification herein provided shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer or employee and shall inure to
the benefit of the heirs, executors and administrators of such a
person.





Section
8.3. Insurance. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer or employee of the Corporation, or
is or was serving at the request of the Corporation in such capacity for another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any capacity, or arising
out of his status as such, whether or not the Corporation would have the power
to indemnify him against liability under the provisions of this Article VIII or
the laws of the State of Nevada.





Section
8.4. Settlement by Corporation. The right of any person to be indemnified shall
be subject always to the right of the Corporation by its Board of Directors, in
lieu of such indemnity, to settle any such claim, action, suit or proceeding at
the expense of the Corporation by the payment of the amount of such settlement
and the costs and expenses incurred in connection therewith.”





These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.





Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. No pending material
litigation or proceeding involving our directors, executive officers, employees
or other agents as to which indemnification is being sought exists, and we are
not aware of any pending or threatened material litigation that may result in
claims for indemnification by any of our directors or executive
officers.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





Equity
Compensation Plan Information





Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plansEquity
      compensation plans
              approved
      by security holdersEquity
      compensation plans
              not
      approved by security holders
            
            
            0
            
            
            
            0
            
            
            
            2,693,100
            (1)(2)TOTAL
            
            
            0
            
            
            
            0
            
            
            
            2,693,100




As of
December 31, 2008, the Company had the following two equity compensation plans
in effect:
 
 (1)
              On October 16, 2002, the Company
      adopted a stock incentive plan for officers, directors, employees, and
      consultants entitled the “Cyber Group Network Corporation Stock Incentive
      Plan # 2” (hereinafter the “2002 Plan”). The maximum number of shares that
      may be issued under the 2002 Plan is 40,000,000 shares of our common
      stock. The 2002 Plan has not previously been approved by security holders
      and awards may be granted under this Plan until October 15, 2012. Under
      this Plan, the Company may issue common stock and/or options to purchase
      common stock to certain officers, directors and employees and consultants
      of the Company and its subsidiaries. The 2002 Plan is administered either
      by the compensation committee or a committee appointed by the Board, which
      is comprised of a combination of two or more officers and/or members of
      the Board. The committee has full and complete authority, in its
      discretion, but subject to the express provisions of the Plan to approve
      the eligible persons nominated by the management of the Company to be
      granted awards of common stock “Awards”) or stock options, to determine
      the number of Awards or stock options to be granted to an eligible person;
      to determine the time or times at which or stock options shall be granted;
      to establish the terms and conditions upon which Awards or Stock Options
      may be exercised; to remove or adjust any restrictions and conditions upon
      Awards or Stock Options; to specify, at the time of grant, provisions
      relating to exercisability of Stock Options and to accelerate or otherwise
      modify the exercisability of any Stock Options; and to adopt such rules
      and regulations and to make all other determinations deemed necessary or
      desirable for the administration of the Plan. As of December 31, 2008,
      there are 2,093,452 shares of our common stock remaining available for
      future issuance under the 2002
Plan.
  39
  (2)
              On February 22, 2006, the Company
      adopted a stock incentive plan for consultants entitled the “2006
      Consultant Stock Plan” (hereinafter the “2006 Plan”). The maximum number
      of shares that may be issued under the 2006 Plan is 1,199,648 shares of
      our common stock. The 2006 Plan has not previously been approved by
      security holders and awards may be granted under this Plan until February
      21, 2016. Under the 2006 Plan, the Company may issue common stock to
      certain consultants of the Company who are crucial to the future growth
      and success of the Company and its subsidiaries and affiliates. The 2006
      Plan is administered by either a committee appointed by the Board, which
      is comprised of one or more members of the Board who is not serving on
      another plan committee, or the Board. The committee has full and complete
      authority, in its discretion, but subject to the express provisions of the
      Plan, to designate the persons or classes of persons eligible to receive
      awards of common stock “Awards”; to determine the form and amount of
      Awards to be granted to an eligible person or class of persons; to
      establish the terms and conditions upon which Awards may be exercised; to
      remove or adjust any restrictions and conditions upon Awards; and to adopt
      such rules and regulations and to make all other determinations deemed
      necessary or desirable for the administration of the Plan. As of December
      31, 2008, there are 599,648 shares of our common stock remaining available
      for future issuance under the 2006
Plan.




Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth certain information regarding our common stock
beneficially owned on March 25, 2009, for (i) each stockholder known to be the
beneficial owner of 5% or more of our outstanding common stock, (ii) each
executive officer and director, and (iii) all executive officers and directors
as a group. In general, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60
days.  Shares of common stock subject to options, warrants or
convertible securities exercisable or convertible within 60 days of March 25,
2009 are deemed outstanding for computing the percentage of the person or entity
holding such options, warrants or convertible securities but are not deemed
outstanding for computing the percentage of any other person. To the best of our
knowledge, subject to community and martial property laws, all persons named
have sole voting and investment power with respect to such shares, except as
otherwise noted.





Title of
      Class
            
            Name and
      Address
              of  Beneficial
      Owners (1)
            
            Amount
              of Beneficial
      Ownership
            
            
            Percent
              ofClass (2)Common
      Stock
            
            Upform
      Group Limited (3)
            
            
            4,695,623
            
            
            
            25.16
            %Common
      Stock
            
            Weibing
      Lu, Director and Chief Executive Officer (3)
            
            
            4,695,623
            
            
            
            25.16
            %Common
      Stock
            
            Wei
      Wen, Director (4)
            
            
            207,715
            
            
            
            1.11
            %Common
      Stock
            
            Bennet
      P. Tchaikovsky, Chief Financial Officer (5)
            
            
            52,173
            
            
            
            *Common
      Stock
            
            R.
      Scott Cramer, Director (6)
            
            
            892,231
            
            
            
            4.78
            %Common
      Stock
            
            Qiang
      Fan, Director (7)
            
            
            -0-
            
            
            
            0
            %Common
      Stock
            
            Chengtun
      Qu (8)
            
            
            -0-
            
            
            
            0
            %Common
      Stock
            
            Winston
      Yen (9)
            
            
            -0-
            
            
            
            0
            %Common
      Stock
            
            Shouguo
      Zhao (10)
            
            
            -0-
            
            
            
            0
            %Common
      Stock
            
            Premier
      Renn US Emerging Fund Limited (11)
            
            
            1,051,044
            
            
            
            5.63
            %Common
      Stock
            
            Renaissance
      US Growth Investment Trust PLC (11)
            
            
            2,916,857
            
            
            
            15.63
            %Common
      Stock
            
            All
      officers and directors as a group  (8 total)
            
            
            5,595,569
            
            
            
            30.36
            %


__________


* Less
than 1%.





(1)
            Unless
      otherwise noted, the address for each of the named beneficial owners is:
      Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin District, Xi’an,
      Shaanxi Province, People’s Republic of
China.




40




(2)
            Unless
      otherwise noted, the number and percentage of outstanding shares of our
      common stock is based upon 18,665,189 shares outstanding as of March 25,
      2009.





(3)
            Upform
      Group Limited’s (“Upform Group”) address is Sea Meadow House, Blackburne
      Highway, P.O. Box 116, Road Town, Tortola, British Virgin Islands. Weibing
      Lu and Xinya Zhang are directors of the Upform Group. Mr. Lu is the
      majority stockholder and the Chairman of the Board of Directors of Upform
      Group, and thus Mr. Lu indirectly owns the shares held by Upform Group,
      through his majority ownership of Upform Group. Thus, the number of shares
      reported herein as beneficially owned by Mr. Lu therefore includes the
      shares held by Upform Group. Similarly, because Xinya Zhang is a director
      of Upform Group, he might be deemed to have or share investment control
      over Upform Group’s portfolio. Thus, the number of shares reported herein
      as beneficially owned by Mr. Zhang also include the shares held by Upform
      Group.





(4)
            The
      number of shares reported herein as beneficially owned by Mr. Wen includes
      the shares held Clever Mind International Limited, which address is: Sea
      Meadow House, Blackburne Highway, P.O. Box 116, Road Town, Tortola,
      British Virgin Islands. Mr. Wen is Chairman of the Board of Directors of
      Clever Mind and owns approximately 2.3% of the issued and outstanding
      shares of Clever Mind. Because Mr. Wen is a director of Clever Mind, he
      might be deemed to have or share investment control over Clever Mind’s
      portfolio.





(5)
            Bennet
      P. Tchaikovsky’s address is: 6571 Morningside Drive, Huntington Beach, CA
      92648. Includes 26,087 shares that Mr. Tchaikovsky has right to acquire
      beneficial ownership of within 60 days of March 25,
  2009.





(6)
            R.
      Scott Cramer’s address is: 1012 Lewis Dr., Winter Park, FL 32789. Includes
      771,411 shares held by the Cramer Family Trust of which Mr. Cramer is the
      sole trustee and sole primary beneficiary, and 110,000 shares that Mr.
      Cramer has right to acquire beneficial ownership of within 60 days of
      March 25, 2009.





(7)
            Qiang
      Fan’s address is: 9176 West Laguna Way, Elk Grove, CA
    95758.





(8)
            Chengtun
      Qu’s address is: No. 18 Dian Zi 2nd Road, School of Chemistry &
      Chemical Engineering, Xi'an Shiyou University, Xi'an, Shaanxi Province,
      People’s Republic of China.





(9)
            Winston
      Yen’s address is: 345 S. Figueroa Street, Suite 100, Los Angeles,
      California 90071.





(10)
            Shouguo
      Zhao’s address is: No. 229 North Tai Bai Road, School of Economics and
      Management, Northwest University, Xi'an, Shaanxi Province, People’s
      Republic of China.





(11)
            The
      address for both Renaissance US Growth Investment Trust PLC
      (“Renaissance”) and Premier RENN US Emerging Growth Fund Ltd.’s (“RENN”)
      is: 8080 North Central Expressway, Suite 210, Dallas, Texas 75206. Russell
      Cleveland is the natural person who has voting power and the power to
      sell, transfer or otherwise dispose of the common stock held by
      Renaissance and RENN. Because Renaissance and RENN share common control,
      they are deemed affiliates of each
other.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Our
Officers and Directors’ Relationship with Skystar, Our Subsidiaries and
VIE





Mr.
Weibing Lu, our Chairman and Chief Executive Officer, is a Director of Upform
Group Limited, a British Virgin Islands company which owns approximately 25.16%
of Skystar’s issued and outstanding common stock. Mr. Wei Wen, who is one of our
directors, is Director of Clever Mind International Limited, a British Virgin
Islands company which owns approximately 1.11% of Skystar’s issued and
outstanding common stock. Mr. R. Scott Cramer, who is also one of our directors,
owns and/or controls approximately 4.19% of Skystar’s issued and outstanding
common stock. Mr. Lu and Mr. Wen are both Directors of Skystar Cayman, our
wholly owned subsidiary.





Mr. Wen
is Director of Fortunate Time, wholly-owned subsidiary of Skystar
Cayman.





The
management of Sida, the wholly-owned subsidiary of Fortunate Time, includes Mr.
Wen as General Manager.





The
management of Xian Tianxing, which we control through contractual arrangements
between Sida and Xian Tianxing, includes Mr. Lu as Chairman and Chief Executive
Officer and Mr. Wen as Vice-General Manager and Director. As of the date of this
report, Mr. Lu also owns approximately 25.16%, and Mr. Wen approximately 1.11%,
of the issued and outstanding stock of Xian Tianxing.





Mr. Wen
is the General Manager of Shanghai Siqiang, wholly-owned subsidiary of Xian
Tianxing.




41




Conflicts
of interests between Mr. Lu and Mr. Wen’s duties to our Company and Xian
Tianxing may arise. As they are directors of the Company (and also an executive
officer in the case of Mr. Lu), they have a duty of loyalty and care to us under
U.S. and Cayman Islands law when there are any potential conflicts of interests
between our Company and Xian Tianxing. We cannot assure you, however, that when
conflicts of interest arise, they will act completely in our interests or that
conflicts of interests will be resolved in our favor. In addition, they could
violate their legal duties by diverting business opportunities from us to
others. If we cannot resolve any conflicts of interest between us and Mr. Lu or
between us and Mr. Wen, we would have to rely on legal proceedings, which could
result in the disruption of our business.





Certain
Relationships and Related Transactions





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





December
      31, 2008
            
            
            December
      31, 2007Short term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1) (2)
            
            $
            220,050
            
            
            $
            -Mr.
      Wei Wen – officer and shareholder (2)
            
            
            44,010
            
            
            
            -Ms.
      Aixia Wang – shareholder (2)
            
            
            44,010
            
            
            
            -Total
            
            $
            308,070
            
            
            $
            -Amounts
      due from related partyMr.
      Weibing Lu – officer and shareholder (3)
            
            $
            -
            
            
            $
            59,462Shares to be issued to
      related partyScott
      Cramer – non-executive director (4)
            
            $
            95,204
            
            
            $
            -Amounts due to related
      partiesTianXing
      Digital - owned by a director (5)
            
            $
            -
            
            
            $
            17,137Ms.
      Aixia Wang – shareholder (5)
            
            
            -
            
            
            
            1,371Bennet
      P. Tchaikovsky – CFO (5)
            
            
            13,168
            
            
            
            -Scott
      Cramer – non-executive director and shareholder (5)
            
            
            224,684
            
            
            
            30,245Shaanxi
      Xingji Electronics Co. - owned by a director's wife (5)
            
            
            4,373
            
            
            
            32,817Total
            
            $
            242,225
            
            
            $
            81,570





(1)
            During
      2008, Mr. Lu obtained a personal loan from Huaxia Bank’s Xian Branch and
      advanced $176,040 in cash from theproceeds to XianTianxing to facilitate
      its operations. The loan, which matured on December 30, 2008, bore an
      interest rate of7.47% per annum, was unsecured and was guaranteed by Xian
      Tianxing. On January 4, 2009, Xian Tianxing paid to the bank the full
      principal amount along with interest of
$15,741.





(2)
            On
      May 29, 2008, Mr. Lu, Mr. Wen and Ms. Wang obtained personal loans from
      Yanta Credit Union’s East Xiaozai RoadBranch, and advanced $132,030 in
      cash from the proceeds to Xian Tianxing to facilitate its operations. The
      loans, which are dueon May 29, 2009, have 8.436% interest per annum and
      are guaranteed by Xian Tianxing. As of December 31, 2008, Xian Tianxing
      had paid $3,695 in interest for the loans of these three
      shareholders.





(3)
            As
      of December 31, 2008 and 2007, the Company had a receivable from Mr. Lu in
      the amount of $0 and $59,462, respectively.The amounts due from Mr. Lu was
      comprised of cash advances to Mr. Lu to facilitate Xian Tianxing’s
      operations and for thereimbursement of expenses paid, or to be paid, by
      Mr. Lu on behalf of Xian Tianxing. These balances are non-interest
      bearing, unsecured, and due on
demand.





(4)
            As
      of December 31, 2008, the Company had $95,204 in common shares to be
      issued to Mr. Cramer, which represented 110,000common shares as
      compensation to Mr. Cramer for services as a U.S. representative of the
      Company for the period from May2008 to December
  2008.





(5)
            Shaanxi
      Xinji Electronics Co., Ltd. is owned by the wife of Mr. Lu
      and Tianxing Digital Co., Ltd. is owned by Mr. Lu. The amounts due to
      Shaanxi Xinji Electronics and Tianxing Digital as of December 31, 2007
      were short term cash transfers for business operations, non-interest
      bearing, unsecured, and payable upon demand. As of December 31, 2008 and
      2007, the Company also had $224,684 and $13,168 payable to Scott Cramer
      and Bennet P. Tchaikovsky for the expenses paid by them on behalf of the
      Company.




42




On
January 1, 2007, we entered into a 5-year lease agreement with Mr. Weibing Lu to
lease the premises at Rm. 10601, Jiezuo Plaza, No.4, Fenghui Road South, Gaoxin
District, Xian Province, PRC, which belongs to Mr. Lu and which has been serving
as our headquarters. The annual rent under the lease agreement is RMB 165,600
(approximately $24,000). Mr. Lu previously provided the premises rent-free, in
2005 and 2006, for the use of our administrative division.




The
Company also entered into a tenancy agreement with Mr. Lu for the lease of
Shanghai Siqiang’s office for a period of ten years from August 1, 2007 to
August 1, 2017, with annual rent of approximately $21,000 (or RMB
144,000).


Other
than the above transactions or otherwise set forth in any reports filed by the
Company with the SEC, the Company and its subsidiaries have not entered into any
material transactions with any director, executive officer, and nominee for
director, beneficial owner of five percent or more of its common stock, or
family members of such persons. The Company is not a subsidiary of any
company.





Director
Independence





Based
upon information submitted by Mr. Qiang Fan, Dr. Chengtun Qu, Mr. Winston Yen
and the Dr. Shouguo Zhao, our board of directors has determined that each of
them is “independent” under the listing standards of NYSE Alternext US LLC
(formerly the American Stock Exchange).





ITEM 14.PRINCIPAL
ACCOUNTING FEES AND SERVICES





Audit
Fees





For the
years ended December 31, 2008 and 2007, the aggregate fees billed by our
independent auditors, Moore Stephens Wurth Frazer & Torbet LLP (“Moore
Stephens”), for professional services rendered for the audit of the Company’s
annual financial statements and review of the Company’s quarterly financial
statements were $185,000 and $160,000, respectively.





Audited-Related
Fees





For the
years ended December 31, 2008 and 2007, there were no fees billed by Moore
Stephens for services reasonably related to the performance of the audit or
review of the financial statements outside of those fees disclosed above under
“Audit Fees,”





Tax
Fees





For the
years ended December 31, 2008 and December 31, 2007, the aggregate fees billed
by Moore Stephens for services rendered for tax compliance, tax advice and tax
planning work to the Company were $7,000 and $5,000, respectively.





All
Other Fees





For the
years ended December 31, 2008 and December 31, 2007, there were no other fees
billed by Moore Stephens for products and services outside of those fees
disclosed above under “Audit Fees”, “Audit-Related Fees” and “Tax
Fees”.





ITEM
15.   EXHIBITS





(1) Financial
Statements





The
following consolidated financial statements of Skystar are included in Part II,
Item 8 of this Report:





Report of
Independent Registered Public Accounting Firm





Consolidated
Balance Sheets at December 31, 2008 and 2007





Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2008 and 2007





Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2008 and
2007





Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007





Notes to
Consolidated Financial Statements




43




(2)
Financial Statement Schedules





Schedules
are omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.





(3)
Exhibits





EXHIBIT INDEX




Exhibit
      Number
                
                Description2.1
                
                Share
      Purchase Agreement by and between The Cyber Group Network, Inc. and Howard
      L. Allen and Donald G. Jackson (shareholders of Hollywood Entertainment
      Network, Inc.) dated May 12, 2000 (1)2.2
                
                Plan
      of Merger Agreement between The Cyber Group Network Corp. and CGN
      Acquisitions Corporation dated December 7, 2000 (2)2.3
                
                Share
      Exchange Agreement between The Cyber Group Network Corporation, R. Scott
      Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical, and the
      Skystar Shareholders dated September 20, 2005 (3)3.1
                
                Charter
      of The Cyber Group Network Corporation as filed with the State of Nevada
      (4)3.2
                
                Certificate
      of Amendment and Certificate of Change (5)3.3
                
                Certificate
      of Amendment to Increase Number of Authorized Shares of Common Stock
      (13)3.4
                
                Amended
      and Restated Bylaws of Skystar Bio-Pharmaceutical Company
    (14)4.1
                
                Certificate
      of Designation of Series B Convertible Preferred Stock
  (4)4.2
                
                Form
      of Class A Convertible Debenture (6)4.3
                
                Form
      of Class B Convertible Debenture (6)4.4
                
                Form
      of Class A Warrant (6)4.5
                
                Form
      of Class B Warrant (6)10.1
                
                Form
      of Securities Purchase Agreement, dated as of February 26, 2007 by and
      among the Company and eight accredited investors (6)10.2
                
                Form
      of Registration Rights Agreement, dated as of February 26, 2007 by and
      among the Company and eight accredited investors (6)10.3
                
                Form
      of Company Principal Lockup Agreement in connection with the Securities
      Purchase Agreement dated as of February 26, 2007 (6)10.4
                
                Form
      of the Amendment, Exchange and Waiver Agreement between the Company and
      certain accredited investors dated November 9, 2007 (7)10.5
                
                Form
      of the Amendment and Waiver Agreement between Skystar Bio-Pharmaceutical
      Company and two institutional and accredited investors dated March 31,
      2008 (10)10.6
                
                Amendment
      to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
      Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
      (8)




44


10.7
            
            Agreement
      to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
      Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
      2008 (8)10.8
            
            Amendment
      to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
      (8)10.9
            
            Designation
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, Weibing Lu and Sida dated March 10, 2008
  (8)10.10
            
            Agreement
      to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10, 2008
      (8)10.11
            
            Employment
      Agreement with Weibing Lu dated May 5, 2008 (11)10.12
            
            Loanout
      Agreement with Worldwide Officers, Inc. with respect to the services of
      Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008
      (11)10.13
            
            Form
      of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
      (14)10.14
            
            Form
      of Director Offer Letter with Chengtun Qu and Shouguo Zhao
      (14)14.1
            
            Code
      of Ethics (15)21.1
            
            List
      of subsidiaries (15)31.1
            
            Section
      302 Certification by the Corporation’s Chief Executive Officer
      (15)31.2
            
            Section
      302 Certification by the Corporation’s Chief Financial Officer
      (15)32.1
            
            Section
      906 Certification by the Corporation's Chief Executive Officer
      (15)32.2
            
            Section
      906 Certification by the Corporation's Chief Financial Officer
      (15)99.1
            
            Legal
      Opinion from Allbright Law Offices regarding the transfer of the
      contractual arrangements from Skystar Cayman to Sida, dated April 29, 2008
      (12)99.2
            
            Lease
      Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
      (9)99.3
            
            Lease
      Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
      Lu dated June 17, 2007 (12)99.4
            
            Summary
      of Research Arrangement between Shanghai Poultry Verminosis Institute and
      Xian Tianxing (12)99.5
            
            Cooperation
      Agreement between Shaanxi Microbial Institute and Xian Tianxing
      (12)




(1)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on
      June 1, 2000.
 
 (2)
              Incorporated by reference from
      the Registrant’s Current Report on Form 8-K/A filed on January 12,
      2001.
 
 (3)
              Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on September 26,
      2005.
 
 (4)
              Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on November 14,
      2005.
 
 (5)
              Incorporated by reference from
      the Registrant’s Annual Report on Form 10-KSB filed on April 17,
      2006.
 
 45
  (6)
              Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on March 5,
      2007.
 
 (7)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      December 11, 2007.
  (8)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on March 11,
      2008.
 
 (9)
              Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K on April 2,
      2008.
 
 (10)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on April 23,
      2008.
 
 (11)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on May 5,
      2008.
 
 (12)
              Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 26, 2008.
 
 (13)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on July 14,
      2008.
 
 (14)
              Incorporated
      by reference from the Registrant’s Current Report on Form 8-K on July 15,
      2008.
 
 (15)
              Filed
      herewith.
  46
  SIGNATURES





Pursuant
to the requirements of section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.




SKYSTAR
      BIO-PHARMACEUTICAL COMPANY
                (Registrant)Date:
      April 15, 2009
              By:
              /s/
      Weibing LuWeibing
      Lu
                Chief
      Executive Officer




Date:
      April 15, 2009
                By:
                /s/
      Bennet P. TchaikovskyBennet
      P. TchaikovskyChief
      Financial Officer





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





Name
            
            Title
            
            Date/s/
      Weibing Lu
            
            Chief
      Executive Officer / Director
            
            April
      15, 2009Weibing
      Lu/s/
      Bennet P. Tchaikovsky
            
            Chief
      Financial Officer
            
            April
      15, 2009Bennet
      P. Tchaikovsky/s/
      Wei Wen
            
            Secretary
      / Director
            
            April
      15, 2009Wei
      Wen/s/
      R. Scott Cramer
            
            Director
            
            April
      15, 2009R.
      Scott Cramer/s/
      Qiang Fan
            
            Director
            
            April
      15, 2009Qiang
      Fan/s/
      Chengtun Qu
            
            Director
            
            April
      15, 2009Chengtun
      Qu/s/
      Winston Yen
            
            Director
            
            April
      15, 2009Winston
      Yen/s/
      Shouguo Zhao
            
            Director
            
            April
      15, 2009Shouguo
      Zhao




47
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders of
 Skystar
Bio-Pharmaceutical Company and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Skystar
Bio-Pharmaceutical Company and Subsidiaries (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations and other
comprehensive income, shareholders’ equity, and cash flows for each of the years
in the two-year period ended December 31, 2008.  The Company’s
management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the 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, 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 consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. 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 Skystar Bio-Pharmaceutical
Company and Subsidiaries as of December 31, 2008 and 2007, and the results of
its operations and its cash flows for each of the years in the two-year period
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.
 
 
 /s/  Moore
Stephens Wurth Frazer and Torbet, LLP
 Walnut,
California
 April 14,
2009
  F-1
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2008 AND 2007
  ASSETS




2008
              
              
              2007CURRENT
      ASSETS:Cash
              
              $
              576,409
              
              
              $
              771,492Restricted
      cash
              
              
              80,885
              
              
              
              74,969Short-term
      investment
              
              
              352,080
              
              
              
              383,880Accounts
      receivable, net of allowance for doubtful accounts of $327,857
                and
      $199,639 as of December 31, 2008 and 2007, respectively.
              
              
              2,424,102
              
              
              
              1,356,094Inventories
              
              
              3,086,060
              
              
              
              2,242,611Deposits
      and prepaid expenses
              
              
              4,878,851
              
              
              
              806,657Loan
      and other receivables
              
              
              380,186
              
              
              
              628,772Amounts
      due from related party
              
              
              -
              
              
              
              59,462Total
      current assets
              
              
              11,778,573
              
              
              
              6,323,937PROPERTY,
      PLANT AND EQUIPMENT, NET
              
              
              7,413,689
              
              
              
              6,262,731CONSTRUCTION-IN-PROGRESS
              
              
              6,516,630
              
              
              
              5,531,236OTHER
      ASSETS:Long
      term prepayments
              
              
              5,207,117
              
              
              
              1,220,190Deferred
      financing costs
              
              
              -
              
              
              
              101,815Intangible
      assets, net
              
              
              899,529
              
              
              
              1,011,236Total
      other assets
              
              
              6,106,646
              
              
              
              2,333,241Total
      assets
              
              $
              31,815,538
              
              
              $
              20,451,145LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short
      term loan
              
              $
              748,170
              
              
              $
              -Accounts
      payable
              
              
              547,430
              
              
              
              126,754Accrued
      expenses
              
              
              1,488,575
              
              
              
              502,871Short
      term loans from shareholders
              
              
              308,070
              
              
              
              -Deposits
      from customers
              
              
              424,266
              
              
              
              61,706Taxes
      payable
              
              
              212,661
              
              
              
              568,797Other
      payables
              
              
              68,398
              
              
              
              81,221Shares
      to be issued to related party
              
              
              95,204
              
              
              
              -Amounts
      due to related parties
              
              
              242,225
              
              
              
              81,570Total
      current liabilities
              
              
              4,134,999
              
              
              
              1,422,919OTHER
      LIABILITIES:Deferred
      government grant
              
              
              1,100,250
              
              
              
              1,028,250Convertible
      debentures, fully converted as of December 31, 2008 and net
    of$398,171
      discount as of December 31, 2007
              
              
              -
              
              
              
              84,752Total
      other liabilities
              
              
              1,100,250
              
              
              
              1,113,002Total
      liabilities
              
              
              5,235,249
              
              
              
              2,535,921COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, 2,000,000 series
      "A" shares
                issued
      and outstanding as of December 31, 2008 and 2007,
      respectively;  Nil series "B"
                shares
      issued and outstanding as of December 31, 2008 and 2007,
      respectively.
              
              
              2,000
              
              
              
              2,000Common
      stock, $0.001 par value, 200,000,000 and 50,000,000 shares authorized as
      of
                December
      31, 2008 and 2007, respectively; 18,665,189 and 17,111,200
      sharesissued
      and outstanding as of December 31, 2008 and 2007,
      respectively.
              
              
              18,665
              
              
              
              17,111Paid-in-capital
              
              
              16,330,843
              
              
              
              14,741,278Deferred
      compensation
              
              
              -
              
              
              
              (62,758
              )Statutory
      reserves
              
              
              2,952,710
              
              
              
              1,652,720Retained
      earnings
              
              
              4,418,464
              
              
              
              122,271Accumulated
      other comprehensive income
              
              
              2,857,607
              
              
              
              1,442,602Total
      shareholders' equity
              
              
              26,580,289
              
              
              
              17,915,224Total
      liabilities and shareholders' equity
              
              $
              31,815,538
              
              
              $
              20,451,145


The
accompanying notes are an integral part of these consolidated financial
statements.
 See
report of independent registered public accounting firm.
  F-2
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 FOR THE
YEARS ENDED DECEMBER 31, 2008 and 2007
 
 Years
      ended December 31,2008
              
              
              2007REVENUE,
      NET
              
              $
              25,584,446
              
              
              $
              15,056,828COST
      OF REVENUE
              
              
              12,808,896
              
              
              
              6,712,365GROSS
      PROFIT
              
              
              12,775,550
              
              
              
              8,344,463OPERATING
      EXPENSESResearch
      and development
              
              
              549,236
              
              
              
              268,320Selling
      expenses
              
              
              1,381,807
              
              
              
              739,422General
      and administrative
              
              
              2,663,520
              
              
              
              2,438,995Total
      operating expenses
              
              
              4,594,563
              
              
              
              3,446,737INCOME
      FROM OPERATIONS
              
              
              8,180,987
              
              
              
              4,897,726OTHER
      INCOME (EXPENSE)Other
      income (expense), net
              
              
              30,906
              
              
              
              (3,651
              )Interest
      income from short-term investment
              
              
              13,406
              
              
              
              8,690Interest
      expense, net
              
              
              (342,573
              )
              
              
              (4,918,572
              )Inducement
      cost for debentures converted
              
              
              (756,855
              )
              
              
              (634,450
              )Inducement
      cost for warrants exercised
              
              
              -
              
              
              
              (279,547
              )Total
      other expense
              
              
              (1,055,116
              )
              
              
              (5,827,530
              )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
              
              
              7,125,871
              
              
              
              (929,804
              )PROVISION
      FOR INCOME TAXES
              
              
              1,529,688
              
              
              
              1,027,172NET
      INCOME (LOSS)
              
              
              5,596,183
              
              
              
              (1,956,976
              )OTHER
      COMPREHENSIVE INCOME :Foreign
      currency translation adjustment
              
              
              1,415,005
              
              
              
              982,582COMPREHENSIVE
      INCOME (LOSS)
              
              $
              7,011,188
              
              
              $
              (974,394
              )EARNINGS
      PER SHAREBasic
              
              $
              0.31
              
              
              $
              (0.15
              )Diluted
              
              $
              0.31
              
              
              $
              (0.15
              )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARESBasic
              
              
              18,228,731
              
              
              
              13,453,543Diluted
              
              
              18,246,979
              
              
              
              13,453,543




The
accompanying notes are an integral part of these consolidated financial
statements.
 See
report of independent registered public accounting firm.
  F-3
 
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY




Preferred
      stock
              
              
              Common
      stock
              
              
              
              
              
              
              
              
              Retained
      earnings
              
              
              OtherPaid-in
              
              
              Deferred
              
              
              Statutory
              
              
              
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Compensation
              
              
              Reserves
              
              
              Unrestricted
              
              
              Income
              
              
              TotalBALANCE,
      January 01, 2007
              
              
              2,000,000
              
              
              $
              2,000
              
              
              
              12,795,549
              
              
              $
              12,795
              
              
              $
              6,246,325
              
              
              $
              (705,877
              )
              
              $
              779,624
              
              
              $
              2,952,343
              
              
              $
              460,020
              
              
              $
              9,747,230Shares
      issued for services
              
              
              
              
              
              
              
              
              
              
              78,750
              
              
              
              79
              
              
              
              115,684
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              115,763Beneficial
      conversion feature of debentures
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,130,575
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,130,575Warrants
      issued to debenture holders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,944,425
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,944,425Warrants
      issued to placement agent
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,277
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,277Inducement
      cost for debentures converted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              634,450Inducement
      cost for warrants exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,547Debentures
      converted to common stock
              
              
              
              
              
              
              
              
              
              
              3,278,720
              
              
              
              3,279
              
              
              
              2,747,953
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,751,232Cashless
      exercise of warrants
              
              
              
              
              
              
              
              
              
              
              958,181
              
              
              
              958
              
              
              
              (958
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Amortization
      of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,119
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643,119Foreign
      currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              982,582
              
              
              
              982,582Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,956,976
              )
              
              
              
              
              
              
              (1,956,976
              )Appropriation
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              873,096
              
              
              
              (873,096
              )
              
              
              
              
              
              
              -BALANCE,
      December 31, 2007
              
              
              2,000,000
              
              
              $
              2,000
              
              
              
              17,111,200
              
              
              $
              17,111
              
              
              $
              14,741,278
              
              
              $
              (62,758
              )
              
              $
              1,652,720
              
              
              $
              122,271
              
              
              $
              1,442,602
              
              
              $
              17,915,224Shares
      issued for services
              
              
              
              
              
              
              
              
              
              
              116,086
              
              
              
              116
              
              
              
              130,305
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              130,421Shares
      issued for debt settlement
              
              
              
              
              
              
              
              
              
              
              210,400
              
              
              
              210
              
              
              
              220,710
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              220,920Debentures
      converted to common stock
              
              
              
              
              
              
              
              
              
              
              1,227,503
              
              
              
              1,228
              
              
              
              1,238,550
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,239,778Amortization
      of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,758
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,758Foreign
      currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,415,005
              
              
              
              1,415,005Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,596,183
              
              
              
              
              
              
              
              5,596,183Appropriation
      to statutory reserves
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,299,990
              
              
              
              (1,299,990
              )
              
              
              
              
              
              
              -BALANCE,
      December 31, 2008
              
              
              2,000,000
              
              
              $
              2,000
              
              
              
              18,665,189
              
              
              $
              18,665
              
              
              $
              16,330,843
              
              
              $
              -
              
              
              $
              2,952,710
              
              
              $
              4,418,464
              
              
              $
              2,857,607
              
              
              $
              26,580,289






The
accompanying notes are an integral part of these consolidated financial
statements.
 See
report of independent registered public accounting firm.
  F-4
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 and 2007




Years
      ended December 31,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
              
              $
              5,596,183
              
              
              $
              (1,956,976
              )Adjustments
      to reconcile net income (loss) to cashprovided
      by operating activities:Depreciation
              
              
              443,062
              
              
              
              281,894Amortization
              
              
              179,343
              
              
              
              33,135Amortization
      of deferred financing costs
              
              
              101,815
              
              
              
              879,212Amortization
      of discount on converible debentures
              
              
              680,446
              
              
              
              3,716,243Amortization
      of deferred compensation
              
              
              62,758
              
              
              
              643,119Inducement
      cost for debentures converted
              
              
              257,775
              
              
              
              634,450Inducement
      cost for warrants exercised
              
              
              -
              
              
              
              279,547Issuance
      of common stock for services
              
              
              130,421
              
              
              
              115,763Bad
      debt expense
              
              
              112,253
              
              
              
              238,094Common
      share issuance for debt settlement
              
              
              42,081
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,068,391
              )
              
              
              (1,405,316
              )Inventories
              
              
              (674,486
              )
              
              
              (1,610,916
              )Deposits
      and prepaid expenses
              
              
              (3,647,834
              )
              
              
              (743,955
              )Other
      receivables
              
              
              93,613
              
              
              
              (10,921
              )Accounts
      payable
              
              
              404,642
              
              
              
              48,582Accrued
      expenses
              
              
              946,801
              
              
              
              (34,166
              )Deposits
      from customers
              
              
              352,012
              
              
              
              59,262Taxes
      payables
              
              
              (389,081
              )
              
              
              322,131Other
      payables
              
              
              (18,189
              )
              
              
              (546,037
              )Shares
      to be issued to related party
              
              
              95,204
              
              
              
              -Net
      cash provided by operating activities
              
              
              3,700,428
              
              
              
              943,145CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of short-term investment
              
              
              57,660
              
              
              
              -Proceeds
      of non-interest bearing loan to third parties
              
              
              315,472
              
              
              
              -Refund
      of long term prepayments
              
              
              562,185
              
              
              
              -Long
      term prepayments
              
              
              (4,395,854
              )
              
              
              (1,171,863
              )Purchase
      of intangible assets
              
              
              -
              
              
              
              (658,350
              )Addition
      of construction in progress
              
              
              (1,606,280
              )
              
              
              (383,322
              )Purchase
      of property, plant and equipment
              
              
              (9,529
              )
              
              
              (19,148
              )Net
      cash used in investing activities
              
              
              (5,076,346
              )
              
              
              (2,232,683
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      in restricted cash
              
              
              (654
              )
              
              
              (505
              )Repayments
      from related parties
              
              
              98,901
              
              
              
              (1,198,791
              )Proceeds
      from related companies
              
              
              -
              
              
              
              27,633Proceeds
      from shareholder loans
              
              
              302,715
              
              
              
              1,170,944Proceeds
      from short term loan
              
              
              735,165
              
              
              
              -Loans
      to third parties
              
              
              -
              
              
              
              (912,901
              )Principal
      payment on non-interest bearing loan from third parties
              
              
              -
              
              
              
              (104,019
              )Principal
      payment on convertible debentures
              
              
              -
              
              
              
              (880,259
              )Proceeds
      from convertible debentures, net of debenture expenses
              
              
              -
              
              
              
              3,737,250Net
      cash provided by financing activities
              
              
              1,136,127
              
              
              
              1,839,352EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              44,708
              
              
              
              29,662(DECREASE)
      INCREASE IN CASH
              
              
              (195,083
              )
              
              
              579,476CASH,
      beginning of year
              
              
              771,492
              
              
              
              192,016CASH,
      end of year
              
              $
              576,409
              
              
              $
              771,492SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
              
              $
              35,177
              
              
              $
              2,817Income
      taxes paid
              
              $
              740,899
              
              
              $
              864,392NON-CASH
      INVESTING AND FINANCING TRANSACTIONSConstruction-in-progress
      transferred to property, plant and equipment
              
              $
              1,133,580
              
              
              $
              5,143,496Interest
      capitalized as construction-in-progress
              
              $
              114,990
              
              
              $
              -Share
      issuance for debt settlement
              
              $
              178,839
              
              
              $
              -Share
      issuance for convertible notes converted
              
              $
              482,923
              
              
              $
              -





The
accompanying notes are an integral part of these consolidated financial
statements.
 See
report of independent registered public accounting
firm.




F-5




SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
1 — Description of Business and Organization
 
 Skystar Bio-Pharmaceutical Company (“Skystar” or the “Company”),
was incorporated in Nevada. The Company has not carried on any substantive
operations of its own, except for the entering of certain exclusive agreements
with Xian Tianxing Bio-Pharmaceutical Co., Limited (“Xian Tianxing”), a joint
stock company in the People’s Republic of China (“China” or “PRC”), through the
Company’s wholly-owned subsidiary, Skystar Bio-Pharmaceutical (Cayman) Holdings
Co., Limited (“Skystar Cayman”), a Cayman Islands company which the Company
acquired on November 7, 2005. Skystar Cayman, through its variable interest
entity (“VIE”), Xian Tianxing, engages in research, development, production,
marketing and sales of veterinary healthcare and medical care products. All
current operations of the Company are in China.
 
 On August
21, 2007, Xian Tianxing invested $66,700 to establish Shanghai Siqiang
Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang was
established in Putuo District, Shanghai, with a registered capital of $66,700
and is wholly-owned by Xian Tianxing. Shanghai Siqiang is engaged in the
research, development, production and sales of veterinary products, feed
additives, and veterinary disease diagnosis equipment.
 
 On
October 16, 2007, the board of directors of the Company approved the purchase of
all of the issued and outstanding shares of Fortunate Time International Limited
(“Fortunate Time”), a Hong Kong company owned 100% by the Company’s
non-executive director Russell Scott Cramer, for $129 (HKD 1,000).
 
 On July
10, 2007, Fortunate Time established Sida Biotechnology (Xian) Co., Ltd.
(“Sida”) with registered capital of $5,000,000. Fortunate Time invested
$2,000,000 into Sida on July 20, 2007, which amount is payable to Skystar
Cayman. Pursuant to the Xian High Technology District approval notice, Fortunate
Time is required to contribute the remaining $3,000,000 of registered capital by
July 9, 2009. Except for the $2,000,000 investment in Sida and payable to
Skystar Cayman, Fortunate Time does not have any assets or liabilities. Sida was
established in a high technology district in Xian, and is engaged in veterinary
bio-pharmaceutical research, production and selling activities. Sida also
provides technology consultation services to Xian Tianxing.
 
 On March
10, 2008, the Company entered into a series of agreements (collectively the
“Transfer Agreements”) transferring the contractual arrangements governing the
relationship among Skystar Cayman, Xian Tianxing, and the majority shareholders
of Xian Tianxing. Pursuant to the Transfer Agreements, all of the rights and
obligations of Skystar Cayman under the contractual arrangements were
transferred to Sida. In effect, Skystar Cayman assigned the contractual rights
it had with Xian Tianxing to Sida.
 
 As a
result of these contractual arrangements, which obligates Sida to absorb all of
the risk of loss from Xian Tianxing’s activities and enable Sida to receive all
of its expected residual returns, Sida accounts for Xian Tianxing as a VIE under
Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN
46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51.” Accordingly, Sida consolidates Xian Tianxing’s results, assets and
liabilities.
 
 Note
2 — Summary of Significant Accounting Policies
 
 Basis
of Presentation and Consolidation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries and its variable interest entities. All
significant inter-company transactions and balances between the Company, its
subsidiaries and VIEs are eliminated upon consolidation.
   See
report of independent registered public accounting firm.
  F-6
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
  Use
of Estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. For example, the Company estimates its allowance for doubtful
accounts and useful lives of plant and equipment. Because of the use of
estimates inherent in the financial reporting process, actual results could
materially differ from those estimates upon which the carrying values were
based.
 
 Fair
Values of Financial Instruments
 
 On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosure requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets for current
receivables, payables and short term loans qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy
are defined as follow:
  •
                Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 •
                Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 
 •
                Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 The
Company did not identify any assets and liabilities that are required to be
presented on the consolidated balance sheets at fair value in accordance with
SFAS 157.
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and Emerging Issues Task Force
(“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock.” In 2007, the Company issued 8%
convertible debentures in the aggregate face amount of $4.075 million which were
due February 28, 2009 (the “Debentures”), as well as warrants to purchase
4,075,000 shares of the Company’s common stock (the “Warrants”). In 2007 and
2008, the entire $4.075 million of debentures were converted into the Company’s
common stock. As the conversion price of the Debentures and the exercise prices
are set for the conversion prices of such convertible debentures and the
attached warrants, the Company is in a position to be sure it had adequate
authorized shares for the future conversion of convertible debentures and
warrants. Therefore, the embedded derivatives and warrants were recorded as
equity and are not required to be recorded at fair value and marked-to-market at
each reporting period.
 
 Revenue
Recognition
 
 Revenue
of the Company is primarily from the sales of veterinary healthcare and medical
care products in China. Sales are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectability is
reasonably assured. Sales are presented net of value added tax (“VAT”). No
allowance for sales returns is made on these consolidated financial statements
as product returns are insignificant based on historical
experience.
 
 There are
two types of sales upon which revenue is recognized:
 
 a.
              Credit
      sales: Revenue is recognized when the products have been delivered to the
      customers.
 
 b.
              Full
      payment before delivering: Revenue is recognized when the products have
      been delivered to customers.
  
  F-7
 
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Shipping
and handling costs related to costs of goods sold are included in selling
expenses, which totaled $335,605 and $184,766 for years ended December 31, 2008
and 2007, respectively.
 
 The
Company’s revenue and cost of revenue by product line were as
follows:
 
 Years
      EndedDecember
      31, 2008
              
              December
      31, 2007RevenueMicro-organism
              
              $
              5,868,623
              
              
              $
              4,271,139Veterinary
      Medications
              
              
              17,535,757
              
              
              
              9,003,400Feed
      Additives
              
              
              1,189,108
              
              
              
              971,019Vaccines
              
              
              990,958
              
              
              
              811,270Total
      Revenue
              
              
              25,584,446
              
              
              
              15,056,828Cost
      of RevenueMicro-organism
              
              
              1,781,598
              
              
              
              1,416,550Veterinary
      Medications
              
              
              10,389,726
              
              
              
              4,654,347Feed
      Additives
              
              
              525,653
              
              
              
              549,714Vaccines
              
              
              111,919
              
              
              
              91,754Total
      Cost of Revenue
              
              
              12,808,896
              
              
              
              6,712,365Gross
      Profit
              
              $
              12,775,550
              
              
              $
              8,344,463
 
 Cash
 
 Cash
includes cash on hand, demand deposits with banks and liquid investments with an
original maturity of three months or less.
 
 Restricted
Cash
 
 The
Company had restricted cash of $80,885 and $74,969 as of December 31, 2008 and
2007, respectively. Restricted cash is comprised of amounts received from the
PRC government as subsidies and set aside for specific uses (see Note 14). The
restricted funds are maintained as bank deposits and reflected as current assets
based on the expected period when such funds will be put into their specific
uses.
 
 Short
Term Investment
 
 Short-term
investment is comprised of securities classified as available-for-sale, held by
a private investment trust company for investing
activities.  Available-for-sale securities are carried at fair value,
with unrealized gains or losses reported in other comprehensive income, net of
tax. Realized gains or losses are included in the results of operations. There
were no unrealized gains or losses relating to short term investment for the
years ended December 31, 2008 and 2007, and as such, no such amounts were
included in other comprehensive income for such periods.
    F-8
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Accounts
Receivable
 Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed. The Company uses
the aging method to estimate the allowance for anticipated uncollectible
receivable balances. Under the aging method, bad debt percentages determined by
management based on historical experience, as well as current economic climate,
are applied to customers’ balances categorized by the number of months the
underlying invoices have remained outstanding. At each reporting period, the
allowance balance is adjusted to reflect the amount computed as a result of the
aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, a corresponding adjustment is made to
the allowance account as a change in estimate.  The ultimate
collection of the Company’s accounts receivable may take one year. Delinquent
account balances are reserved after management determines that the likelihood of
collection is not probable, and known bad debts are written-off against
allowance for doubtful accounts when identified.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market, as determined on a moving weighted
average basis. Costs of inventories include purchases and related costs incurred
in bringing the inventories to their present location and
condition.
 
 Property,
Plant and Equipment
 
 Property,
plant and equipment are stated at cost, less accumulated depreciation. Major
renewals are charged to the property, plant and equipment accounts while
replacements, maintenance and repairs, which do not improve or extend the
respective lives of the assets, are expensed currently. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Estimated useful lives of the assets are as follows:
 
 Estimated
                Useful
      LifeBuildings
              20
      – 40 yearsMachinery
      and equipment
              10
      yearsComputer,
      office equipment and furniture
              5
      yearsVehicles
              5 –
      10 years
 
 Management
assesses the carrying value of plant and equipment annually, more often when
factors indicating impairment are present, and reduces the carrying value of
such assets by the amount of the impairment. The Company determines the
existence of such impairment by measuring the expected future cash flows
(undiscounted and without interest charges) and comparing such amount to the net
asset carrying value. An impairment loss, if it exists, is measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Based on its review, management believes that as of December 31, 2008 and
2007, there was no impairment of its plant and equipment.
 
 Construction
in Progress
 
 Construction
in progress includes direct costs of construction of a factory building.
Interest incurred during the period of construction, if material, is
capitalized. Construction in progress is not depreciated until such time the
assets are completed and put into service.
 
 Intangible
Assets
 
 Land Use Rights —Land use
rights represent the amounts paid to acquire a long-term interest to utilize the
land underlying the Company’s facilities. This type of arrangement is common for
the use of land in the PRC. Land use rights are amortized on a straight-line
basis over its 50 year term.
     F-9
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Technological Know-How —Purchased technological know-how includes confidential formulas,
manufacturing processes, and technical and procedural manuals, and is amortized
using the straight-line method over the expected useful economic life of five
years, which reflects the period over which such confidential formulas,
manufacturing processes, and technical and procedural manuals are kept
confidential by the Company as agreed between the Company and the selling
parties.
 
 Impairment of Intangible Assets —The Company evaluates the carrying value of intangible assets annually,
more often when factors indicating impairment are present. The Company
determines the existence of such impairment by measuring the estimated future
cash flows (undiscounted) and comparing such amount to the net asset carrying
value. If the undiscounted cash flow estimated to be generated by any such
intangible asset is less than its carrying amount, a loss is recognized based on
the amount by which the carrying amount exceeds the intangible asset’s fair
market value. Loss on intangible assets to be disposed of is determined in a
similar manner, except that fair market values are reduced by the cost of
disposal. Based on its review, the Company believes that, as of December 31,
2008, there were no impairments of its intangible assets.
 
 Comprehensive
Income
 
 SFAS No.
130, “Reporting Comprehensive Income” requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The accompanying consolidated financial statements include
the provisions of SFAS No. 130. Accumulated other comprehensive income is
comprised of the changes in foreign currency exchange rates.
 
 Research
and Development Costs
 
 Research
and development costs are expensed to operations as incurred and include
salaries, professional fees and technical support fees.
 
 Advertising
Costs
 
 Cost
incurred in the advertisement of the Company and the Company’s products are
charged to operations currently. Advertising costs for the years ended December
31, 2008 and 2007 were $93,573 and $33,627, respectively.
 
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with the SFAS No. 109,
“Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires a company to use
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS 109, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all
of, a deferred tax asset will not be realized. There were no deferred tax
amounts at December 31, 2008 and December 31, 2007.
 
 On
January 1, 2007, the Company adopted FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). In accordance with FIN 48, a tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition. The adoption had no effect on the Company’s consolidated financial
statements.
     F-10
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
 
 The
Company does not anticipate any events which could cause a change to these
uncertainties.
 
 Stock
Based Compensation
 
 The
Company records stock-based compensation in accordance with SFAS No. 123(R),
“Share-Based Payment” (“SFAS 123R”). SFAS 123R requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. Under SFAS 123R, the Company’s volatility is based on the historical
volatility of the Company’s stock or the expected volatility of similar
companies. The expected life assumption is primarily based on historical
exercise patterns and employee post-vesting termination behavior. The risk-free
interest rate for the expected term of the option is based on the U.S. Treasury
yield curve in effect of the time of grant. SFAS 123R allows the “simplified”
method to determine the term of employee options when certain information is not
available. Because the Company does not have a history of employee stock
options, the Company used the “simplified” method to estimate the expected
life of the options.
 
 Stock
compensation granted to non-employees is determined in accordance with 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”
(“EITF 96-18”), which incorporates the fair value of the consideration received
or the fair value of equity instruments issued, whichever is more reliably
measured.
 
 The
Company uses the Black-Scholes option-pricing model which was developed for use
in estimating the fair value of options. Option-pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option-pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
 
 Through
December 31, 2008, the Company did not grant any stock options.
 
 Earnings
per Share
 
 Earnings
per share is calculated in accordance with the SFAS No. 128, “Earnings Per
Share” (“SFAS 128”).  Basic earnings per share is based upon the
weighted average number of common shares outstanding. Diluted earnings per share
is based on the assumption that all dilutive convertible shares, including
convertible preferred shares, and stock options were converted or exercised.
Further, SFAS 128 requires that stock dividends or stock splits be accounted for
retroactively if the stock dividends or stock splits occur during the period, or
retroactively if the stock dividends or stock splits occur after the end of the
period but before the release of the financial statements, by considering it
outstanding of the entirety of each period presented.  Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.
 
 Foreign
Currency Translation
 
 The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes. The Company’s subsidiaries and VIEs maintain their books and records
in their functional currency, being the primary currency of the economic
environment in which their operations are conducted.
     F-11
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 The
Company translates the subsidiaries’ and VIEs’ assets and liabilities into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet
dates, and the statements of operations and cash flows are translated at average
exchange rates during the reporting period. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the subsidiaries’ and VIEs’
financial statements are recorded as accumulated other comprehensive
income.
 
 The
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China. The rate of exchange quoted by the People’s Bank of China on December 31,
2008 and 2007 was $1.00 to RMB6.82 and RMB7.29, respectively. The weighted
average translation rate of $1.00 to RMB6.94 and RMB7.59 were applied to the
income statement accounts for the years ended December 31, 2008 and 2007,
respectively. As of December 31, 2008 and 2007, the Company had accumulated
other comprehensive income related to translation in the amount of $2,857,607
and $1,442,602, respectively.
 
 Approval
of foreign currency payments by the People’s Bank of China or other institutions
requires submitting a payment application form together with invoices, shipping
documents and signed contracts. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.
 
 Related
Parties
 
 Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of such principal owners and management, and other parties with which
the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests.
 
 Recently
Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141 R”), which replaced SFAS 141. SFAS 141R retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase accounting as
well as requiring the expensing of acquisition-related costs as incurred.
Furthermore, SFAS 141R provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective for fiscal
years beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company is evaluating the impact, if any, that the adoption of this
statement will have on its consolidated results of operations or consolidated
financial position.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It is intended to eliminate the diversity in
practice regarding the accounting for transactions between equity and
noncontrolling interests by requiring that they be treated as equity
transactions. Further, it requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. SFAS 160 also establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation, requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated, requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent’s owners and the interests of the noncontrolling
owners of a subsidiary, among others. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, with early adoption permitted, and it
is to be applied prospectively. SFAS 160 is to be applied prospectively as
of the beginning of the fiscal year in which it is initially applied, except for
the presentation and disclosure requirements, which must be applied
retrospectively for all periods presented. The Company has not yet evaluated the
impact that SFAS 160 will have on its consolidated financial position or
consolidated results of operations.
     F-12
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 In
February 2008, the FASB issued FASB Staff Position No. 157-1 ("FSP 157-1"),
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13."  FSP 157-1
indicates that it does not apply under SFAS 13, "Accounting for Leases," and
other accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under SFAS 13. This scope
exception does not apply to assets acquired and liabilities assumed in a
business combination that are required to be measured at fair value under SFAS
141 or SFAS 141R, regardless of whether those assets and liabilities are related
to leases.
 
 Also in
February 2008, the FASB issued FASB Staff Position No. 157-2 ("FSP 157-2"),
"Effective Date of FASB Statement No. 157."  With the issuance of FSP
157-2, the FASB agreed to: (a) defer the effective date in SFAS No. 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), and (b) remove certain leasing transactions
from the scope of SFAS 157. The deferral is intended to provide the FASB time to
consider the effect of certain implementation issues that have arisen from the
application of SFAS 157 to these assets and liabilities.
 
 In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" (“SFAS 161”). SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for
interim periods and fiscal years beginning after November 15, 2008, with early
adoption encouraged. The Company does not anticipate that the adoption of SFAS
161 will have a material impact on its consolidated results of operations or
consolidated financial position.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3 “Determination of the
useful life of Intangible Assets,” which amends the factors a company should
consider when developing renewal assumptions used to determine the useful life
of an intangible asset under SFAS 142. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. SFAS 142 requires companies to
consider whether renewal can be completed without substantial cost or material
modification of the existing terms and conditions associated with the asset. FSP
142-3 replaces the previous useful life criteria with a new requirement—that an
entity consider its own historical experience in renewing similar arrangements.
If historical experience does not exist, then the Company would consider market
participant assumptions regarding renewal including 1) highest and best use of
the asset by a market participant, and 2) adjustments for other entity-specific
factors included in SFAS 142. The Company is currently evaluating the impact
that adopting FSP 142-3 will have on its consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS 162”). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles." The
Company does not expect the adoption of SFAS 162 will have a material impact on
its consolidated results of operations or consolidated financial
position.
     F-13
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
  In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60” (“SFAS 163”).
The scope of SFAS 163 is limited to financial guarantee insurance (and
reinsurance) contracts issued by enterprises included within the scope of SFAS
60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued
by enterprises excluded from the scope of SFAS 60 or to some insurance contracts
that seem similar to financial guarantee insurance contracts issued by insurance
enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). SFAS 163 also does not apply to financial guarantee insurance
contracts that are derivative instruments included within the scope of SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities.”  The
Company does not expect the adoption of SFAS 163 will have a material impact on
its consolidated results of operations or consolidated financial
position.
 
 On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)."  FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP
APB14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact that FSP APB 14-1 will have on its
consolidated results of operations or consolidated financial
position.
 
 On June
16, 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities
prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment
awards that contain rights to dividend payments should be included in earnings
per share calculations. The guidance will be effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
requirements of FSP EITF 03-6-1 and the impact that its adoption will have on
the consolidated results of operations or consolidated financial
position.
 
 In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.”  EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted. Paragraph 11(a)
of SFAS No. 133,  “Accounting for Derivatives and Hedging
Activities,”  specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own stock
and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all options and warrants exercisable at strike
prices denominated in any currency other than the functional currency of the
operating entity in the PRC. The Company is currently evaluating the impact of
the adoption of EITF 07-5 on the accounting for related warrants
transactions.
 
 In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5,  “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,”  that result from EITF 00-27 “
Application of Issue No. 98-5 to Certain Convertible
Instruments,”  and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.”  EITF 08-4 is effective for financial statements issued for
fiscal years ending after December 15, 2008. Early application is permitted. The
Company is currently evaluating the impact of adoption of EITF 08-4 on the
accounting for the convertible notes and related warrants
transactions.
 
 In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable
Interest Entities.” The changes proposed include a removal of the scope
exemption from FIN 46R for QSPEs, a revision of the current risks and
rewards-based FIN 46R consolidation model to a qualitative model based on
control and a requirement that consolidation of VIEs be re-evaluated on an
ongoing basis. Although the revised standards have not yet been finalized, these
changes may have a significant impact on the Company’s consolidated financial
statements as the Company may be required to deconsolidate certain assets and
liabilities due to the ongoing evaluation of its primary beneficiary status. In
addition, the Company may also be required to consolidate other VIEs that are
not currently consolidated based an analysis under the current FIN 46R
consolidation model. The proposed revisions would be effective for fiscal years
that begin after November 15, 2009.
     F-14
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s consolidated results of operations or
consolidated financial position.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the
Company’s consolidated financial statements.
 
 Reclassification
 
 Certain
amounts in the prior year’s consolidated financial statements have been
classified to conform to the 2008 presentation with no impact on the previously
reported net income or cash flows.
 
 Note
3 — Concentration and Credit Risk
 
 The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
 
 Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation insured limits
for the banks located in the United States. Balances at financial institutions
or state owned banks within the PRC are not covered by insurance. As of December
31, 2008 and 2007, the Company had deposits in excess of federally-insured
limits (including restricted cash) of $448,082 and $844,773, respectively. The
Company has not experienced any losses in such accounts.
 
 For the
years ended December 31, 2008 and 2007, all of the Company’s sales were
generated in the PRC. In addition, all accounts receivable at December 31, 2008
and 2007 were generated in the PRC. No major customers accounted for more than
10% of the Company’s total revenue or total accounts receivable as of and for
the years ended December 31, 2008 and 2007, respectively.
 
 The
Company’s four largest vendors collectively accounted for approximately 58.71%
and 66.13% of the Company’s total purchases for the years ended December 31,
2008 and 2007, respectively.
     F-15
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 One major
product accounted for approximately 11.55% of the Company’s total revenue for
the year ended December 31, 2008, while no single product accounted for more
than 10% of the Company’s total revenue for the year ended December 31,
2007.
 
 Note
4 — Short Term Investment
 
 In 2007,
the Company entered into an investment agreement with an unrelated party to
invest certain funds in the Chinese stock market. The nature of the investment
is available-for-sale with certain guaranteed returns such as 7.2% interest
through August 1, 2008 and 5.0% interest after August 1, 2008 for one
year.  There are no restrictions or penalties for early withdrawals
prior to maturity. The investment matures on July 31, 2009. The Company had
$352,080 and $383,880 in short-term investment as of December 31, 2008 and 2007,
respectively.
 
 For the
years ended December 31, 2008 and 2007, the Company recognized interest income
amounting to $13,406 and $8,690, respectively, from the short term
investment.
 
 Note
5 — Allowance for Doubtful Accounts
 
 The
following table presents the movement of allowance for doubtful accounts as of
December 31, 2008 and 2007:
 
 2008
              
              
              2007Balance
      at the beginning of the period
              
              $
              199,639
              
              
              $
              14,426Charge
      for the period
              
              
              114,239
              
              
              
              176,916Write-off
      of accounts receivable against the allowance
              
              
              -
              
              
              
              -Foreign
      currency translation adjustments
              
              
              13,979
              
              
              
              8,297Balance
      at the end of the period
              
              $
              327,857
              
              
              $
              199,639
 
 Note
6 — Inventories
 
 Inventories
are comprised of the following as of December 31, 2008 and 2007:
 
 2008
              
              
              2007Raw
      materials
              
              $
              2,087,428
              
              
              $
              1,761,145Packing
      materials
              
              
              165,077
              
              
              
              110,020Work
      in process
              
              
              2,446
              
              
              
              2,639Finished
      goods
              
              
              811,538
              
              
              
              355,041Low
      value consumables
              
              
              19,571
              
              
              
              13,766Total
              
              $
              3,086,060
              
              
              $
              2,242,611
 
 The
Company periodically reviews its reserves for slow moving and obsolete
inventories. As of December 31, 2008 and 2007, the Company believes that no such
reserves were necessary.
 
 Note
7 — Deposits and Prepaid Expenses
 
 Deposits
and prepaid expenses are comprised of the following as of December 31, 2008 and
2007:
 
 2008
              
              
              2007Prepayment
      for raw materials purchasing
              
              $
              4,210,618
              
              
              $
              475,669Prepayment
      for packaging materials purchasing
              
              
              499,755
              
              
              
              240,545Prepayment
      for advertisement fee
              
              
              89,436
              
              
              
              -Prepayment
      for due diligence fee
              
              
              73,350
              
              
              
              -Other
              
              
              5,692
              
              
              
              90,443Total
              
              $
              4,878,851
              
              
              $
              806,657
     F-16
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Note
8 — Loans and Other Receivables
 
 Loans and
other receivables consist of the following as of December 31, 2008 and
2007:
 
 2008
              
              
              2007Shaanxi
      Xinbangdike Technology Developing Company, non-interest bearing, unsecured
      and due on demand.
              
              
              295,087
              
              
              
              -Shaanxi
      Suoang Biotechnological Company, due October 30, 2007, extended to March
      31, 2008, annual interest at 7.0%, secured by unrelated company Shanxi New
      Resource Co., paid in full in March 2008.
              
              
              -
              
              
              
              27,420Xi’an
      SilverRiver Automatic Equipment Company, due March 23, 2008 and extended
      to April 2008, annual interest rate 8.4%, unsecured, paid in full in April
      2008.
              
              
              -
              
              
              
              411,300Shaanxi
      Hongye Housing Company, due on demand, non-interest bearing, unsecured,
      paid in full in 2008.
              
              
              -
              
              
              
              137,100Others,
      non-interest bearing, due on demand, unsecured, paid in full in
      2008.
              
              
              
              
              
              
              9,152Other
      receivables
              
              
              85,099
              
              
              
              43,800Total
      loans and other receivables
              
              $
              380,186
              
              
              $
              628,772
 
 Note  9
— Property, Plant and Equipment, Net
 
 Property,
plant and equipment consist of the following as of December 31, 2008 and
2007:
 
 2008
              
              
              2007Buildings
      and improvements
              
              $
              4,977,654
              
              
              $
              3,592,519Machinery
      and equipment
              
              
              3,035,376
              
              
              
              2,827,591Office
      equipment and furniture
              
              
              186,702
              
              
              
              167,617Vehicles
              
              
              329,331
              
              
              
              295,995Total
              
              
              8,529,063
              
              
              
              6,883,722Less:
      accumulated depreciation
              
              
              (1,115,374
              )
              
              
              (620,991
              )Plant
      and equipment , net
              
              $
              7,413,689
              
              
              $
              6,262,731
 
 Depreciation
expense was $443,062 and $281,894 for the years ended December 31, 2008 and
2007, respectively.
 
 Note
10 — Construction in Progress
 
 Construction
in progress is related to a production facility being built in accordance with
the PRC’s Good Manufacturing Practices (“GMP”) Standard. Construction on this
facility commenced in 2005, the veterinary medicine facility and the building
that houses quality control, research and development and administration were
completed during 2007, and the remaining facilities are expected to be completed
by the end of 2009, depending upon the Company’s ability to raise additional
capital. The Company estimates that as of December 31, 2008, additional funds
will be needed to complete the construction project. No depreciation is provided
for construction in progress until such time the assets are completed and placed
into service.
     F-17
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 As of
December 31, 2008 and 2007, the Company had construction in progress amounting
to $6,516,630 and $5,531,236, respectively. $150,789 and $0 in interest expense
had been capitalized for construction in progress for the years ended December
31, 2008 and 2007, respectively.
 
 Note
11— Long Term Prepayment
 
 Long term
prepayment consists of the following as of December 31, 2008 and
2007:
 
 2008
              
              
              2007Construction
      deposit
              
              $
              2,493,167
              
              
              $
              685,500Deposit
      for the potential acquisitions
              
              
              2,713,950
              
              
              
              534,690Total
              
              $
              5,207,117
              
              
              $
              1,220,190
 
 As of
December 31, 2008 and 2007, the Company has determined that these prepayments
are noncurrent because: (1) these amounts relate to noncurrent assets, and (2)
the Company’s ability to complete the projects underlying the construction
deposit and any potential acquisitions is contingent upon the Company obtaining
financing, the successful outcome of which cannot be determined.
 
 Note
12 — Intangible Assets
 
 Intangible
assets consist of the following as of December 31, 2008 and 2007:
 
 2008
              
              
              2007Land
      use rights
              
              $
              378,853
              
              
              $
              354,061Technological
      know-how
              
              
              880,200
              
              
              
              822,600Total
              
              
              1,259,053
              
              
              
              1,176,661Less:
      accumulated amortization
              
              
              (359,524
              )
              
              
              (165,425
              )Intangible
      assets, net
              
              $
              899,529
              
              
              $
              1,011,236
 
 During
2007, the Company paid $658,350 for the exclusive rights to the use of a strain
of micro-bio organisms for a five-year term from November 1, 2007 through
October 31, 2012. The Company began using the strain in its veterinary medicines
in 2008.
 
 Amortization
expense for intangible assets was $179,343 and $33,135 for the years ended
December 31, 2008 and 2007, respectively.
 
 Amortization
expenses for the future five years and thereafter are as follow:
 
 Years
      ending December 31,
              
              Amount2009
              
              $
              179,3432010
              
              
              179,3432011
              
              
              179,3432012
              
              
              179,3432013
              
              
              179,3432014
      and thereafter
              
              
              2,814Total
              
              $
              899,529
     F-18
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Note
13 — Short Term Loan
 
 On
September 3, 2008, the Company signed a one year short term loan contract with
the Bank of East Asia to borrow up to $1.9 million (RMB13 million) for operating
purposes secured by the Company’s buildings. On September 17, 2008, the Company
received proceeds of $733,500 (RMB5 million) from the bank. This amount will
become due on September 16, 2009. The balance of $1.1 million (RMB8 million) can
be borrowed once the Company has a deposit balance in the amount of $4 million
with the bank and uses the bank as the Company’s primary transaction bank. The
Company’s land use right and the buildings above the land, which are owned by
the Company, have been pledged as collateral for the loan. As of December 31,
2008, the net value of the land use right and properties pledged for the loan
was $337,179 and $3,311,940, respectively.
 
 The
applicable interest rate of the loan is the Bank of China’s standard short term
rate, 6.93% at inception of the loan, which is subject to change with the
government policy, plus an additional 20% interest rate float. Pursuant to these
terms, the interest rate was approximately 8.32% as of December 31, 2008.
Interest payments to the Bank of East Asia are due every three months. Interest
expense incurred and associated with the short term loan amounted to $15,741 for
the year ended December 31, 2008, which has been capitalized as part of
construction-in-progress, and no principal amount has been paid.
 
 Pursuant
to the short term loan agreement, the Company is required to comply with certain
covenants, such as maintaining sufficient environmental controls with respect to
the Company’s manufacturing processes, providing written notification to the
Bank of East Asia for any changes in the organizational structure or executive
officers, among others.  As of and for the year ended December 31,
2008, the management of the Company determined that the Company was in
compliance with these covenants.
    Note
14 — Deferred Government Grant
 
 Deferred
government grant represents subsidies for GMP projects granted by the PRC
government. A subsidy in the amount of $641,000 was approved by the PRC
government for the Company to construct a new factory in which operations will
meet the GMP Standard. In 2003, $516,500 was received by the Company and the
remaining $124,500 was received in the first quarter of 2006. In 2006, the
Company expended $186,644 for the construction of its new factory.
 
 Also in
2003, the Company received a second subsidy in the amount of $256,400 to finance
the Company’s research and development activities. In 2005, the Company received
a third subsidy of $64,100 for the Company’s research and development
activities, which was expended during that year.
 
 According
to the PRC’s government regulations, the funds granted may be treated as capital
contributed by a company appointed by the PRC government or as a loan from such
company, which the Company will be required to repay. As of December 31, 2008,
the Company has not reached a final agreement with the PRC government regarding
the treatment of these three subsidies as either a loan or capital contribution,
and the Company does not expect that the final agreement will be completed
within the year of 2009. Therefore, these amounts are reflected as liabilities
in the accompanying consolidated financial statements.
 
 As of
December 31, 2008 and 2007, deferred government grant amounted to $1,100,250 and
$1,028,250, respectively, and the Company had $80,885 and $74,969, respectively,
of fund balance and recorded as restricted cash.
     F-19
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Note
15 — Capital Transactions
 
 On July
10, 2007, the Company issued 40,000 shares of common stock as salary to a
non-executive director. On the same date, the Company issued 38,750 shares of
common stock to an independent consultant. The trading value of the Company's
common stock as of July 10, 2007, was $1.47 per share and a corresponding amount
of $115,763 was charged to general and administrative expenses.
 
 In the
fourth quarter of 2007, certain of the Company’s convertible note holders
converted their debentures into 3,278,720 shares of common stock as more fully
described in Note 16.
 
 Also, in
the fourth quarter of 2007, certain of the Company’s warrant holders exercised
3,100,000 warrants into 958,181 shares of common stock, in a cashless
exercise.
 
 On
February 12, 2008, the Company issued 90,000 shares of common stock as salary to
a non-executive director. The trading value of the Company's common stock on
February 12, 2008, was $1.11 per share and a corresponding amount of $99,900 was
charged to general and administrative expenses.  The Company also had
$95,204 balance under shares to be issued as of December 31, 2008, which
represented 110,000 common shares to be issued to the non-executive director for
his service provided for the period of May 2008 to December 2008. The Company
recorded it as part of general and administrative expenses based on the weighted
average trading price of the Company’s common stock for the said
period.
 
 On
February 29, 2008, the Company issued 210,400 shares of common stock to its
legal counsel as partial payment for services rendered. The trading value of the
Company's common stock on February 29, 2008, was $1.05 per share and additional
inducement cost of $42,081 between the fair value of the shares at $220,920 and
the partial payment of $178,839 was charged to general and administrative
expenses.
 
 On April
21, 2008, two of the Company’s convertible note holders converted $982,003 of
debentures into 1,227,503 shares of common stock as more fully described in Note
16.
 
 On May 5,
2008, the Company agreed to issue 52,173 shares of common stock to its chief
financial officer during the term of his agreement. The shares vest in four
equal installments of 13,043 shares each quarter. The trading value of the
common stock on May 5, 2008, was $1.17 per share for a total value of $61,042.
This compensation expense is recognized on a straight-line basis over the
vesting period. Compensation expense of $40,137 was charged to general and
administrative expenses for the year ended December 31, 2008. 26,086 shares
vested in 2008.
 
 Following
is a summary of the status of warrants outstanding at December 31,
2008:
 
 Outstanding
      Warrants
                  
                  Exercisable
      WarrantsExercise
      Price
                  
                  Number
                  
                  Average
      Remaining
                    Contractual
      Life
                  
                  Average
      Exercise Price
                  
                  
                  Number
                  
                  
                  Intrinsic
      Value$1.20
                  
                  
                  975,000
                  
                  1.16
      years
                  
                  $
                  1.20
                  
                  
                  
                  975,000
                  
                  
                  $
                  -$1.00
                  
                  
                  570,500
                  
                  3.16
      years
                  
                  $
                  1.00
                  
                  
                  
                  570,500
                  
                  
                  
                  17,115Total
                  
                  
                  1,545,500
                  
                  
                  
                  $
                  1.13
                  
                  
                  
                  1,545,500
                  
                  
                  $
                  17,115
 
 Following
is a summary of the warrant activity:
  Outstanding
      as of January 01, 2007
              
              
              -Granted
              
              
              4,645,500Forfeited
              
              
              -Exercised
              
              
              3,100,000Outstanding
      as of December 31, 2007
              
              
              1,545,500Granted
              
              
              -Forfeited
              
              
              -Exercised
              
              
              -Outstanding
      as of December 31, 2008
              
              
              1,545,500
     F-20
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Note
16 — Convertible Debentures
 
 On
February 27, 2007, the Company entered into a Securities Purchase Agreement (the
“Agreement”), with several institutional and accredited investors (the
“Purchasers”) pursuant to which the Company sold to the Purchasers $4,075,000 8%
convertible debentures due February 28, 2009 (the “Debentures”), and warrants to
purchase 4,075,000 shares of the common stock of the Company (the “Warrants”),
(collectively referred to as the “Transaction”). The initial conversion price of
the debentures is $1.00 per share. The initial exercise price of the warrants is
$1.20 per share with a life of three years. The conversion price and warrant
exercise price are subject to downward adjustments should the Company issue more
shares of common stock or securities convertible into common stock for capital
raising activities for less than the conversion price or exercise price.
Additional interest of 15% would begin in June 2007 and would continue through
February 2008 after which the additional interest would increase to 25% through
the maturity date of the note.
 
 Gross
proceeds from the Transaction were $4,075,000, of which $285,250 was paid to the
placement agent for the Transaction and $52,500 was paid to consultants for the
Purchasers in connection with the Transaction. The Company also issued to the
placement agent a warrant to purchase an aggregate of 570,500 shares of common
stock with an exercise price of $1.00 per share with a life of five years. The
value of the warrants issued to the placement agent was calculated as $643,277
using the Cox, Ross and Robenstein (“CRR”) Binomial Model. The total amount of
the cash payments and the fair value of the warrants amounted to $981,027, which
was recorded as deferred debenture expenses. These costs are amortized to
interest expense over the two year life of the Debentures.
 
 The
Company determined the value of the warrants using the CRR Binomial Model with a
volatility of approximately 75%, which is calculated by using the historical
closing prices of the Company’s common stock. In accordance with APB No. 14,
EITF-98-5, and EITF-00-27, the Company allocated the proceeds using relative
fair value method and determined that the Debentures were issued with a
beneficial conversion feature. As a result, on February 27, 2007, the allocated
value of the Warrants amounted to $1,944,425 and the beneficial conversion
feature amounted to $2,130,575. The allocated value of the Warrants and
beneficial conversion feature totaling $4,075,000, was recorded as discount (or
reduction in the carrying amount) of the Debentures and additional paid-in
capital and are amortized over the two year life of the Debentures using the
effective interest method. For the years ended December 31, 2008 and 2007,
$371,546 and $584,598 was amortized as interest expense,
respectively.
 
 In
connection with the issuance of the Debentures, the Company entered into a
Registration Rights Agreement, in which a registration statement registering the
resale of the common stock into which the Debentures are convertible and for
which the Warrants are exercisable, as well as certain other shares of the
Company's common stock must be filed with the SEC not later than April 13, 2007,
and be declared effective by the SEC not later than May 28, 2007, if there is no
SEC review of the registration statement, and June 27, 2007, if there is an SEC
review. Failure to meet these deadlines would result in liquidated damages of 2%
of the aggregate purchase price of the Debentures and Warrants per month, pro
rated for partial periods.
 
 On or
about December 6, 2007, the Company entered into an Amendment, Exchange and
Waiver Agreement (the “Amended Agreement”), dated November 9, 2007, with certain
of the Purchasers (the “Participating Purchasers”). Below are highlights of the
Amended Agreement:
  •
                The
      Amended Agreement amends the terms of the Debentures held by the
      Participating Purchasers by: (a) changing the conversion price from $1.00
      per share to $0.85 per share; (b) deleting the trading conditions for
      mandatory conversion; (c) granting the Company the right to mandatory
      conversion at any time, and (d) allowing the Company to designate the date
      for the mandatory conversion.
     F-21
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
  •
                The
      Amended Agreement amends the terms of the Warrants held by the
      Participating Purchasers by: (a) changing the exercise price from $1.20
      per share to $0.95 per share; and (b) granting to the Participating
      Purchasers the right to exercise their Warrants on a cashless
      basis.
  •
                The
      Amended Agreement is deemed to be: (a) the Company’s notice to require
      conversion of the entire outstanding principal of the Debentures held by
      the Participating Purchasers and all accrued but unpaid interest thereto;
      and (b) the Participating Purchasers’ notice to the Company to exercise
      all of their unexercised Warrants on a cashless
  basis.
  •
                The
      Amended Agreement amends the Registration Rights Agreement by waiving all
      outstanding registration damages due to the Purchasers in their entirety.
      Because the outstanding principal amounts of the Debentures held by the
      Participating Purchasers, as of the effective date of the Amended
      Agreement, total more than seventy-five percent (75%) of the aggregate
      outstanding principal amounts of the outstanding Debentures held by all
      the Purchasers on that date, the amendment to the Registration Rights
      Agreement binds all of the
Purchasers.
  The
Company has evaluated the cost of the amended terms of the Warrants and the
Debentures. As the Amended Agreement has reduced the exercise price of the
Warrants and the conversion price of the Debentures held by the Participating
Purchasers, the difference between the value of the Warrants and the conversion
option at the old prices and their values at the modified prices are deemed
costs for the Company and are charged to operations.
 
 The
inducement cost for the Debentures converted was $634,450 for the fiscal year
ended December 31, 2007. The inducement cost for the Debentures converted was
based on the market value of the additional 461,418 shares obtained by the
Participating Purchasers at $1.375 per shares on November 9, 2007. The
inducement cost for the Warrants exercised was $279,547 for the fiscal year
ended December 31, 2007. The inducement cost for the Warrants exercised was
calculated using the CRR Binomial Model by determining the difference between
the original exercise price of $1.20 shares and the reduced exercise price of
$0.95.
 
 3,076,120
shares of common stock were issued upon conversion of the Participating
Purchasers’ Debentures with a carrying value of $2,548,632 at a reduced
conversion price of $0.85. Another 202,600 shares of common stock were issued
upon conversion of the Participating Purchasers’ Debentures with a carrying
value of $202,600 at the original conversion price of $1.00.
 
 In
accordance with EITF 00-27, all unamortized discount amounting to $2,403,480 at
the time of the conversion was recognized as interest expense for the year ended
December 31, 2007. The unamortized deferred financing costs of $540,167 at
conversion of the Debentures into common stock were also recorded as interest
expense for the year ended December 31, 2007.
 
 The
Company’s registration statement did not become effective until September 25,
2007. However, because the Amended Agreement waived all outstanding registration
damages, the Company reversed the previously accrued liquidated damages totaling
$345,017 at December 31, 2007.
 
 On April
21, 2008, the Company entered into an Amendment and Waiver Agreement (the
“Amendment”) with two institutional and accredited investors who acquired the
two remaining unconverted Debentures in a private transaction from the original
holders of these Debentures. The Amendment is similar to the above Amended
Agreement with significant differences summarized below:
  •
                The
      Amendment amends the terms of the Debentures held by these two investors
      by changing the conversion price from $1.00 per share to $0.80 per
      share.
  •
                The
      Amendment is deemed to be: (a) the Company’s notice to require conversion
      of the entire outstanding principal of the Debentures held by these two
      investors and all accrued but unpaid interest
  thereon.
 
   F-22
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 The
difference between the value of the conversion option at the previous prices and
their value at the modified prices are deemed costs for the Company and are
charged to operations. The inducement cost for the two Debentures converted was
$257,775 for the year ended December 31, 2008. The inducement cost for the
converted Debentures was based on the market value of the additional 245,501
shares obtained by these two investors at $1.05 per share on April 21,
2008.
 
 1,227,503
shares of common stock were issued upon conversion of the two Debentures with a
carrying value of $982,003 (including $490,713 of default premium) at a reduced
conversion price of $0.80.
 
 In
accordance with EITF 00-27, all unamortized discount amounting to $291,548 at
the time of the conversion was recognized as interest expense for the year ended
December 31, 2008. The unamortized deferred financing costs of $79,998 on
conversion of the Debentures were also recorded as interest expense for the year
ended December 31, 2008.
 
 Note
17 — Statutory Reserves
 
 As
stipulated by the laws of the PRC as applicable to Chinese companies with
foreign ownership, net income after taxation can only be distributed as
dividends after appropriations have been made for the following:
 
 i.
              Making
      up cumulative prior years’ losses, if
any;
 
 ii.
              Allocations
      to the statutory surplus reserve of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;
 
 iii.
              Allocations
      to the common welfare reserve of 5% of income after tax, as determined
      under PRC accounting rules and
regulations;
 
 iv.
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders’
      general meeting.
 
 The
statutory surplus reserve can be used to increase the registered capital and
eliminate future losses of  a company upon approval by relevant
government authorities under PRC GAAP. A company’s statutory surplus reserve is
not distributable to shareholders except in the event of
liquidation.  Appropriations to the statutory surplus reserve are
accounted for as a transfer from unrestricted earnings to statutory reserves.
After 2006, allocation to the common welfare reserve is at the discretion of the
Company instead of a legal requirement per the PRC Corporation Law.
 
 During
the years ended December 31, 2008 and 2007, the Company made total
appropriations to these statutory reserves of $1,299,990, and $873,096,
respectively. The component of these statutory reserves and the amount of future
contribution required pursuant to the PRC Corporation Law are as follows at
December 31, 2008 and 2007:
 
 2008
              
              
              2007Statutory
      surplus reserve
              
              $
              1,968,473
              
              
              $
              1,101,813Common
      welfare reserve
              
              
              984,237
              
              
              
              550,907Total
              
              $
              2,952,710
              
              
              $
              1,652,720Statutory
      surplus reserve of Tianxing
              
              $
              1,968,473
              
              
              $
              1,101,81350%
      of registered share capital of Tianxing
              
              
              2,541,000
              
              
              
              2,541,000Extra
      contribution to be contributed
              
              $
              572,527
              
              
              $
              1,439,187
     F-23
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 There are
no legal requirements in the PRC to fund these statutory reserves by the
transfer of cash to any restricted accounts, and as such, the Company has not
transferred any cash to these accounts. These reserves are not distributable as
cash dividends.
 
 Note
18 — Taxes
 
 The
Company is registered in the State of Nevada whereas its subsidiary, Skystar
Cayman, is a tax exempt company incorporated in the Cayman Islands and conducts
all of its business through its subsidiaries, Fortunate Time and Sida, and
Sida’s PRC VIEs, Xian Tianxing and Shanghai Siqiang.
 
 Sida,
Xian Tianxing, and Shanghai Siqiang are subject to PRC’s Enterprise Income Tax.
Pursuant to the PRC Income Tax Laws, Enterprise Income Tax is generally imposed
at a statutory rate of 25% beginning on January 1, 2008. The Company has been
approved as a new technology enterprise, and under PRC Income Tax Laws is
entitled to a preferential tax rate of 15%.
 
 For the
years ended December 31, 2008 and 2007, the provisions for income tax were as
follows:
 
 2008
              
              
              2007Current
      PRC income tax expenseEnterprise
      income tax
              
              $
              1,529,688
              
              
              $
              1,027,172
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the years ended December 31, 2008 and 2007:
 
 2008
              
              2007U.S.
      Statutory rates
              
              
              34.0
              %
              
              
              34.0
              %Foreign
      income not recognized in USA
              
              
              (34.0
              )
              
              
              (34.0
              )China
      income taxes
              
              
              25.0
              
              
              
              33.0China
      income tax exemption
              
              
              (3.5
              )
              
              
              77.5Total
      provision for income taxes
              
              
              21.5
              %
              
              
              110.5
              %
 
 The
estimated tax savings due to the reduced tax rate for the year ended December
31, 2008 and 2007 amounted to $1,019,600 and $1,232,606, respectively. The net
effect on earnings per share if the non-preferential income tax rate had been
applied would decrease basic and diluted earnings per share by $0.06 for the
year ended December 31, 2008. For the year ended December 31, 2007, the removal
of the estimated tax savings would decrease the basic and diluted losses per
share by $0.09.
 
 The
Company was incorporated in the United States and has incurred a net operating
loss for income tax purposes for 2008. The net operating loss carry forwards for
U.S. income tax purposes amounted to $7,687,725, which may be available to
reduce future years’ taxable income. These carry forwards will expire, if not
utilized, beginning in 2006 through to 2028. Management believes that the
realization of the benefits arising from this loss appears to be uncertain due
to the Company’s continuing losses for U.S. income tax purposes. Accordingly,
the Company has provided a 100% valuation allowance at December 31, 2008, which
amounted to $3,169,907 The Company’s management reviews such valuation allowance
periodically and makes adjustments as warranted.
     F-24
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Note
19 — Earnings per Share
 
 The
following is a calculation for earnings per share:
  For
      years ended December 31,2008
              
              
              2007Net
      income (loss) for earnings per share
              
              $
              5,596,183
              
              
              $
              (1,956,976
              )Weighted
      average shares used in basic computation
              
              
              18,228,731
              
              
              
              13,453,543Diluted
      effect of stock options and warrants
              
              
              18,248
              
              
              
              -Weighted
      average shares used in diluted computation
              
              
              18,246,979
              
              
              
              13,453,543Earnings
      per share:Basic
              
              $
              0.31
              
              
              $
              (0.15
              )Diluted
              
              $
              0.31
              
              
              $
              (0.15
              )
 
 For the
year ended December 31, 2008, the average stock price was greater than the
exercise price of 570,500 warrants outstanding at such time which resulted in
additional weighted average common stock equivalents of 18,248 shares. As such,
975,000 outstanding warrants were excluded from the diluted earnings per share
calculation as they were anti-dilutive.
 
 For the
year ended December 31, 2007, the average stock price was greater than the
exercise price of 4,645,500 warrants outstanding at such time which resulted in
additional weighted average common stock equivalents of 1,354,233 shares.
However, all outstanding convertible debentures were excluded from the diluted
earnings per share calculation as they were anti-dilutive.
 
 Note
20 — Related Party Transactions and Arrangements
 
 Related
Party Receivables and Payables
 
 Amounts
receivable from and payable to related parties are summarized as
follows:
 
 December
      31, 2008
              
              
              December
      31, 2007Short term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1) (2)
              
              $
              220,050
              
              
              $
              -Mr.
      Wei Wen – officer and shareholder (2)
              
              
              44,010
              
              
              
              -Ms.
      Aixia Wang – shareholder (2)
              
              
              44,010
              
              
              
              -Total
              
              $
              308,070
              
              
              $
              -Amounts due from
      related partyMr.
      Weibing Lu – officer and shareholder (3)
              
              $
              -
              
              
              $
              59,462Shares to be issued to
      related partyScott
      Cramer – non-executive director (4)
              
              $
              95,204
              
              
              $
              -Amounts due to related
      partiesTianXing
      Digital - owned by a director (5)
              
              $
              -
              
              
              $
              17,137Ms.
      Aixia Wang – shareholder (5)
              
              
              -
              
              
              
              1,371Bennet
      P. Tchaikovsky – CFO (5)
              
              
              13,168
              
              
              
              -Scott
      Cramer – non-executive director and shareholder (5)
              
              
              224,684
              
              
              
              30,245Shaanxi
      Xingji Electronics Co. - owned by a director's wife (5)
              
              
              4,373
              
              
              
              32,817Total
              
              $
              242,225
              
              
              $
              81,570
     F-25
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (1) In
2008, Weibing Lu obtained personal loans from Huaxia Bank’s Xian Branch and
advanced $176,040 in cash to Xian Tianxing to facilitate operations. The
interest rate is 7.47% per annum and is unsecured. Pursuant to the loan
agreement, the principal and related interest was due on December 30, 2008. Xian
Tianxing was the guarantor of Weibing Lu’s personal loan. On January 4, 2009,
the Company paid the full principal amount to the bank, with related interest of
$15,741.
 
 (2) On
May 29, 2008, Weibing Lu, Wei Wen and Aixia Wang obtained personal loans from
Yanta Credit Union’s East Xiaozai Road Branch and advanced cash to Xian Tianxing
in the total amount of $132,030 for business operations. The loans are due on
May 29, 2009 with 8.436% interest per annum and are guaranteed by the Company.
As of December 31, 2008, Xian Tianxing had paid interest of $3,695 for the loans
of the three shareholders.
 
 (3) As of
December 31, 2008 and 2007, the Company had a receivable from Weibing Lu in the
amount of $0 and $59,462, respectively. The amounts due from Mr. Lu was
comprised of cash advances to Weibing Lu to facilitate Xian Tianxing’s
operations and for the reimbursement of expenses paid, or to be paid, by Weibing
Lu on behalf of Xian Tianxing. These balances are non-interest bearing,
unsecured, and due on demand.
 (4) The
Company had $95,204 balance under shares to be issued to Scott Cramer, a
non-executive director and shareholder as of December 31, 2008, which
represented 110,000 common shares as compensation for being a representative of
the Company in the United States for the period of May 2008 to December
2008.
 
 (5)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Mr. Lu and Tianxing
Digital Co., Ltd. is owned by Mr. Lu. The amounts due to Shaanxi Xinji
Electronics and Tianxing Digital as of December 31, 2007 were short term cash
transfers for business operations, non-interest bearing, unsecured, and payable
upon demand. As of December 31, 2008 and 2007, the Company also has $224,684 and
$13,168 payable to Scott Cramer and Bennet P. Tchaikovsky for the expenses paid
by them on behalf of the Company.
 
 Note
21 — Commitments and Contingencies
 
 Lease
Commitments
 
 The
Company recognizes lease expense on a straight-line basis over the term of the
lease in accordance to SFAS 13, “Accounting for Leases.” The Company entered
into a tenancy agreement for the lease of factory premises for a period of ten
years from October 1, 2004 to December 31, 2014, with annual rent of $13,563 (or
RMB 94,600), which is subject to a 10% increase every four subsequent
years.
 
 The
Company leases office space from Weibing Lu, the Company’s chief executive
officer, for a period of five years from January 1, 2007 to December 31, 2011,
with annual rent of approximately $24,000 (or RMB 165,600). The Company also
entered into a tenancy agreement with Weibing Lu for the lease of Shanghai
Siqiang’s office for a period of ten years from August 1, 2007 to August 1,
2017, with annual rent of approximately $21,000 (or RMB 144,000).
 
 Minimum
future lease payments under these leases for the next five years and thereafter
are as follows:
 
 Years
      ending December 31,
              
              Amount2009
              
              $
              60,6842010
              
              
              60,6842011
              
              
              60,6842012
              
              
              36,6452013
              
              
              37,9172014
      and thereafter
              
              
              92,489$
              349,103
     F-26
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 Lease
expense for the years ended December 31, 2008 and 2007 amounted to $63,303 and
$33,412, respectively.
 
 Legal
Proceedings
 
 From time
to time, the Companyis involved in legal
matters arising in the ordinary course of business.  Management
currentlyis not
aware of any legal matters or pending litigation, which would have a significant
effect on the Company’s consolidated financial statements as of December 31,
2008.
 
 In May
2007, Andrew Chien filed suit against the Company, R. Scott Cramer, Steve Lowe,
David Wassung and Weibing Lu in United States District Court for the District of
Connecticut, alleging causes of action for violation of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. In or around November 2007, the
defendants filed motions to dismiss the complaint for failure to state a claim
and for lack of personal jurisdiction. Plaintiff agreed to voluntarily amend the
complaint after the motions were filed, and an amended complaint was
subsequently filed on or around January 4, 2008. The amended complaint removed
Weibing Lu (who is a resident of China and had never been served) as a
defendant. The remaining defendants contended that the amended complaint failed
to correct the deficiencies of the original, and filed a renewed motion to
dismiss for failure to state a claim, also preserving their challenge to
personal jurisdiction. The defendants denied all claims and moved the Court to
dismiss the amended complaint in its entirety in their motion to dismiss. The
motion to dismiss also requested that the Court award sanctions against Mr.
Chien under the Private Securities Litigation Reform Act (“PSLRA”) and other
authority. On July 17, 2008, the Court granted defendants’ motion and
subsequently dismissed the lawsuit, entering a judgment on behalf of the
defendants. On February 5, 2009, the Court determined that the action filed by
Mr. Chien to have been frivolous, and imposed monetary sanctions on both Mr.
Chien and his former attorney. Mr. Chien subsequently filed motions seeking to
“re-open” this case, but the motion was denied.
 
 Subsequently,
Mr. Chien filed another lawsuit against the Company, Scott Cramer, Steve Lowe,
David Wassung and Weibing Lu in the Connecticut Superior Court, alleging causes
of action similar to those alleged in his federal complaint described above as
well as state law causes of action. The Company contends that the new complaint
is just as frivolous as Mr. Chien’s earlier federal action, which the new
complaint substantially duplicates. A Notice of Removal to the U.S. District
Court, District of Connecticut was filed in the state case on January 27, 2009,
and the case has been assigned to the same federal judge in the related federal
case already dismissed. The Company has filed a motion to dismiss this new
action which remains pending.
 
 Other
than the above described legal proceedings, the Company is not aware of any
other legal matters in which purchasers, any director, officer, or any owner of
record or beneficial owner of more than five percent of any class of voting
securities of the Company, or any affiliate of purchaser, or of any such
director, officer, affiliate of the Company, or security holder, is a party
adverse to the Company or has a material adverse interest to the Company. No
provision has been made in the consolidated financial statements for the above
contingencies.
 
 Ownership
of Leasehold Property
 
 In 2005,
a shareholder contributed a leasehold office building as additional capital of
Xian Tianxing. However, the title of the leasehold property has not passed to
the Company. The Company does not believe there are any legal barriers for the
shareholder to transfer the ownership to the Company. However, in the event that
the Company fails to obtain the ownership certificate for the leasehold
property, there is a risk that the building will need to be vacated due to
unofficial ownership. Management believes that this possibility is remote, and
as such, no provision has been made in the consolidated financial statements for
this potential occurrence.
     F-27
 
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 R&D
Project
 
 During
the first quarter of 2008, the Company contracted with Northwestern Agricultural
Technology University to jointly work on an R&D project concerning the
application of nano-technology in the prevention of major milk cow disease. The
total projected budget for this project is approximately $574,000 (RMB4 million)
which is to be paid according to the completed stages of the project. The
Company expects this project to be completed in one year. As of December 31,
2008, the Company incurred $43,245 (RMB 300,000) R&D expenses associated
with the project and also prepaid $289,773 (RMB 1,975,273) for specific raw
materials for the project. The Company expects that the project will reach trial
stage in 2009 and obtain veterinary permit for the new product from government
on 2010.
 
 Note
22 — Subsequent event
 
 New
bank loan
 
 On
January 14, 2009, the Company entered into a short-term loan agreement with
Yanta Credit Union’s East Xiaozai Road Branch in the amount of $220,050. The
loan is due on January 13, 2010 with fixed interest rate of 8.6585% per annum
and is collateralized by the CEO’s personal property.










F-28