**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, 2007**




**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: 000-28153**





**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 29, 2007, the aggregate market value of the voting stock held by
      non-affiliates of the Registrant was approximately $18 million based on a
      closing price of $1.48 per share of common stock as reported on the
      Over-the-Counter Bulletin Board on such date.





On
      March
      25, 2008, we had 17,111,200 shares of common stock issued and
      outstanding.










**TABLE
      OF CONTENTS**


**TO
      ANNUAL REPORT ON FORM 10-KSB**


**FOR
      YEAR ENDED DECEMBER 31, 2006**





PagePART
                IItem
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            8Item
                1B.
            Unresolved
                Staff Comments
            19Item
                2.
            Properties
            19Item
                3.
            Legal
                Proceedings
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20PART
                IIItem
                5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            20Item
                6.
            Selected
                Financial Data
            23Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operation
            23Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            27Item
                8.
            Financial
                Statements and Supplementary Data
            28Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            28Item
                9A(T).
            Controls
                and Procedures
            29Item
                9B.
            Other
                Information
            31PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate Governance
            31Item
                11.
            Executive
                Compensation
            34Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            37Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            39Item
                14.
            Principal
                Accounting Fees and Services
            40PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            41Signatures
            
            44




i


**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 such statements, prospective investors
      should carefully review various risks and uncertainties identified in this
      Report, including the matters set forth under the captions “Risk Factors” and in
      the Company’s other SEC filings. These risks and uncertainties could cause the
      Company’s actual results to differ materially from those indicated in the
      forward-looking statements. The Company undertakes no obligation to update
      or
      publicly announce revisions to any forward-looking statements to reflect future
      events or developments.




Although
      forward-looking statements in this 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 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 developer, manufacturer and
      distributor of vaccines and medicines for poultry, birds, livestock and domestic
      pets in the People’s Republic of China (“PRC”). Our
      business divisions include a veterinary bio-pharmaceutical products division,
      a
      veterinary drugs division, a fodder or feed additive division, and a
      microorganism preparation division. Our
      products, which are produced at a state-of-the-art facility in Xian by our
      Chinese affiliated company, Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian
      Tianxing”), are currently available in 29 provinces throughout China.





**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
      abandoned this enterprise to become 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 from The
      Cyber Group Network Corporation to our present name Skystar Bio-Pharmaceutical
      Company.





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 Bio-Pharmaceutical (Cayman) Holdings Co., Ltd.,
      a
      Cayman Island Company (“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 issued 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.




1





The
      closing of the Share Exchange Transaction occurred 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.
      Upon the closing of the Share Exchange Transaction, we became a Chinese
      bio-pharmaceutical company that develops, manufactures and markets a wide range
      of bio-pharmaceutical and veterinary products.





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 variable interest entity (“VIE”), Xian Tianxing. Chinese law currently has
      limits on foreign ownership of certain companies. To comply with these foreign
      ownership restrictions, we operate our bio-pharmaceutical 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 shareholders 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
      shareholder 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
      Shareholders” below.





Xian
      Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
      company without shares. The paid-in capital of Xian Tianxing was funded by
      the
      majority shareholders of Skystar Cayman. On December 31, 2003, Xian Tianxing
      restructured from a limited liability company without shares to a joint stock
      company limited by shares. All of our veterinary products are developed and
      produced by, and marketed and distributed from, Xian Tianxing. On
      August
      21, 2007, Xian Tianxing invested $66,700 (RMB 500,000) to establish Shanghai
      Siqiang Biotechnological Company Limited (“Shanghai Siqiang”). Shanghai Siqiang
      was established in Putuo District, 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 International Ltd., a Hong Kong company (“Fortunate Time”), 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
      Biotechnology (Xian) Co., Ltd., a PRC limited liability company with registered
      capital of $5,000,000 (“Sida”). $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. As of December 31, 2007, neither Fortunate
      Time
      nor Sida had engaged in any business activities. 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 Increase 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.




***Contractual
      Arrangements with Xian Tianxing and Its Shareholders***




Our
      relationships with Xian Tianxing and its shareholders are governed by a series
      of contractual arrangements. PRC law currently has limits on foreign ownership
      of certain companies. To comply with these foreign ownership restrictions,
      on
      October 28, 2005, Skystar Cayman entered into certain exclusive agreements
      with
      Xian Tianxing and its shareholders:





Consulting
      Services Agreement .
      Pursuant to the exclusive consulting services agreement between Skystar Cayman
      and Xian Tianxing, Skystar Cayman had the exclusive right to provide to Xian
      Tianxing general bio-pharmaceutical business operations services as well as
      consulting services related to the technological research, development, design
      and manufacturing of bio-pharmaceutical products (the “Services”). Skystar
      Cayman also sent employees to Xian Tianxing for whom Xian Tianxing bore the
      costs and expenses. Under this agreement, Skystar Cayman owned the intellectual
      property rights developed or discovered through research and development
      providing the Services for Xian Tianxing. Xian Tianxing paid a quarterly
      consulting service fees in Renminbi (“RMB”) to Skystar Cayman that equal to all
      of Xian Tianxing’s revenue for such quarter.




2





Operating
      Agreement .
      Pursuant to the operating agreement among Skystar Cayman, Xian Tianxing and
      the
      shareholders of Xian Tianxing who collectively hold the majority of the
      outstanding shares of Xian Tianxing (collectively “Xian’s Majority
      Shareholders”), Skystar Cayman provided guidance and instructions on Xian
      Tianxing’s daily operations, financial management and employment issues. The
      shareholders of Xian Tianxing designated the candidates recommended by Skystar
      Cayman as their representatives on Xian Tianxing’s board of directors. Skystar
      Cayman had the right to appoint senior executives of Xian Tianxing. In addition,
      Skystar Cayman agreed 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, agreed to pledge its accounts
      receivable and all of its assets to Skystar Cayman. Moreover, Xian Tianxing
      agreed that without the prior consent of Skystar Cayman, Xian Tianxing would
      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 was ten (10)
      years from October 28, 2005, which 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 between the shareholders of Xian Tianxing and Skystar
      Cayman, Xian’s Majority Shareholders pledged all of their equity interests in
      Xian Tianxing to Skystar Cayman to guarantee Xian Tianxing’s performance of its
      obligations under the technology consulting agreement. Any breach by Xian
      Tianxing or Xian’s Majority Shareholders of their respective contractual
      obligations would have entitled Skystar Cayman, as pledgee, to certain rights,
      including the right to sell the pledged equity interests. Xian’s Majority
      Shareholders also agreed that upon occurrence of any event of default, Skystar
      Cayman would be granted an exclusive, irrevocable power of attorney to take
      actions in the place and stead of them 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. Xian’s Majority Shareholders agreed not to dispose of
      the pledged equity interests or take any actions that would prejudice Skystar
      Cayman’s interest. The equity pledge agreement was to expire two (2) years after
      Xian Tianxing’s obligations under the exclusive consulting services agreement
      have been fulfilled.





Option
      Agreement *.*  ** Under
      the
      option agreement between the shareholders of Xian Tianxing and Skystar Cayman,
      the shareholders of Xian Tianxing irrevocably granted Skystar Cayman or its
      designated person an exclusive option to purchase, to the extent permitted
      under
      PRC 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 PRC law. Skystar Cayman or its designated
      person had sole discretion to decide when to exercise the option, whether in
      part or in full. The term of this agreement was 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 among Skystar Cayman, Xian’s Majority Shareholders, and
      Xian Tianxing, Xian’s Majority Shareholders agreed to entrust all the rights to
      exercise their voting power to the person(s) appointed by Skystar Cayman,
      including the attendance at and the voting of Xian’s Majority Shareholders’
shares at the shareholder’s meetings (or by written consent in lieu of 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, and appoint and vote for the directors and chairman of Xian
      Tianxing as the authorized representative of the shareholders of Company. The
      term of this Proxy Agreement was ten (10) years from the October 28, 2005 and
      may be extended prior to its expiration by written agreement of the parties.





***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 majority shareholders
      of Xian Tianxing. 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. The Company was 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.




3




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, Xian Tianxing’s majority shareholders
      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, Xian Tianxing’s
      majority shareholders 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, Xian Tianxing’s majority shareholders 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.





***Current
      Corporate Structure***





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




4


Current Corporate Structure





**Our
      Business**





As
      discussed above, we conduct our business through Xian Tianxing. After 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.





**Current
      Products**





Currently,
      we have four product lines:





1.
            Our
                bio-pharmaceutical veterinary vaccine line currently includes over
                10
                products;2.
            Our
                veterinary medicine line for poultry and livestock currently includes
                over
                70 products;3.
            Our
                fodder and feed additives line currently includes over 10 products;
                and4.
            Our
                micro-organism products line currently includes over 10
                products.





Among
      our
      products is the DLV avian coccidiosis vaccine for the prevention of avian
      coccidiosis disease. Our DLV vaccine has won a number of accreditation and
      awards from PRC national authorities. Avian
      coccidiosis is a common parasitic disease and is the number one cause of death
      among chickens and poultry. Our
      DLV
      avian coccidiosis vaccine is licensed as a “National
      Second Level New Veterinary Drug” which entitles our product to PRC regulatory
      protection and gives us five years of exclusive production rights. Additionally, with
      our
      ongoing research projects, management expects that we will continue to introduce
      new products to the market.




5


**Research
      and Development**





We
      place
      great emphasis on product research and development, and are currently working
      closely with two research institutes in the veterinary science field. With
      technology support and consultation from Shanghai Poultry Verminosis
      Institution, which is a part of the Chinese Academy of Agricultural Sciences,
      we
      have established Shanghai
      Siqiang i n
      Shanghai to
      research and develop feed additives and veterinary disease diagnosis
      equipment .
      We have
      also established a research and development center, located on our premises,
      with Shaanxi Microbial Institute, the only microbial research institute in
      northwest China. Major projects currently being undertaken at these centers
      focus on the following:




1.
            Development
                of new bio-pharmaceutical products for animal immunization by employing
                new technologies in microorganism and bacterium.
                We expect to be placing greater resources into the research and
                development of toxoid, mixed vaccines of toxoid and thalli, genetic
                vaccines and complex titanium vaccines, which we believe will gradually
                replace traditional chemical drugs and which will greatly impact
                the
                animal vaccination industry.2.
            Development
                of protein technology and enzyme mechanism.
                Introducing the technology in polypeptides, we are cooperating with
                relevant research institutes to develop new products to cure piglet
                diarrhea. The products are expected to stimulate the release of growth
                hormones in piglets, improve their ability to produce antibody and
                excrete
                stomach acidity, enhance the activity of albumen enzyme and adjust
                the
                activity of T.B. cells, thereby improving their all-around
                disease-resistance ability. We expect these new products will greatly
                reduce the use of traditional chemical drugs and lead to more
                environmentally-friendly livestock raising. These products are now
                in the
                interim stage of development. We are also developing complex enzyme
                preparations as new feed additives and aim to use anti-inflammatory
                enzyme, polyase, and cellulose to form the best combination to effectively
                dissolve and cause the additive to be absorbed in the feed. The goal
                of
                this technology is to enable us to produce products that will drastically
                improve the absorption rate of the feed. By doing do it will reduce
                feed
                cost to the farmer and will increase the total meat yields when the
                farmer
                takes the animal to market. In addition, the technology will concurrently
                reduce the incidence of disease in livestock and
                poultry.3.
            Development
                of non-pathogenic micro-organisms.
                We are also developing non-pathogenic micro-organisms and, based
                upon
                current products of microbe preparations, lactobacillus, bacillus,
                bifid
                bacterium baceroid, and combined with the most appropriate oligosaccharide
                preparations to produce living bacterium which will be applied to
                cure
                gastrointestinal tract diseases resulting from the maladjustment
                of flora.
                If successful, microorganism preparations can be effective cure and
                prevention for livestock disease, and can greatly reduce the use
                of
                antibiotic and other drugs. This will reduce the total costs of raising
                and bringing an animal to market. It will also reduce the mortality
                incidence of the animals which means a farmer can bring more animals
                to
                market for less costs.4.
            Development
                of veterinary medicines for pets.
                We believe that the pet markets have been fast growing alongside
                the
                growing economy in China. We believe that this niche is being overlooked
                by local manufacturers. To attempt to take advantage of this opportunity,
                we have over 20 products of veterinary medicines for pets that are
                in the
                course of development.





In
      2006,
      we spent approximately $131,000 or approximately 1.34% of our 2006 revenue
      on
      research and development of products. In 2007, we spent approximately $268,000
      or approximately 1.78% of our revenue on research and development of
      products.





**Distribution
      Methods of the Products or Services and Our Customers**




We
      have a
      distribution network covering 29 provinces in China. Currently, we
      have over 600 distribution agents throughout China. We intend to establish
      more representative offices and engage additional distribution agents in order
      to strengthen its distribution network.





We
      recognize the importance of branding as well as packaging. All of our products
      bear a uniform brand but we also brand and package our products with specialized
      designs to differentiate the different categories of our products.





We
      conduct promotional marketing activities 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;
                and4.
            sending
                direct mail to major farms.





As
      of
      March 23, 2008, we have over 800 customers in 29 provinces in China, including
      over 600 distributors and 200 direct customers.




6





**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.
      Currently, we have one patent issued in China, valid for 10 years, and we intend
      to apply for more patents to protect our core technologies. We also enter into
      confidentiality, non-compete and invention assignment agreements with our
      employees and consultants and nondisclosure agreements with third parties.
      “Jiateng Jun”, “Star Pigeon” and “Cure King” 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.





**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.
      Although these companies have more assets, resources and larger market shares,
      we believe that we are able to compete with them because of our location in
      Northwestern China, our unique and extensive product offerings and our
      competitive prices. Other than these three competitors, most of the other PRC
      companies in this industry manufacture only one or two products. Skystar, on
      the
      other hand, has four product lines, including complete series of feed additives
      and veterinary medicine products designed to treat the animal from the time
      of
      birth to the time the animal is ready for the market.




**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 fifty-seven percent (57%) of the raw materials we
      used to manufacture our products. We design, create prototypes and manufacture
      our products at our manufacturing facilities located at Xi’an city, Shang’xi
      province, China. Our principal raw materials include dexamethasone sodium
      phosphate (a glucocorticoid with anti-inflammatory property), stachyose (a tetrasaccharide found
      naturally in many vegetables) and
      thiamphenicol (an antibiotic). We also use Chinese herbs such as Huoxiang,
      Huanglian, and Zhang Red Flowers as raw
      materials, which are supplied to us by Shanghai
      Yino Technology Development Co., Ltd., Wan Shou Bei Lu Zhong Kui Cao Yao
      Xing, Shaanxi Jin Wei Gong Mao Co., Ltd, Hebei Wei Yuan Dong Wu Yao Co., Ltd
      and
      Shaanxi Yongfeng Su Ye Ke Ji Co., Ltd. The
      prices for these raw materials are subject to market forces largely beyond
      our
      control, including 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 in cooperation with research institutes
      including Shaanxi
      Microbial Research Institute, Jiangsu Microbial Research Institute, China
      Northwestern University and China Northwest A&F University, 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.





**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 Ministry of Agriculture of China government,
      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. The Company
      currently has obtained the requisite approval and licenses from the Ministry
      of
      Agriculture in order to operate our production facilities.




7





**Costs
      and Effects of Compliance with Environmental Laws**





In
      compliance with Chinese environmental regulations, we spent Nil in 2006, and
      approximately $13,000 in 2007, mainly for the wastewater treatment in connection
      with our production facilities.





**Employees**




As
      of
      March 23, 2008, we had 196 full-time employees, including management. 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 offering that are not historic facts are forward-looking statements that
      are subject to risks and uncertainties that could cause actual results to differ
      materially from those set forth in or implied by forward-looking statements.
      If
      any of the following risks actually occurs, our business, financial condition
      or
      results of operations could be harmed. In that case, the trading price of our
      common stock could decline, and you may lose all or part of your
      investment.*





**Risks
      Relating to Our Business**





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




We
      have a
      relatively limited operating history. Xian Tianxing, the variable interest
      entity through which we operate our business, commenced operations in 1997
      and
      first achieved profitability in the quarter ended September 30, 1999.
      Accordingly, you should consider our future prospects in light of the risks
      and
      uncertainties typically experienced by companies such as ours in evolving
      industries such as the 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;·
            upgrade
                our technology to support additional research and development of
                new
                products; and·
            maintain
                or improve our position as one of the market leaders in China.




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. Despite our recent financing, 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.




8




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 have various research collaborations
      and
      outsource other business functions. Our license agreements could obligate us
      to
      diligently bring potential products to market, make substantial milestone
      payments and royalties and incur the costs of filing and prosecuting patent
      applications. There are no assurances that we will be able to establish or
      maintain collaborations that are important to our business on favorable terms,
      or at all. 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. A number of risks arise from our dependence
      on
      collaborative agreements with third parties. Product development and
      commercialization efforts could be adversely affected if any collaborative
      partner:




·
            terminates
                or suspends its agreement with us;·
            causes
                delays;·
            fails
                to timely develop or manufacture in adequate quantities a substance
                needed
                in order to conduct clinical trials;·
            fails
                to adequately perform clinical trials;·
            determines
                not to develop, manufacture or commercialize a product to which it
                has
                rights; or·
            otherwise
                fails to meet its contractual
                obligations.


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




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




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




·
            any
                of our patent applications will result in the issuance of
                patents;·
            we
                will develop additional patentable products;·
            the
                patents we have been issued will provide us with any competitive
                advantages;




9




·
            the
                patents of others will not impede our ability to do business;
                or·
            third
                parties will not be able to circumvent our
                patents.


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




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




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




***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***





Production
      of our products could require raw materials which are scarce or which can be
      obtained only from a limited number of sources. If we are unable to obtain
      adequate supplies of such raw materials, the development, regulatory approval
      and marketing of our products could be delayed.




***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.




10




***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.




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.***




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





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




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





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





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





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




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





**Risks
      Related to Our Corporate Structure**




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




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




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




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,
      a
      Chinese joint stock company. 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, we cannot assure you
      that
      the Chinese government would agree that these operating arrangements comply
      with
      Chinese licensing, registration or other regulatory requirements, with existing
      policies or with requirements or policies that may be adopted in the future.
      If
      the Chinese government determines that we do not comply with applicable law,
      it
      could revoke our business and operating licenses, require us to discontinue
      or
      restrict our operations, restrict our right to collect revenues, require us
      to
      restructure our operations, impose additional conditions or requirements with
      which we may not be able to comply, impose restrictions on our business
      operations or on our customers, or take other regulatory or enforcement actions
      against us that could be harmful to our business.




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




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





***The
      Chairman of the Board of Directors of Xian Tianxing has potential conflicts
      of
      interest with us, which may adversely affect our
      business.***




Weibing
      Lu, our Chief Executive Officer, is also the Chairman of the Board of Directors
      of Xian Tianxing. Conflicts of interests between his duties to our company
      and
      Xian Tianxing may arise. As Mr. Lu is a director and executive officer of our
      company, he has a duty of loyalty and care to us under U.S. and Cayman Islands
      law when there are any potential conflicts of interests between our company
      and
      Xian Tianxing. We cannot assure you, however, that when conflicts of interest
      arise, Mr. Lu will act completely in our interests or that conflicts of
      interests will be resolved in our favor. In addition, Mr. Lu could violate
      his
      legal duties by diverting business opportunities from us to others. If we cannot
      resolve any conflicts of interest between us and Mr. Lu, we would have to rely
      on legal proceedings, which could result in the disruption of our
      business.




13




**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.





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




Under
      Chinese laws and regulations, a foreign invested enterprise may enjoy
      preferential tax benefits if it is registered in a high-tech zone and also
      qualifies as “new or high-technology enterprise”. As a foreign invested
      enterprise as well as a certified “new or high-technology enterprise” located in
      a high-tech zone in Xian, the Company has been approved as a new technology
      enterprise and under Chinese Income Tax Laws, it is entitled to a preferential
      tax rate of 15%. If the Chinese law were to phase out preferential tax benefits
      currently granted to “new or high-technology enterprises” and technology
      consulting services, we would be subject to the standard statutory tax rate,
      which currently is 33%, and we would be unable to obtain business tax refunds
      for our provision of technology consulting services. Loss of these preferential
      tax treatments could have a material and adverse effect on our financial
      condition and results of operations.




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




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




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




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




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




14




***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 the
      prospectus.***




We
      conduct substantially all of our operations in China and substantially all
      of
      our assets are located in China. In addition, all of our senior executive
      officers reside within China. As a result, it may not be possible to effect
      service of process within the United States or elsewhere outside China upon
      our
      senior executive officers, 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.





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




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




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




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




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




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





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





***The
      full 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.***




The
      conversion or exercise price of certain of our outstanding convertible
      debentures and warrants may be less than the current market price for our common
      shares. In the event of conversion or exercise of these securities, a
      stockholder could suffer substantial dilution of his, her or its investment
      in
      terms of the percentage ownership in us as well as the book value of the common
      shares held. Full conversion and exercise of the convertible debentures and
      warrants would increase the outstanding common shares as of March 25, 2008
      by
      approximately 8% to approximately 18,534,540 shares.




15





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





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




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





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. We intend to apply for listing on the American Stock
      Exchange, but cannot assure you that this listing or listing on any other
      exchange will ever occur.




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





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





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




16




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





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





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





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




As
      of
      March 25, 2008, our principal stockholders and their affiliated entities own
      approximately 32.7% of our outstanding common shares, representing approximately
      32.7% 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.***





Our
      articles of incorporation do not contain any specific provisions that eliminate
      the liability of our directors for monetary damages to our company and
      stockholders, however we are prepared to give such indemnification to our
      directors and officers to the extent provided by Nevada law. We may also have
      contractual indemnification obligations under our employment agreements with
      our
      officers. 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. In addition,
      insurers are likely to increase premiums as a result of high claims rates over
      the past several years, which we expect will increase our premiums for insurance
      policies. Further, 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.




17





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





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




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




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





·
            actual
                or anticipated fluctuations in our quarterly operating
                results;·
            changes
                in financial estimates by securities research analysts;·
            conditions
                in bio-pharmaceutical and agricultural markets;·
            changes
                in the economic performance or market valuations of other
                bio-pharmaceutical 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 and the net proceeds from our recent financing will be sufficient
      to
      meet our anticipated cash needs for the foreseeable future. We may, however,
      require additional cash resources due to changed business conditions or other
      future developments, including any investments or acquisitions we may decide
      to
      pursue. If our resources are insufficient to satisfy our cash requirements,
      we
      may seek to sell additional equity or debt securities or obtain a credit
      facility. The sale of additional equity securities could result in additional
      dilution to our stockholders. The incurrence of indebtedness would result in
      increased debt service obligations and could result in operating and financing
      covenants that would restrict our operations. We cannot assure you that
      financing will be available in amounts or on terms acceptable to us, if at
      all.




18




***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, 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. Our management may conclude
      that our internal controls over our financial reporting are not effective.
      Moreover, even if our management concludes that our internal controls over
      financial reporting are effective, our independent registered public accounting
      firm may still decline to attest to our management’s assessment or may issue a
      report that is qualified if it is not satisfied with our controls or the level
      at which our controls are documented, designed, operated or reviewed, or if
      it
      interprets the relevant requirements differently from us. Our reporting
      obligations as a public company will place a significant strain on our
      management, operational and financial resources and systems for the foreseeable
      future. Effective internal controls, particularly those related to revenue
      recognition, are necessary for us to produce reliable financial reports and
      are
      important to help prevent fraud. As a result, our failure to achieve and
      maintain effective internal controls over financial reporting could result
      in
      the loss of investor confidence in the reliability of our financial statements,
      which in turn could harm our business and negatively impact the trading price
      of
      our stock. Furthermore, we anticipate that we will incur considerable costs
      and
      use significant management time and other resources in an effort to comply
      with
      Section 404 and other requirements of the Sarbanes-Oxley Act.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




None.





**ITEM
      2. DESCRIPTION OF PROPERTY**





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, Xian Province, PRC. This property belongs to Mr. Weibing
      Lu, director and chief executive officer of the Company. This property was
      provided free for the use of the Company’s administrative division 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 $21,800) per year.





**Production
      Facilities**





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





***The
      Sanqiao Plant***





Xian
      Tianxing is leasing the land underlying 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 $10,361 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 facility is run in cooperation with experts from
                Japan
                Kato Microbiology Institute, Microbiology Institute of Shanxi Province
                and
                Northwest Agro-Forestry Sci-tech University. This facility was expanded
                in
                2007 from approximately 16,100 square feet to approximately 21, 500
                square
                feet in accordance with national Good Manufacturing Practice (“GMP”)
                standards, and has been submitted to theChinese
                Ministry of Agriculture’s Veterinary Drugs GMP Inspection Committeefor
                inspection and approval.





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 land
      now
      underlying 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 Shanxi provincial government and the Xi’an municipal
      government.





Construction
      of the Huxian plant commenced in late 2004 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 by the end of 2008. 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:




19





**Description**
            
            **Approximate
                Size**
            
            **Status**GMP
                standard veterinary medicine facility
            
            45,200
                square feet
            
            CompletedQuality
                control, research and development, and administration
                building
            
            36,600
                square feet
            
            CompletedGMP
                standard bio-pharmaceutical facility with three production lines
                for
                active bacteria, inactivated vaccines, and coccidiosis
                vaccines
            
            48,400
                square feet
            
            Completion
                expected in the second half of 2008Animal
                laboratory complying with Animal Bio-safety Level 2 (ABSL-2) requirements
            
            10,700
                square feet
            
            Completion
                expected in the second half of 2008





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.




**ITEM
      3. LEGAL PROCEEDINGS**




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





Gregory
      Evans v. The Cyber Group Network Corp, et al. (District Court, Clark County, State of Nevada, Case No. A513378). We have
      learned that Gregory Evans filed suit against us, (under our former name, The
      Cyber Group Network Corp), R. Scott Cramer, Steve Lowe and David Wassung in
      State of Nevada District Court in Clark County, Nevada, alleging causes of
      action for “Refusing to Call Vote of Stockholders” and “Conversion” on or about
      November 18, 2005. We have not been served with a summons or complaint in the
      matter. We have denied the plaintiff’s claims and intend to vigorously defend
      against them if such complaint is properly served on us.





Andrew
      Chien v. Skystar Bio-Pharmaceutical Company, et. al. (US
      District Court, District of Connecticut, Case No. 3:2007cv00781). On
      or
      around May 2007, Andrew Chien (“Chien” or "Plaintiff") filed suit against the
      Company, R. Scott Cramer, Steve Lowe, David Wassung and Weibing Lu
      (“Defendants”) in United States District Court for the District of Connecticut,
      alleging causes of action for violation of Sections 10(b) and 20(a) of the
      Securities Exchange Act of 1934.  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.  The Plaintiff agreed to voluntarily
      amend the complaint after the motions were filed, and an amended complaint
      was
      subsequently filed on or around January 4, 2008.  The amended complaint
      dropped Weibing Lu (who is a resident of China and had never been served) as
      a
      defendant.  The remaining Defendants contend that the amended complaint has
      failed to correct the deficiencies of the original complaint, and have filed
      a
      renewed motion to dismiss for failure to state a claim, also preserving their
      challenge to personal jurisdiction.  The Defendants deny all claims
      and have moved the Court to dismiss the amended complaint in its entirety in
      their motion to dismiss, which is still pending. The motion to dismiss also
      requests that the Court award sanctions against Chien under the Private
      Securities Litigation Reform Act and other authority in the event the
      Defendants' motion to dismiss the amended complaint 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 report.




**PART
      II**




**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




**Market
      Information**





Our
      common stock, par value $0.001 per share (“Common Stock”), 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.




20





Common
      Stock




Quarter
                  Ended
              
              High
                  Bid
              
              Low
                  BidMarch
                  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
              
              
              1.30December
                  31, 2006
              
              
              2.60
              
              
              1.20September
                  30, 2006
              
              
              2.11
              
              
              1.80June
                  30, 2006
              
              
              2.70
              
              
              1.10March
                  31, 2006*
              
              
              5.58
              
              
              1.60





*
      Increase in stock price commencing in the first quarter of our 2006 fiscal
      year
      reflect the effect of a 1-for-397 reverse stock split of the Company’s common
      stock that became effective on February 15, 2006.





We
      currently have approximately 17,111,200 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 will have approximately 18,656,700 shares of common
      stock outstanding.





**Holders**




We
      currently have approximately 421 record holders of our common stock and one
      (1)
      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**





***Private
      Placement Financing***





As
      discussed more fully in our Current Report on Form 8-K filed on March 5, 2007,
      on February 28, 2007, pursuant to a securities purchase agreement, we sold
      to
      with several institutional and accredited investors $4.075 million in aggregate
      principal amount of 8% convertible debentures due February 28, 2009, and
      warrants to purchase 4,075,000 shares of the common stock of the Company,
      in a private placement pursuant to Regulation D under the Securities Act of
      1933. Pursuant to a registration rights agreement we executed with these
      investors, we agreed to register the shares of common stock underlying the
      convertible debentures and the warrants in a resale registration statement.
      Gross proceeds from the sale to the Company were $4.075 million, of which
      $285,250 was paid to Pacific Ridge Capital who served as placement agent for
      the
      transaction and $52,500 were paid to counsel for the investors in connection
      with the transaction. We also issued to the placement agent a warrant to
      purchase an aggregate of 570,500 shares with an exercise price of $1.00 per
      share and with an expiration date of February 28, 2012.





The
      convertible debentures bear interest at 8% per year and are convertible into
      shares of the Company’s common stock at an original conversion price of $1.00
      per share (the “Conversion Price”). We may require the conversion of the
      convertible debentures (“Mandatory Conversion”) provided that (a) certain equity
      conditions are met, which include, among other things, the effectiveness of
      the
      resale registration statement for the shares of common stock underlying the
      conversion of the convertible debentures, and that (b) for the 20 consecutive
      trading days prior to such election, the daily volume weighted average price
      exceeds $2.75 (as appropriately adjusted for any stock dividend, stock
      split, reverse stock split or other similar transaction) and the average trading
      volume equals or exceeds 45,000 shares of common stock (the “Trading Conditions
      for Mandatory Conversion”).




21





The
      warrants entitle each investor to purchase a number of shares of common stock
      equal to one hundred percent of the number of shares of common stock that would
      be issuable upon conversion of the convertible debenture purchased by such
      investor in the transaction. The warrants have an initial exercise price of
      $1.20 per share (the “Exercise Price”), and may only be exercised for cash.





Under
      the
      terms of the registration rights agreement, the resale registration statement
      was to be filed with the SEC not later than 45 days from the closing date of
      the
      transaction, and be declared effective by the SEC not later than 90 days from
      the closing date if there was no SEC review of the resale registration
      statement, and no later than 120 days from the closing date if there was SEC
      review. Failure to meet these deadlines would result in the Company incurring
      certain payment obligations (the “Registration Damages”) to the investors
      amounting to 2% of the aggregate purchase price of the convertible debentures
      and warrants per month, pro rated for partial periods. Because the resale
      registration statement was filed on June 1, 2007, and was declared effective
      on
      September 25, 2007 after SEC review, we incurred Registration Damages.





As
      reported in our Current Report on Form 8-K filed on December 11, 2007, on
      December 6, 2007, we entered into an Amendment, Exchange and Waiver Agreement
      (the “Amendment”), dated as of November 9, 2007, with certain of the investors
      (the “Participating Purchasers”) to amend terms of the convertible debentures,
      warrants and the registration rights agreement as follows:





·
            The
                terms of the convertible debentures held by the Participating Purchasers
                were amended by: (a) changing the Conversion Price from $1.00 per
                share to
                $0.85 per share; (b) deleting the Trading Conditions for Mandatory
                Conversion; (c) granting the Company the right to Mandatory Conversion
                at
                any time, and (d) allowing the Company to designate the date for
                the
                Mandatory Conversion.





·
            The
                terms of the warrants held by the Participating Purchasers were amended
                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
                registration rights agreement was amended as waiving all outstanding
                Registration Damages due to the Purchasers in their entirety. Because
                theoutstanding
                principal amounts of the Debentures held by the Participating Purchasers,
                as of the effective date of the Agreement, total more than seventy-five
                percent (75%) of the aggregate outstanding principal amounts of the
                outstanding Debentures held by all the Purchasers on that date, the
                amendment to the Registration Rights Agreement binds all of the
                Purchasers.





The
      Amendment was also deemed to be: (a) the Company’s notice to require conversion
      of the entire outstanding principal of the convertible 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 date of the conversion and the
      exercise is deemed to be December 6, 2007. Accordingly:





·
            Pursuant
                to the Conversion Notice, we issued an aggregate of 3,076,120 shares
                of our common stock (the “Debenture Shares”) to the Participating
                Purchasers, of which 1,156,944 shares are registered pursuant to
                the
                resale registration statement in effect. The balance of the Debenture
                Shares (the “Unregistered Debenture Shares”) were issued to the
                Participating Purchasers in reliance on the exemptions for sales
                of
                securities not involving a public offering to accredited investors,
                as set
                forth in Rule 506 promulgated under the Securities Act of 1933, as
                amended
                (the “Securities Act”), and in Section 4(2) of the Securities
                Act.





·
            Pursuant
                to the Exercise Notice, we issued an aggregate of 958,181 shares
                of our
                common stock (the “Warrant Shares”) to the Participating Purchasers, in
                reliance on the exemptions for sales of securities not involving
                a public
                offering to accredited investors, as set forth in Rule 506 promulgated
                under the Securities Act and in Section 4(2) of the Securities
                Act.





***Other
      Sales of Unregistered Securities***





In
      July
      2007, the Company issued 40,000 shares of its restricted common stock to a
      non-executive director as compensation for services unrelated to his duties
      as a
      director. Additionally, the Company issued 38,750 shares of its restricted
      common stock to an independent consultant for consultation and advisory services
      relating to investor relationship of the Company.





In
      December 2006, the Company issued 50,000 shares of its restricted common stock
      to an independent consultant for services relating to equity research of the
      Company.




22





In
      November 2006, the Company issued 70,000 shares of its restricted common stock
      to a non-executive director as compensation for services unrelated to his duties
      as a director, and issued 25,000 shares of its restricted common stock to an
      independent consultant for services relating to the marketing of the
      Company.





In
      October 2006, the Company issued 28,750 shares of its restricted common stock
      to
      an independent consultant for consultation and advisory services relating to
      investor relationship of the Company, and issued 15,600 shares of its restricted
      common stock to another independent consultant for financial and business
      consultation services.





**ITEM
      6. SELECTED FINANCIAL DATA**





Not
      applicable.





**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**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, 2007 and 2006 should be read
      in conjunction with Selected Consolidated Financial Data and our financial
      statements and the notes to those financial statements that are included
      elsewhere in this prospectus. Our discussion includes forward-looking statements
      based upon current expectations that involve risks and uncertainties, such
      as
      our plans, objectives, expectations and intentions. Actual results and the
      timing of events could differ materially from those anticipated in these
      forward-looking statements as a result of a number of factors, including those
      set forth under the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking
      Statements” and “Description of Business” sections and elsewhere in this
      prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” “predict,” and similar expressions to identify forward-looking
      statements.*  *Although
      we believe the expectations expressed in these forward-looking statements are
      based on reasonable assumptions within the bound of our knowledge of our
      business, our actual results could differ materially from those discussed in
      these statements. Factors that could contribute to such differences include,
      but
      are not limited to, those discussed in the “Risk Factors” section of this
      Registration Statement. We undertake no obligation to update publicly any
      forward-looking statements for any reason even if new information becomes
      available or other events occur in the future.*





Our
      financial statements are prepared in US Dollars and in accordance with
      accounting principles generally accepted in the United States. See “Exchange
      Rates” below for information concerning the exchanges rates at which Renminbi
      (“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 indirect 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” 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.




23


**Critical
      Accounting Policies**





In
      preparing the consolidated financial statements in accordance with accounting
      principles generally accepted in the United States, we make estimates and
      assumptions about the effect of matters that are inherently uncertain and may
      change in subsequent periods. The resulting accounting estimates will, by
      definition, may 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 presented net
                of value
                added tax (VAT). No return allowance is made as product returns are
                insignificant based on historical experience.*(a)*
            *Credit
                sales:*Revenue is recognized when the products have been delivered to the
                customers.*(b)*
            *Full
                payment before delivering:*Revenue is recognized when the products have been delivered to
                customers.·
            Accounts
                receivable: We perform ongoing credit evaluations of our customers
                and
                adjust credit limits based upon payment history and the customers’ current
                credit worthiness, as determined by a review of their current credit
                information. We continuously monitor collections and payments from
                our
                customers and maintain a provision for estimated credit losses based
                upon
                historical experience and any specific customer collection issues
                that
                have been identified. While such credit losses have historically
                been
                within our expectations and the provisions established, we cannot
                guarantee that we will continue to experience the same credit loss
                rates
                that have been experienced in the past.·
            Convertible
                debentures and warrants: We have adopted APB No. 14, Accounting for
                Convertible Debt and Debt Issued with Stock Purchase Warrants, FAS
                133,
                EITF-98-5, and EITF-00-27, for valuation and accounting treatment
                of our
                outstanding convertible debentures and warrants.·
            Liquidated
                damages: We have adopted FAS 5 and EITF 00-19-2 in connection with
                the
                liquidated damages we accrued pursuant to the terms of our Registration
                Rights Agreement with certain investors dated February 27,
                2007.





**RESULTS
      OF OPERATIONS**




**Comparison
      of Two Years Ended December 31, 2007 and 2006.**





The
      following table sets forth the results of our operations for the periods
      indicated as a percentage of net sales:





Year
                ended  December 312007
            
            %
                of
            
            2006
            
            %
                ofAudited
            
            Revenue
            
            Audited
            
            RevenueREVENUES
            
            $
            15,056,828
            
            
            100.00
            %
            $
            9,796,324
            
            
            100.00
            %COST
                OF SALES
            
            
            6,712,365
            
            
            44.58
            %
            
            5,420,652
            
            
            55.33
            %GROSS
                PROFIT
            
            
            8,344,463
            
            
            55.42
            %
            
            4,375,672
            
            
            44.67
            %SELLING
                EXPENSES
            
            
            739,422
            
            
            4.91
            %
            
            475,504
            
            
            4.85
            %GENERAL
                AND ADMINISTRATIVE EXPENSES
            
            
            1,795,876
            
            
            11.93
            %
            
            881,223
            
            
            9.00
            %AMORTIZATION
                OF DEFERRED COMPENSATION
            
            
            643,119
            
            
            4.27
            %
            
            1,202,235
            
            
            12.27
            %RESEARCH
                AND DEVELOPMENT COSTS
            
            
            268,320
            
            
            1.78
            %
            
            131,371
            
            
            1.34
            %INCOME
                FROM OPERATIONS
            
            
            4,897,726
            
            
            32.53
            %
            
            1,685,339
            
            
            17.20
            %OTHER
                EXPENSE
            
            
            3,651
            
            
            0.00
            %
            
            3,478
            
            
            0.00
            %INDUCEMENT
                COST FOR DEBENTURE CONVERTED
            
            
            634,450
            
            
            4.21
            %
            
            -
            
            
            -INDUCEMENT
                COST FOR WARRANTS EXERCISED
            
            
            279,547
            
            
            1.86
            %
            
            -
            
            
            -INTEREST
                INCOME
            
            
            (14,611
            )
            
            (0.1
            )%
            
            -
            
            
            -INTEREST
                EXPENSES
            
            
            4,924,493
            
            
            32.71
            %
            
            11,768
            
            
            0.12
            %INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            (929,804
            )
            
            (6.18
            )%
            
            1,670,093
            
            
            17.05
            %INCOME
                TAXES
            
            
            1,027,172
            
            
            6.82
            %
            
            494,951
            
            
            5.05
            %NET
                INCOME (LOSS)
            
            $
            (1,956,976
            )
            
            (13.00
            )%
            $
            1,175,142
            
            
            12.00
            %EARNINGS
                PER SHAREBASIC
            
            $
            (0.15
            )
            
            
            
            $
            0.11DILUTED
            
            $
            (0.16
            )
            
            
            
            $
            0.09WEIGHTED
                AVERAGE NUMBER OF COMMON SHARESBASIC
            
            
            13,453,543
            
            
            
            
            
            11,144,153DILUTED
            
            
            14,105,322
            
            
            
            
            
            12,498,386




24




Revenues .
      All of
      our revenue is derived from the sales of bio-pharmaceutical and veterinary
      products in China. During the year ended December 31, 2007, we had revenues
      of
      $15,056,828 as compared to revenues of $9,796,324 during the year ended December
      31, 2006, an increase of approximately 54%. In general, this
      increase is mainly attributable to the increase in the number of promotional
      activities we carried out during the whole year of 2007. Our customers tend
      to
      use more and more products that are used in livestock and poultry breeding
      for
      the promotion of growth and the prevention of diseases, especially during
      times of epidemic such as the porcine reproductive and respiratory syndrome
      (blue-ear disease) that afflicted China’s pig industry during 2007. We
      believe that our sales will continue to grow as we continue to strengthen our
      sales force, build brand recognition and add to our product
      offerings.





Gross
      Profit .
      Cost of
      goods sold, which consist of raw materials, direct labor and manufacturing
      overhead, were $6,712,365 for the year ended December 31, 2007 as compared
      to
      $5,420,652 for the year ended December 31, 2006. Gross profit was $8,344,463
      for
      the year ended December 31, 2007 as compared to $4,375,672 for the year ended
      December 31, 2006, representing gross margins of approximately 55% and 45%,
      respectively. The
      increase in our gross profit margins is attributable to (a) the introduction
      of
      high demand products, such as our “Cure King” series of products beginning in
      the second quarter of 2007, that have higher gross profit margins, (b) the
      improvement in manufacturing techniques through personnel training and the
      adoption of new technologies that cause equipment and machinery to operate
      more
      efficiently, which also allowed us to use raw materials more efficiently thereby
      reducing wastage, and (c) our ability to produce microbial strains internally, which significantly reduced our
      costs for these raw materials and increased the gross profit margins of our
      micro-organism products.





Selling
      Expenses .
      Selling
      expenses, which consist of commission, advertising and promotion expenses,
      freight charges and salaries totaled $739,422 for the year ended December 31,
      2007 as compared to $475,504 for the year ended December 31, 2006, an increase
      of approximately 56%. This
      increase is primarily attributable to our expanding sales team and increased
      sales and marketing activities, such as our participation in the China Animal
      Husbandry and Feed Industry Exposition in Ningbo, the 19th Henan Livestock
      Exhibition and Conference in Zhengzhou, the Shandong Livestock Expo in Jinan
      and
      the China Animal Health Products and Veterinary Technology Exposition in
      Chengdu, to promote public awareness of our brand and products, all of
      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 $1,795,876 for the year ended December
      31,
      2007 as compared to $881,223 for the year ended December 31, 2006, an increase
      of approximately 104%. This
      increase is primarily attributable to legal and accounting fees incurred as
      a
      U.S. public company and other consulting fees relating to financing activities.
      Xian Tianxing had no significant increase in administrative expenses due to
      good
      management controls.




Research
      and Development Costs .
      Research and development costs, which consist of salaries, professional and
      technical support fees, totaled $268,320 for the year ended December 31, 2007
      as
      compared to $131,371 for the year ended December 31, 2006, an increase of
      approximately 104%. The increase is attributable to our continuing efforts
      to
      introduce new products. In 2006, we had 42 products. In 2007, the number of
      products we offered more than doubled to 103 products.




25





Net
      Income .
      Skystar
      had a net loss of $1,956,976 for the year ended December 31, 2007 as compared
      to
      $1,175,142 net income for the year ended December 31, 2006.  The
      decrease in our net income is largely attributable to: (a) the amortization
      of
      the expenses relating to the convertible debentures and warrants from our
      financing in February 2007 and the related interest and financing costs, (b)
      inducement cost for those debentures converted and warrants exercised and (c)
      additional professional services required as a U.S. public company. For the
      year
      ended December 31, 2007, the total interest expense was $4,924,493. Our
      management  believes
      that net income will increase because the convertible debentures have been
      largely converted and the non-cash charges of the
      amortization of the expenses and interest expense relating to the convertible
      debentures will be greatly reduced in the future. Additionally, since the
      majority of the convertible debentures have been converted and warrants
      exercised, we will not have any more non-cash charges for inducement cost
      relating to those convertible debentures already converted. Further, our
      management expects our net income to increase as we
      continue to introduce new products and increase sales.




**Growth
      Strategies**





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 RMB
      82,000,000 (US$10,501,000) 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 late 2004, and we completed the
      veterinary medicine facility and the quality control, research and development,
      and administration building during 2007, both of which are fully operational.
      The remaining facilities of the Huxian plant are expected to be completed by
      the
      end of 2008. We anticipate that the new plant will generate sufficient cash
      flows; thus, management has concluded that there is no impairment loss on the
      construction in progress.





Product
      Research and Development





Xian
      Tianxing is developing several new products, including new
      bio-pharmaceutical products for animal immunization, non-pathogenic
      micro-organisms for the cure and prevention of livestock disease, complex enzyme
      preparations as animal feed additives, and several new veterinary medicine
      products, and our management expects many of these projects to be completed
      within the next 12 months.





**Liquidity**





**Year
      Ended December 31, 2007**





For
      the
      year ended December 31, 2007, we generated cash from operating activities of
      $943,145, as compared to $1,600,554 for the year ended December 31, 2006. The
      decrease is primarily attributable to purchase of inventories. We used
      $3,145,584 in investing activities for 2007 as compared to $1,833,706 for 2006.
      The expenditure in investing activities for 2007 consisted of, among others, payment
      of $402,470 for the purchase of equipment as the construction of one of our
      new
      facilities at our Huxian plant was completed at the end of second quarter of
      2007. We also extended loans in the aggregate amount of $912,901 to unrelated
      third parties to secure good business relationships, purchase of intangible
      assets of $658,350 and advances on purchasing of long term assets of $1,171,863. We
      provided by $2,752,253 from financing activities for 2007, as compared
      to $385,272 provided by in financing activities for 2006, which, among
      others, mainly consisted of the
      issuance of convertible debentures and warrants from our February 2007
      financing discussed in further detail in Note 11 of the accompanying
      footnotes to our consolidated financial statements.





As
      of
      December 31, 2007, the Company had cash of $771,492. Our total current assets
      were $6,323,937 and our total current liabilities were $1,422,919, which
      resulted in a net working capital of $4,901,018. On February 27, 2007, we
      entered into a Securities Purchase Agreement dated February 26, 2007, with
      several institutional and accredited investors pursuant to which we sold
      to these investors $4.075 million in aggregate principal amount of 8%
      convertible debentures due February 28, 2009, and warrants to purchase 4,075,000
      shares of the common stock of the Company, in a private placement pursuant
      to
      Regulation D under the Securities Act of 1993. We believe that we have
      sufficient cash flow to meet our obligations on a timely basis in the
      foreseeable future.





We
      had
      capital expenditure commitments outstanding as of December 31, 2007 in the
      amount of $822,000 in relation to construction at our
      Huxian plant and $548,000 in relation to the purchase of machinery. Once
      all its facilities are completed, the Huxian plant is expected
      to enable us to consolidate our existing operations and to expand the
      production capacity for our bio-pharmaceutical business.




26




**Capital
      Resources**





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





One
      of
      our manufacturing plants obtained a Good Manufacturing Practice (“GMP”)
      certificate and was fully operational at the end of second quarter of 2007.
      We
      have obtained product serial permit numbers for 60 products, which resulted
      in
      higher sales revenue and profit margins for us in the third quarter of
      2007.





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




*Contractual
      Obligations*


**Payments
                  due by Period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than 1**
                **year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **More
                  than 5 years**Long-Term
                  Debt Obligations
              
              
              482,923
              
              
              414,990
              
              
              67,933
              
              
              —
              
              
              —Operating
                  Lease Obligations
              
              
              183,635
              
              
              34,789
              
              
              71,346
              
              
              48,967
              
              
              28,533**Total**
              
              
              666,558
              
              
              449,779
              
              
              139,279
              
              
              48,967
              
              
              28,533





*Off-balance
      Sheet Arrangements*





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




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





We
      do not
      use derivative financial instruments in our investment portfolio and have no
      foreign exchange contracts. Our financial instruments consist of cash and cash
      equivalents, trade accounts receivable, accounts payable and long-term
      obligations. We consider investments in highly-liquid instruments purchased
      with
      a remaining maturity of 90 days or less at the date of purchase to be cash
      equivalents.





**Interest
      Rates**





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      short-term investments and short-term obligations; thus, fluctuations in
      interest rates would not have a material impact on the fair value of these
      securities. At December 31, 2007, we had approximately $771,492 in cash and
      cash equivalents.





**Exchange
      Rates**





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





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




27




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





**December 31, 2007**
            
            **December 31, 2006**Assets
                and liabilities
            
            
            USD****0.1371:****
              RMB1
            
            
            USD0.12820:
              RMB1Statements
                of operations
              and
                cash flows for the
              period/year
                ended
            
            
            USD
                0.13167:
              RMB1
            
            
            USD
                0.12557:
              RMB1





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





**Inflation**





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





**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**





Our
      independent registered public accounting firm presently is Moore Stephens Wurth
      Frazer and Torbet LLP (“Moore Stephens”). Pursuant to Item 304(a) Regulation S-K
      under the Securities Act of 1933, as amended, and under the Securities Exchange
      Act of 1934, as amended, the Company reported the following:





As
      approved by our board of directors, we dismissed Weinberg & Company, P.A.
      (“Weinberg”) as our independent auditors effective January 18,
      2006.  Weinberg served as our independent auditors for the fiscal
      years ended December 31, 2003 and 2004, and the interim periods during fiscal
      year 2005.  Weinberg’s reports on our financial statements for the
      fiscal years ended December 31, 2003 and 2004 did not contain an adverse opinion
      or disclaimer of opinion and were not qualified or modified as to uncertainty,
      audit scope, or accounting principles, except as to our ability to continue
      as a
      going concern. During the fiscal years ended December 31, 2003 and 2004 and
      until Weinberg’s dismissal, there were no disagreements with Weinberg within the
      meaning of Item 304 of Regulation S-B or any matter of accounting principles
      or
      practices, financial disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to Weinberg’s satisfaction, would have caused
      Weinberg to make reference to the subject matter of the disagreements in
      connection with its reports.  During
      the fiscal years ended December 31, 2003 and 2004, and until Weinberg’s
      dismissal, there were no “reportable events” (as such term is defined in Item
      304(a)(1)(v) of Regulation S-B. On January 19, 2006, we filed a Current Report
      on Form 8-K disclosing the dismissal of Weinberg. We requested Weinberg to
      review the disclosure contained therein and asked Weinberg to furnish us with
      a
      letter addressed to the SEC containing any new information, clarification of
      the
      our expression regarding Weinberg’s views, or the respects in which Weinberg
      does not agree with the statements contained herein. Such Form 8-K indicated
      that we would file Weinberg’s letter by amendment at a later date. A copy of
      Weinberg’s letter was filed as an exhibit to Amendment No. 1 to such Form 8-K on
      January 27, 2006.





On
      January 19, 2006, as approved by our board of directors, we engaged GC Alliance
      Limited (“GC”) as our independent accounting firm. Prior to the engagement of
      GC, neither us nor anyone on our behalf consulted with GC regarding either
      (i) the application of accounting principles to a specified transaction, either
      contemplated or proposed, or the type of audit opinion that might be rendered
      on
      our financial statements, or (ii) any matter that was the subject of
      a “disagreement” or a “reportable event.”




28





On
      February 21, 2006, following the approval of our board of directors, we
      dismissed GC as our independent auditors.  GC did not audit or review
      any of our financial statements prior to GC’s dismissal. Until GC’s dismissal,
      there were no disagreements with GC within the meaning of Item 304 of Regulation
      S-B or any matter of accounting principles or practices, financial disclosure,
      or auditing scope or procedure, which disagreements, if not resolved to GC’s
      satisfaction, would have caused GC to make reference to the subject matter
      of
      the disagreements in connection with its reports.  Until
      GC’s dismissal, there were no “reportable events” (as such term is defined in
      Item 304(a)(1)(v) of Regulation S-B. On February 27, 2006, we filed a Current
      Report on Form 8-K disclosing the dismissal of GC. We requested GC to review
      the
      disclosure contained therein and asked GC to furnish us with a letter addressed
      to the SEC containing any new information, clarification of the our expression
      regarding GC’s views, or the respects in which GC does not agree with the
      statements contained herein. Such Form 8-K indicated that we would file GC’s
      letter by amendment at a later date. A copy of GC’s letter was filed as an
      exhibit to Amendment No. 1 to such Form 8-K on March 3, 2006.





On
      February 21, 2006, as approved by our board of directors, we engaged Moore
      Stephens as our independent accounting firm. Prior to the engagement of Moore
      Stephens, neither us nor anyone on our behalf consulted with Moore Stephens
      regarding either (i) the application of accounting principles to a specified
      transaction, either contemplated or proposed, or the type of audit opinion
      that
      might be rendered on our financial statements, or (ii) any matter that was
      the
      subject of a “disagreement” or a “reportable event.”





On
      March
      6, 2007, following the approval of our board of directors, we dismissed Moore
      Stephens as our independent auditors.  Moore Stephens served as our
      independent auditors for the fiscal year ended December 31, 2005 and the interim
      periods during fiscal year 2006.  Moore Stephens’s reports on our
      financial statements for the fiscal year ended December 31, 2005 did not contain
      an adverse opinion or disclaimer of opinion and were not qualified or modified
      as to uncertainty, audit scope, or accounting principles, except for an
      explanatory paragraph regarding the financial statements being prepared assuming
      that we will continue as a going concern.. During the fiscal year ended December
      31, 2005 and until Moore Stephens’s dismissal, there were no disagreements with
      Moore Stephens within the meaning of Item 304 of Regulation S-B or any matter
      of
      accounting principles or practices, financial disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to Moore Stephens’s
      satisfaction, would have caused Moore Stephens to make reference to the subject
      matter of the disagreements in connection with its reports.  During
      the fiscal year ended December 31, 2005 and until Moore Stephens’s dismissal,
      there were no “reportable events” (as such term is defined in Item 304(a)(1)(v)
      of Regulation S-B. On March 6, 2007, we filed a Current Report on Form 8-K
      disclosing the dismissal of Moore Stephens. We requested Moore Stephens to
      review the disclosure contained therein and asked Moore Stephens to furnish
      us
      with a letter addressed to the SEC containing any new information, clarification
      of the our expression regarding Moore Stephens’s views, or the respects in which
      Moore Stephens does not agree with the statements contained herein. Such Form
      8-K indicated that we would file Moore Stephens’s letter by amendment at a later
      date. A copy of Moore Stephens’s letter was filed as an exhibit to Amendment No.
      1 to such Form 8-K on March 8, 2007.





On
      March
      6, 2007, as approved by our board of directors, we engaged Schwartz Levitsky
      Feldman LLP, Chartered Accountants (“SLF”) as our independent accounting firm.
      Prior to the engagement of SLF, neither us nor anyone on our behalf
      consulted with SLF regarding either (i) the application of accounting principles
      to a specified transaction, either contemplated or proposed, or the type of
      audit opinion that might be rendered on our financial statements, or (ii) any
      matter that was the subject of a “disagreement” or a “reportable
      event.”





On
      April
      26, 2007, following the approval of our board of directors, we dismissed SLF
      as
      our independent auditors.  SLF was engaged to serve as our independent
      auditors for the fiscal year ended December 31, 2006 but did not complete the
      audit before their dismissal. Until SLF’s dismissal, there were no disagreements
      with SLF within the meaning of Item 304 of Regulation S-B or any matter of
      accounting principles or practices, financial disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to SLF’s satisfaction, would
      have caused SLF to make reference to the subject matter of the disagreements
      in
      connection with its reports.  Until
      SLF’s dismissal, there were no “reportable events” (as such term is defined in
      Item 304(a)(1)(v) of Regulation S-B. On April 30, 2007, we filed a Current
      Report on Form 8-K disclosing the dismissal of SLF. We requested SLF to review
      the disclosure contained therein and asked SLF to furnish us with a letter
      addressed to the SEC containing any new information, clarification of the our
      expression regarding SLF’s views, or the respects in which SLF does not agree
      with the statements contained herein. A copy of SLF’s letter was filed as an
      exhibit to such Form 8-K.





On
      April
      26, 2007, as approved by our board of directors, we reengaged Moore Stephens
      as
      our independent accounting firm. Prior to the reengagement of Moore Stephens,
      neither us nor anyone on our behalf consulted with Moore Stephens regarding
      either (i) the application of accounting principles to a specified transaction,
      either contemplated or proposed, or the type of audit opinion that might be
      rendered on our financial statements, or (ii) any matter that was the subject
      of
      a ”disagreement” or a “reportable event.”





**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.




29





As
      of
      December 31, 2007, 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 because
      of the material weakness in internal control over financial reporting described
      below, our disclosure controls and procedures (as defined in Rules 13a-15(e)
      and
      15d-15(e) under the Securities Exchange Act of 1934) were not effective as
      of
      December 31, 2007.





**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, 2007. 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." During
      our assessment of the effectiveness of internal control over financial reporting
      as of December 31, 2007, our management identified significant deficiencies
      related to the following:





1.
            *Accounting
                and Finance Personnel Weaknesses*-
                The current staff in the accounting department is relatively
                inexperienced, and needs substantial training so as to meet with
                the
                higher demands of being a U.S. public company. The accounting skills
                and
                understanding necessary to fulfill the requirements of U.S. GAAP-based
                reporting, including the skills of subsidiary financial statement
                consolidation, are not at par, which resulted in a less than optimal
                segregation of duties relative to key financial reporting functions.





2.
            *Lack
                of Internal Audit Function*-
                The Company lacks qualified resources to perform the internal audit
                functions properly. In addition, the scope and effectiveness of internal
                audit function are yet been fully developed.





3.
            *Lack
                of Internal Audit System*-
                The Company lacked internal audit department, which was 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;





30




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;





5.
            Interviewing
                prospective new directors for our Board including a member who is
                appropriately credentialed as a financial expert with a goal to establish
                both an audit and compensation committee as well as sufficient number
                of
                independent directors; and





6.
            Evaluating
                the internal audit function in relation to the Company’s financial
                resources and requirements.





We
        believe that the foregoing steps will remediate the significant deficiency
        identified above, and we will continue to monitor the effectiveness of these
        steps and make any changes that our management deems appropriate.
 
 A
        material weakness (within the meaning of PCAOB Auditing Standard No. 5) is
        a
        deficiency, or a combination of deficiencies, in internal control over financial
        reporting, such that there is a reasonable possibility that a material
        misstatement of our annual or interim financial statements will not be prevented
        or detected on a timely basis.  A significant deficiency is a
        deficiency, or a combination of deficiencies, in internal control over financial
        reporting that is less severe than a material weakness, yet important enough
        to
        merit attention by those responsible for oversight of the company's financial
        reporting.
  Our
        management is not aware of any material weaknesses in our internal control
        over
        financial reporting, and nothing has come to the attention of management
        that
        causes them to believe that any material inaccuracies or errors exist in
        our
        financial statements as of December 31, 2007.  The reportable
        conditions and other areas of our internal control over financial reporting
        identified by us as needing improvement have not resulted in a material
        restatement of our financial statements.  Nor are we aware of any
        instance where such reportable conditions or other identified areas of weakness
        have resulted in a material misstatement or omission in any report we have
        filed
        with or submitted to the Commission.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements.  Projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies and procedures may deteriorate.





**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 quarter ended December 31, 2007 that have materially
      affected, or are reasonably likely to materially affect, our international
      control over financial reporting.





**ITEM
      9B. OTHER INFORMATION**





None.





**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE**




As
      of
      March 25, 2008, the directors and executive officers of the Company, their
      ages,
      their respective offices and positions, and their respective dates of election
      or appointment are as follows:




**Name**
            
            **Age**
            
            **Position**
            
            **Date
                of Appointment**Weibing
                Lu
            
            45
            
            Chief
                Executive Officer and Chairman of the Board of Directors
            
            February
                2006Erna
                Gao
            
            51
            
            Chief
                Financial Officer and Director
            
            February
                2006Wei
                Wen
            
            42
            
            Secretary
                and Director
            
            February
                2006Xinya
                Zhang
            
            59
            
            Director
            
            February
                2006R.
                Scott Cramer
            
            44
            
            Director
            
            October
                2001





31




**Business
      Experience Descriptions**




***Weibing
      Lu, Chief Executive Officer and Director***





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.





***Erna
      Gao, Chief Financial Officer and Director***





Ms.
      Erna
      Gao graduated from Xi’an TB University in Accountancy in 1986. From 1982 to
      2001, she was an accountant, senior accountant and accountant manager at the
      Kunlun Electrical Engineering Company. From April 2001 to March 2004, she was
      chief accountant at Dongda Petroleum Company. Since March 2004, she has been
      the
      Chief Financial Officer of Xian Tianxing Bio-Pharmaceutical Co.,
      Ltd.




***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.





***Xinya
      Zhang, Director***





Mr.
      Xinya
      Zhang graduated from Northwest Agricultural University in Shanxi, China. From
      1990 to 1997, he was the Factory Director and General Engineer of Xian Hua’an
      Livestock Group Company Feed Factory. In July 1997, he joined Xian Tianxing
      Science and Technology Development Co., Ltd. and was appointed as our Vice
      General Manager. Since our reorganization in December 2003, Mr. Zhang has served
      as Vice General Manager of Xian Tianxing Bio-Pharmaceutical Co.,
      Inc.





***R.
      Scott Cramer, Director***





Mr.
      R.
      Scott Cramer was previously the Chairman, Chief Executive Officer and Chief
      Financial Officer of The Cyber Group. He is currently a member of our Board
      of
      Directors. Mr. Cramer is currently also the President of Cramer &
Associates, a firm specializing in retirement management, estate planning and
      investments.





**Family
      Relationships**





There
      are
      no family relationships between or among any of the current directors, executive
      officers or persons nominated or charged by Skystar to become directors or
      executive officers.




32





**Involvement
      in Certain Legal Proceedings**




None
      of
      the 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**





Except
      as
      otherwise set forth herein, 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,
      2007, beneficial owners complied with Section 16(a) filing requirements
      applicable to them: Clever Mind International Limited, of which Wei Wen, a
      director of the Company, is the Chairman of the Board, did not file its Form
      4s
      or Form 5s in connection with transactions that occurred during fiscal
      2007.




**Code
      of Ethics**





A
      code of
      ethics relates to written standards that are reasonably designed to deter
      wrongdoing and to promote:





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




·
            Full,
                fair, accurate, timely and understandable disclosure in reports and
                documents that are filed with, or submitted to, the SEC and in other
                public communications made by an
                issuer;




·
            Compliance
                with applicable governmental laws, rules and
                regulations;




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




·
            Accountability
                for adherence to the code.




The
      Company has not adopted a formal code of ethics because all of its executive
      officers are also directors, who are already subject to ethical and fiduciary
      standards imposed by law. However, the Company intends to develop a formal
      code
      of ethics that will apply to all of its employees (including its executive
      officers). Upon completion, the Company will provide to any person, without
      charge and upon request, a copy of the code of ethics. Any such request must
      be
      made in writing to the Company at its offices in Rm. 10601, Jiezuo Plaza, No.4,
      Fenghui Road South,  Gaoxin
      District, Xian Province, PRC.




**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.




**Audit
      Committee**





We
      are
      not a “listed company” under SEC rules and are therefore not required to have an
      audit committee comprised of independent directors. We do not currently have
      an
      audit committee, however, for certain purposes of the rules and regulations
      of
      the SEC, the Company’s board of directors is deemed to be its audit committee.
      The board of directors has determined that each of its members is able to read
      and understand fundamental financial statements and has substantial business
      experience that results in that member’s financial sophistication. In addition,
      two directors qualify as an “audit committee financial expert” within the
      meaning of the rules and regulations of the SEC. Accordingly, the board of
      directors believes that each of its members has sufficient knowledge and the
      experience necessary to fulfill the duties and obligations that an audit
      committee would have. Our board of directors intends, however, to appoint an
      audit committee in the near future.





33




**ITEM
      11. EXECUTIVE COMPENSATION**





**Compensation
      Discussion and Analysis**





This
      compensation discussion and analysis describes the material elements of the
      compensation awarded to our current executive officers. This compensation
      discussion focuses on the information contained in the following tables and
      related footnotes and narrative for the last completed fiscal year. In 2007,
      our
      board of directors oversaw and administered our executive compensation program.





Our
      current executive compensation includes a base salary, and does not include
      (i) discretionary annual cash performance-based incentives, (ii)
      termination/severance and change of control payments, or (iii) perquisites
      and
      benefits.





*Our
      Compensation Philosophy*





Our
      philosophy regarding compensation of our executive officers includes the
      following principles:





·
            compensation
                should align the interests of our management team with those of our
                shareholders;




·
            compensation
                should reward the achievement of our strategic initiatives and short-
                and
                long-term operating and financial
                goals;




·
            compensation
                should appropriately reflect differences in position and
                responsibility;




·
            compensation
                should be reasonable and bear some relationship with the compensation
                standards in the market in which our management team operates;
                and




·
            compensation
                should be understandable and transparent.




*Determination
      of Compensation Awards*





Our
      board
      of directors is provided with the primary authority to determine the
      compensation awards available to our executive officers.




34





*Compensation
      Benchmarking and Peer Group*





Our
      board
      of directors did not rely on any consultants or utilize any peer company
      comparisons or benchmarking in 2007 in setting executive compensation. As our
      company evolves, we expect to take steps, including the utilization of peer
      company comparisons, to ensure that the board of directors has a comprehensive
      picture of the compensation paid to our executives and with a goal toward total
      direct compensation for our executives that are on a par with the median total
      direct compensation paid to executives in peer companies if annually established
      target levels of performance at the company and business segment level are
      achieved.





*Elements
      of Compensation*




Presently,
      we compensate our executives with only a base salary. We do not pay any
      compensation to our executive officers in the form of discretionary annual
      cash
      performance-based incentives, long-term incentive plan awards or perquisites
      and
      other compensation, although our board of directors may recommend and institute
      such forms of compensation in the future.





*Base
      Salaries*





Base
      salary is used to recognize the experience, skills, knowledge and
      responsibilities required of our employees, including our named executive
      officers. When establishing base salaries for 2007, our board of directors
      and
      management considered a number of factors, including the seniority of the
      individual, the functional role of the position, the level of the individual's
      responsibility, the ability to replace the individual, the base salary of the
      individual at their prior employment and the number of well qualified candidates
      to assume the individual's role.





*Discretionary
      Annual Cash Performance-Based Incentive*





In
      2007,
      we did not pay any compensation in the form of discretionary annual cash
      performance-based incentives or other forms of bonuses to our Chief Executive
      Officer and each other named executive officer. Our board of directors may,
      however, recommend such bonuses in the future.





*Long-Term
      Incentive Plan Awards*





While
      we
      currently have two equity incentive plans in effect, no stock awards or stock
      option grants were made to any of the named executive officers pursuant to
      these
      plans during the fiscal year ended December 31, 2007. No stock options were
      held
      by the named executive officers as of December 31, 2007.





*Perquisites
      and Other Compensation*





We
      do not
      have any retirement or pension plans in place for any of our named
      executives. ******





*Management’s
      Role in the Compensation-Setting Process*





Our
      management plays a role in our compensation-setting process. We believe this
      input from management is needed in order to evaluate the performance of our
      management, recommend business performance targets and objectives, and recommend
      compensation levels. Our management may from time to time, make recommendations
      to our board of directors regarding executive compensation. During this process,
      management may be asked to provide the board with their evaluation of the
      executive officers’ performances, the background information regarding our
      strategic financial and operational objectives, and compensation recommendations
      as to the executive officers.




**Summary
      of Compensation**





The
      following summary compensation table indicates the cash and non-cash
      compensation earned during the fiscal years ended December 31, 2007 and
      2006 by the Chief Executive Officer and each of our other three highest paid
      executives, whose total compensation exceeded $100,000 (if any) during the
      fiscal year ended December 31, 2007 and 2006 .




35




**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,
            
            
            2007
            
            
            8,400
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            8,400current
                CEO
            
            
            2006
            
            
            7,091
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            7,091





(1)
            All
                compensation is paid in Chinese RMB. For reporting purposes, the
                amounts
                in the table above have been converted to U.S. dollars at the conversion
                rate of 7.6 RMB to one U.S. dollar. The officers listed in this table
                received no other form of compensation in the years shown, other
                than the
                salary set forth in this table.




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




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,
      2007.





**Compensation
      of Directors**





The
      following director compensation disclosure reflects all compensation awarded
      to,
      earned by or paid to the directors below for the fiscal year ended December
      31,
      2007.




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)
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            -0-Erna
                Gao (1)
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            -0-Wei
                Wen (1)
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            -0-Xinya
                Zhang (1)
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            -0-R.
                Scott Cramer (2)
            
            
            2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            -0-
            
            
            
            
            
            64,000
            
            
            64,000





(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)
            Mr.
                Cramer was an officer of the Company prior to the share exchange
                transaction and has stayed on as a director thereafter. The compensation
                received by Mr. Cramer during fiscal 2007 was for services unrelated
                to
                his duties as a director. The compensation was paid in the form of
                40,000
                shares of the Company’s restricted common stock, issued on August 1, 2007
                and which were not issued pursuant to any equity incentive plans
                in
                effect. The fair market value of our common stock on August 1, 2007
                was
                $1.60 per share.





There
      were no stock or option awards issued to any directors and outstanding as of
      December 31, 2007.





**Employment
      and Director Agreements**





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.




**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:




36





“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.




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.





We
      do not
      currently carry directors’ and officers’ liability insurance covering our
      directors and officers, but we have plans to do so. Insofar as indemnification
      for liabilities under the Securities Act may be permitted to directors,
      officers, or persons controlling the Company pursuant to the foregoing
      provisions, we have been informed that, in the opinion of the Commission, such
      indemnification is against public policy as expressed in the Securities Act
      and
      is therefore unenforceable.





**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 plans**Equity
                compensation plans approved by security holders
            
            
            —
            
            
            —Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            2,693,100TOTAL
            
            
            0
            
            
            0
            
            
            2,693,100


37


As
                of December 31, 2007, the Company had the following two (2) 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,
                2007,
                there are 2,093,452 shares of our common stock remaining available
                for
                future issuance under the 2002 Plan.(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, 2007, 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 Skystar’s common stock
      beneficially owned on March 25, 2008, for (i) each stockholder known to be
      the
      beneficial owner of 5% or more of Skystar’s 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, 2008 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. Percentages are determined based
      on 17,111,200 common shares issued and outstanding as of March 25, 2008. 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**
              **of**
              **Class****(2)**Common
                Stock
            
            Upform
              Group Limited (3)
            
            
            4,695,623
            
            
            27.44
            %Common
                Stock
            
            Weibing
              Lu, Director and Chief Executive Officer (3)
            
            
            4,695,623
            
            
            27.44
            %Common
                Stock
            
            Xinya
              Zhang, Director (3)
            
            
            4,695,623
            
            
            27.44
            %Common
                Stock
            
            Wei
              Wen, Director (4)
            
            
            207,715
            
            
            1.21
            %Common
                Stock
            
            Erna
              Gao, Director and Chief Financial Officer
            
            
            -0-
            
            
            0
            %Common
                Stock
            
            R.
              Scott Cramer, Director (5)
            
            
            692,231
            
            
            4.05
            %Common
                Stock
            
            US
              Special Opportunities Trust PLC (6) (8)
            
            
            1,293,903
            (8)
            
            7.56
                %
            (8)Common
                Stock
            
            Renaissance
              US Growth Investment Trust PLC (7) (8)
            
            
            1,293,903
            (8)
            
            7.56
                %
            (8)Common
                Stock
            
            All
              officers and directors as a group (5 total)
            
            5,595,569
            
            
            32.70
            %


38


(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,
                Xian
                Province, PRC.




(2)
            Unless
                otherwise noted, the number of outstanding shares of common stock
                of
                Skystar is based upon 17,111,200 shares outstanding as of March 25,
                2008.




(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 Ms. Zhang also include the shares held by
                Upform
                Group.


(4)
            The
                number of shares reported herein as beneficially owned by Wei 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)
            R.
                Scott Cramer address is: 1012 Lewis Dr., Winter Park, FL 32789. Includes
                681,411 shares held by the Cramer Family Trust of which Mr. Cramer
                is the
                sole trustee and sole primary beneficiary.(6)
            US
                Special Opportunities Trust PLC’s (“USSO”) address 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 upon conversion and/or
                exercise.(7)
            Renaissance
                US Growth Investment Trust PLC’s (“USGI”) address 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 upon conversion and/or
                exercise.(8)
            Because
                USSO and USGI share common control, they are deemed affiliates of
                each
                other.





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





**Certain
      Relationships and Related Transactions**




Amounts
      receivable from and payable to related parties are summarized as follows as
      of
      December 31:





2007
            
            2006Amounts
                due from shareholder:Mr.
                Weibing Lu (1)
            
            $
            59,462
            
            $
            -Amount
                due to shareholders:Ms.
                Aixia Wang (1)
            
            $
            1,371Mr.
                Scott Cramer (1)
            
            
            30,245
            
            
            -Total
            
            $
            31,616
            
            $
            -Amount
                due to related companies:TianXing
                Digital Co., Ltd. (2)
            
            $
            17,137
            
            $
            16,025Shanxi
                Xingji Electronics Co. Ltd. (2)
            
            
            32,817
            
            
            -Total
            
            $
            49,954
            
            
            16,025




39




(1)
            The
                related individuals, Mr. Weibing Lu, Ms. Aixia Wang, and Mr. R. Scott
                Cramer are all shareholders of the Company. Mr. Lu and Mr. Cramer
                are also
                our directors, and Mr. Lu is additionally our chief executive officer.
                The
                amounts due to shareholders were cash advances to facilitate Company
                operations or expenses paid by these individuals on behalf of the
                Company.
                These balances are non-interest bearing, unsecured, due on demand,
                and the
                ultimate manner of settlement is in cash or in exchange for office
                premises rental.





(2)
            Shanxi
                Xingji 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 Shanxi Xingji
                Electronics Co., Ltd. and Tianxing Digital Co., Ltd. are short term
                cash
                transfers for business operations, non-interest bearing, unsecured,
                and
                payable upon demand. The ultimate manner of settlement is in cash.





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 $21,800). Mr. Lu previously provided the premises rent-free,
      in
      2005 and 2006, for the use of our administrative division.





Mr.
      Weibing Lu is also the Chairman of the Board of Directors of Xian Tianxing.
      Conflicts of interests between his duties to our company and Xian Tianxing
      may
      arise. As Mr. Lu is a director and executive officer of our company, he has
      a
      duty of loyalty and care to us under U.S. and Cayman Islands law when there
      are
      any potential conflicts of interests between our company and Xian Tianxing.
      We
      cannot assure you, however, that when conflicts of interest arise, Mr. Lu will
      act completely in our interests or that conflicts of interests will be resolved
      in our favor. In addition, Mr. Lu could violate his legal duties by diverting
      business opportunities from us to others. If we cannot resolve any conflicts
      of
      interest between us and Mr. Lu, we would have to rely on legal proceedings,
      which could result in the disruption of our business.





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**





As
      of
      March 25, 2008, none of the directors serving on our board are “independent,”
within the meaning of the applicable federal securities laws. However, we expect
      to be able to attract and recruit additional candidates to serve on our board
      as
      independent directors, the timing of which will depend on the availability
      and
      willingness of qualified independent director candidates to serve in such
      capacity. Our Board plans to appoint independent directors as part of its plans
      to form audit, nominating and compensation committees for the Company. We intend
      to appoint independent directors in a manner consistent with the American Stock
      Exchange listing requirement prior to filing our listing application on such
      stock exchange.





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





**Audit
      Fees**





The
      aggregate fees billed by Moore Stephens Worth Frazer and Torbet LLP (“Moore
      Stephens”) for professional services rendered for the audit of the Company’s
      annual financial statements for the fiscal year ended December 31, 2006, was
      $150,000.





The
      aggregate fees billed by Schwartz Levitsky Feldman LLP (“Schwartz Levitsky”) for
      professional services rendered for the audit of the Company’s annual financial
      statements for the fiscal year ended December 31, 2006 was
      $120,000.





The
      aggregate fees billed by Moore Stephens for professional services rendered
      for
      the audit of the Company’s annual financial statements for the fiscal year ended
      December 31, 2007, was $100,000.





**Audited-Related
      Fees**





There
      were no fees billed 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” for the years ended December 31, 2007 and
      2006.




40





**Tax
      Fees**





For
      the
      years ended December 31, 2007 and December 31, 2006, there were $3,000 and
      $5,000, respectively, billed by Moore Stephens for services for tax compliance,
      tax advice and tax planning work to the Company.





**All
      Other Fees**





There
      were no other fees billed by Weinberg & Company, GC Alliance
      Limited, Schwartz Levitsky or Moore Stephens during the last two fiscal
      years for products and services provided by Weinberg & Company, GC Alliance
      Limited, Schwartz Levitsky or Moore Stephens.





**ITEM
      15.**  **EXHIBITS**




**a.
      (1)**  **Financial
      Statements**





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





Report
      of
      Moore Stephens Wurth Frazer and Torbet, LLP, Independent Auditors




Consolidated
      Balance Sheets at December 31, 2007 and 2006




Consolidated
      Statements of Operations and Comprehensive Income (Loss) for the Years
      Ended December 31, 2007 and 2006




Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2007 and
      2006




Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006




Notes
      to
      Consolidated Financial Statements





**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**
            
            **Description**2.1
            
            Share
                Purchase Agreement by and between The Cyber Group Network, Inc. and
                Howard
                L. Allen and Donald G. Jackson (shareholders of Hollywood Entertainment
                Network, Inc.) dated May 12, 2000 (1)2.2
            
            Plan
                of Merger Agreement between The Cyber Group Network Corp. and CGN
                Acquisitions Corporation dated December 7, 2000 (2)2.3
            
            Share
                Exchange Agreement between The Cyber Group Network Corporation, R.
                Scott
                Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical,
                and the
                Skystar Shareholders dated September 20, 2005 (3)3.1
            
            Charter
                of The Cyber Group Network Corporation as filed with the State of
                Nevada
                (4)3.2
            
            Certificate
                of Amendment and Certificate of Change (5)




41




3.3
            
            Company
                Bylaws (6)10.1
            
            Form
                of Securities Purchase Agreement, dated as of February 26, 2007 by
                and
                among the Company and eight accredited investors (7)10.2
            
            Form
                of Class A Convertible Debenture (7)10.3
            
            Form
                of Class B Convertible Debenture (7)10.4
            
            Form
                of Class A Warrant (7)10.5
            
            Form
                of Class B Warrant (7)10.6
            
            Form
                of Registration Rights Agreement, dated as of February 26, 2007 by
                and
                among the Company and eight accredited investors (7)10.7
            
            Form
                of Company Principal Lockup Agreement (7)10.8
            
            Form
                of the Amendment, Exchange and Waiver Agreement between the Company
                and
                certain accredited investors dated November 9, 2007 (8)10.9
            
            Lease
                Agreement between Xian Tianxing Bio-Pharmaceutical Co., Ltd. and
                Weibing
                Lu dated June 1, 2007 (14)16.1
            
            Letter
                from Weinberg & Company, P.A. (9)16.2
            
            Letter
                from GC Alliance Limited (10)16.3
            
            Letter
                from Moore Stephens Wurth Frazer & Torbet LLP (11)16.4
            
            Letter
                from Schwartz Levitsky Feldman LLP (12)21.1
            
            Subsidiaries
                of the Company (14)23.1
            
            Consent
                of Moore Stephens Worth Frazer and Torbet LLP (14)31.1
            
            Section 302
                Certification by the Corporation’s Chief Executive Officer
                (14)31.2
            
            Section 302
                Certification by the Corporation’s Chief Financial Officer
                (14)32.1
            
            Section 906
                Certification by the Corporation’s Chief Executive Officer
                (14)32.2
            
            Section 906
                Certification by the Corporation’s Chief Financial Officer
                (14)


99.1
            
            Consulting
                Services Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings,
                Co., Ltd., Xian Tianxing Bio-Pharmaceutical Co., Ltd. dated October
                28,
                2005 (4)99.2
            
            Equity
                Pledge Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings,
                Co., Ltd. and Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”)
                and Xian Tianxing’s Majority Shareholders dated October 28, 2005
                (4)99.3
            
            Operating
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.,
                and Xian Tianxing Bio-Pharmaceutical Co. (“Xian Tianxing”), Xian
                Tianxing’s Majority Shareholders, Ltd. and Weibing Lu dated October 28,
                2005 (4)




42


99.4
            
            Proxy
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.
                and Xian Tianxing Bio-Pharmaceutical Co. (“Xian Tianxing”), Xian
                Tianxing’s Majority Shareholders and Weibing Lu dated October 28, 2005
                (4)99.5
            
            Option
                Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings, Co.,
                Ltd.
                and Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”), Xian
                Tianxing Majority Shareholders and Weibing Lu dated October 28, 2005
                (4)99.6
            
            Amendment
                to Consulting Agreement by and among Skystar Bio-Pharmaceutical (Cayman)
                Holdings Co., Ltd. (“Skystar Cayman”), Sida Biotechnology (Xian) Co., Ltd.
                (“Sida”), Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”) and
                Skystar Bio-Pharmaceutical Co. (“Skystar”) dated March 10, 2008
                (13)99.7
            
            Amendment
                to Equity Pledge Agreement among Skystar Cayman, Sida, Xian Tianxing,
                Xian
                Tianxing’s majority shareholders and Skystar dated March 10, 2008
                (13)99.8
            
            Agreement
                to Transfer of Operating Agreement among Skystar Cayman, Sida, Xian
                Tianxing, Xian Tianxing’s majority shareholders and Skystar dated March
                10, 2008 (13)99.9
            
            Designation
                Agreement among Skystar Cayman, Sida, Xian Tianxing, Xian Tianxing’s
                majority shareholders and Skystar dated March 10, 2008
                (13)99.10
            
            Agreement
                to Transfer of Option Agreement among Skystar Cayman, Sida, Xian
                Tianxing,
                Xian Tianxing’s majority shareholders and Skystar dated March 10, 2008
                (13)





(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.(6)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K December 16,
                2005.(7)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                March 5, 2007.(8)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                December 11, 2007.(9)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K/A filed on
                January 27, 2006.(10)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K/A filed on
                March 3, 2006.(11)
            
            Incorporated
                by reference from the Registrant's Current Report on Form 8-K filed
                on
                March 8, 2007.(12)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K on April 30,
                2007.(13)
            
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K on March 11,
                2008.(14)
            
            Filed
                herewith.




43




**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 2, 2008
            By:
            /s/
                Weibing LuWeibing
                LuChief
                Executive OfficerDate:
                April 2, 2008
            By:
            /s/
                Erna GaoErna
                GaoChief
                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 2, 2008Weibing
                Lu/s/
                Erna Gao
            
            Chief
                Financial Officer / Director
            April 2, 2008Erna
                Gao/s/
                Wei Wen
            
            Secretary
                / Director
            April 2, 2008Wei
                Wen/s/
                Xinya Zhang
            
            Director
            April 2, 2008Xinya
                Zhang/s/
                R. Scott Cramer
            
            Director
            April 2, 2008R.
                Scott Cramer


44


**INDEX
        TO FINANCIAL STATEMENTS**
 
 PageREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              
              F-1CONSOLIDATED
                  BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
              
              F-2CONSOLIDATED
                  STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
                  FOR THE
                  YEARS ENDED DECEMBER 31, 2007 and 2006
              
              F-3CONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS' EQUITY
              
              F-4CONSOLIDATED
                  STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007
                  AND
                  2006
              
              F-5NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2007
              
              F-6





**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 Skystar
        Bio-Pharmaceutical Company and Subsidiaries
  We
        have
        audited the accompanying consolidated balance sheets of Skystar
        Bio-Pharmaceutical Company and Subsidiaries as of December 31, 2007 and 2006,
        and the related consolidated statements of operations and other comprehensive
        income (loss), shareholders’ equity, and cash flows for each of the years in the
        two-year period ended December 31, 2007. Skystar Bio-Pharmaceutical 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, 2007 and 2006, and the results
        of
        its operations and its cash flows for each of the years in the two-year period
        ended December 31, 2007, in conformity with accounting principles generally
        accepted in the United States of America.
  /s/
        Moore
        Stephens Wurth Frazer and Torbet, LLP
  Walnut,
        California
 March
        31,
        2008
  F-1


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      DECEMBER 31, 2007 AND 2006


2007
            
            2006ASSETSCURRENT
                ASSETS:Cash
            
            $
            771,492
            
            $
            192,016Restricted
                cash
            
            
            74,969
            
            
            69,610Accounts
                receivable, net of allowance for doubtfulaccounts
                of $199,639 and $14,426 as ofDecember
                31, 2007 and 2006, respectively.
            
            
            1,356,094
            
            
            131,599Inventories
            
            
            2,242,611
            
            
            528,566Deposits
                and prepaid expenses
            
            
            806,657
            
            
            29,944Loans
                receivable
            
            
            968,852
            
            
            8,558Other
                receivables
            
            
            43,800
            
            
            38,881Other
                receivables-shareholder
            
            
            59,462
            
            
            -Total
                current assets
            
            
            6,323,937
            
            
            999,174PLANT
                AND EQUIPMENT, net
            
            
            11,793,967
            
            
            10,910,948OTHER
                ASSETS:Long
                term prepayment
            
            
            1,220,190
            
            
            -Deferred
                financing costs
            
            
            101,815
            
            
            -Intangible,
                net
            
            
            1,011,236
            
            
            336,852Total
                other assets
            
            
            2,333,241
            
            
            336,852Total
                assets
            
            $
            20,451,145
            
            $
            12,246,974LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Interest-bearing
                short-term loan
            
            $
            -
            
            $
            38,460Non-interest
                bearing loan from third party
            
            
            -
            
            
            62,818Accounts
                payable
            
            
            126,754
            
            
            71,223Accrued
                expenses
            
            
            502,871
            
            
            523,892Deposits
                from customers
            
            
            61,706
            
            
            -Taxes
                payable
            
            
            568,797
            
            
            218,231Other
                payables
            
            
            81,221
            
            
            607,595Amount
                due to related companies
            
            
            49,954
            
            
            16,025Amount
                due to shareholders and directors
            
            
            31,616
            
            
            -Total
                current liabilities
            
            
            1,422,919
            
            
            1,538,244OTHER
                LIABILITIES:Deferred
                government grant
            
            
            1,028,250
            
            
            961,500Convertible
                debenture, net of $398,171 discount
            
            
            84,752
            
            
            -Total
                other liabilities
            
            
            1,113,002
            
            
            961,500Total
                liabilities
            
            
            2,535,921
            
            
            2,499,744CONTINGENT
                LIABILITIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Preferred
                stock, $0.001 par value, 50,000,000 shares authorized,
                2,000,000series
                "A" shares issued and outstanding as of December 31, 2007and
                2006, respectively; Nil series "B" shares issued and outstandingas
                of December 31, 2007 and 2006, respectively.
            
            
            2,000
            
            
            2,000Common
                stock, $0.001 par value, 50,000,000 shares authorizedas
                of December 31, 2007 and 2006, respectively; 17,111,200and
                12,795,549 shares issued and outstanding as ofDecember
                31, 2007 and 2006, respectively.
            
            
            17,111
            
            
            12,795Paid-in-capital
            
            
            14,741,278
            
            
            6,246,325Deferred
                compensation
            
            
            (62,758
            )
            
            (705,877
            )Statutory
                reserves
            
            
            1,652,720
            
            
            779,624Retained
                earnings
            
            
            122,271
            
            
            2,952,343Accumulated
                other comprehensive income
            
            
            1,442,602
            
            
            460,020Total
                shareholders' equity
            
            
            17,915,224
            
            
            9,747,230Total
                liabilities and shareholders' equity
            
            $
            20,451,145
            
            $
            12,246,974




See
        report of independent registered public accounting firm. The accompanying
        notes are an integral part of this statement.


F-2


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 and 2006


2007
            
            2006REVENUE
            
            $
            15,056,828
            
            $
            9,796,324COST
                OF SALES
            
            
            6,712,365
            
            
            5,420,652GROSS
                PROFIT
            
            
            8,344,463
            
            
            4,375,672OPERATING
                EXPENSESResearch
                and development
            
            
            268,320
            
            
            131,371Selling
                expenses
            
            
            739,422
            
            
            475,504General
                and administrative expenses
            
            
            1,795,876
            
            
            881,223Amortization
                of deferred compensation
            
            
            643,119
            
            
            1,202,235Total
                operating expenses
            
            
            3,446,737
            
            
            2,690,333INCOME
                FROM OPERATIONS
            
            
            4,897,726
            
            
            1,685,339OTHER
                EXPENSE (INCOME)Other
                expense
            
            
            3,651
            
            
            3,478Interest
                income
            
            
            (14,611
            )
            
            -Interest
                expense
            
            
            4,924,493
            
            
            11,768Inducement
                cost for debentures converted
            
            
            634,450
            
            
            -Inducement
                cost for warrants exercised
            
            
            279,547
            
            
            -Total
                other expense
            
            
            5,827,530
            
            
            15,246INCOME
                (LOSS) BEFORE PROVISION FOR INCOME TAXES
            
            
            (929,804
            )
            
            1,670,093PROVISION
                FOR INCOME TAXES
            
            
            1,027,172
            
            
            494,951NET
                INCOME (LOSS)
            
            
            (1,956,976
            )
            
            1,175,142OTHER
                COMPREHENSIVE INCOME :Foreign
                currency translation adjustment
            
            
            982,582
            
            
            298,675COMPREHENSIVE
                INCOME (LOSS)
            
            $
            (974,394
            )
            $
            1,473,817EARNINGS
                PER SHAREBasic
            
            $
            (0.15
            )
            $
            0.11Diluted
            
            $
            (0.16
            )
            $
            0.09WEIGHTED
                AVERAGE NUMBER OF COMMON SHARESBasic
            
            
            13,453,543
            
            
            11,144,153Diluted
            
            
            14,105,322
            
            
            12,498,386




See
        report of independent registered public accounting firm. The accompanying
        notes are an integral part of this statement.


F-3





SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY


AccumulatedRetained earnings
              
              otherPreferred stock
              
              Common stock
              
              Paid-in
              
              Deferred
              
              Statutory
              
              
              
              comprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              Compensation
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                    December 31, 2005
              
              
              50,000,000
              
              $
              50,000
              
              
              1,260,651
              
              $
              1,261
              
              $
              4,301,747
              
              $
              -
              
              $
              364,460
              
              $
              2,192,365
              
              $
              161,345
              
              $
              7,071,178Shares
                  conversion
              
              
              (48,000,000
              )
              
              (48,000
              )
              
              10,745,548
              
              
              10,745
              
              
              37,255
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Shares
                  issued for services
              
              
              
              
              
              
              
              
              789,350
              
              
              789
              
              
              1,907,323
              
              
              (1,908,112
              )
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,202,235
              
              
              
              
              
              
              
              
              
              
              
              1,202,235Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              298,675
              
              
              298,675Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,175,142
              
              
              
              
              
              1,175,142Appropriation
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              415,164
              
              
              (415,164
              )
              
              
              
              
              -BALANCE,
                  December 31, 2006
              
              
              2,000,000
              
              $
              2,000
              
              
              12,795,549
              
              $
              12,795
              
              $
              6,246,325
              
              $
              (705,877
              )
              $
              779,624
              
              $
              2,952,343
              
              $
              460,020
              
              $
              9,747,230Shares
                  issued for services
              
              
              
              
              
              
              
              
              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
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (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
              
              $
              17,915,224






See
        report of independent registered public accounting firm. The accompanying
        notes are an integral part of this statement.


F-4


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006


2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss)
            
            $
            (1,956,976
            )
            $
            1,175,142Adjustments
                to reconcile net income (loss) to cashprovided
                by operating activities:Depreciation
            
            
            281,894
            
            
            84,365Amortization
            
            
            33,135
            
            
            35,405Amortization
                of deferred financing costs
            
            
            879,212
            
            
            -Amortization
                of discount on debentures
            
            
            3,716,243
            
            
            -Amortization
                of deferred compensation
            
            
            643,119
            
            
            1,202,235Inducement
                cost for debentures converted
            
            
            634,450
            
            
            -Inducement
                cost for warrants exercised
            
            
            279,547
            
            
            -Issuance
                of common stock for service
            
            
            115,763
            
            
            -Bad
                debt expense
            
            
            238,094
            
            
            (57,187
            )Change
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (1,405,316
            )
            
            178,774Inventories
            
            
            (1,610,916
            )
            
            (339,811
            )Deposits
                and prepaid expenses
            
            
            (743,955
            )
            
            (13,958
            )Other
                receivables
            
            
            (10,921
            )
            
            (9,721
            )Accounts
                payable
            
            
            48,582
            
            
            59,947Accrued
                expenses
            
            
            (34,166
            )
            
            376,131Deposits
                from customers
            
            
            59,262
            
            
            -Taxes
                payables
            
            
            322,131
            
            
            (1,620,586
            )Other
                payables
            
            
            (546,037
            )
            
            529,818Net
                cash provided by operating activities
            
            
            943,145
            
            
            1,600,554CASH
                FLOWS FROM INVESTING ACTIVITIES:Loan
                to third parties
            
            
            (912,901
            )
            
            -Proceeds
                from loans receivable
            
            
            -
            
            
            264,953Long
                term prepayment
            
            
            (1,171,863
            )
            
            -Purchase
                of intangible assets
            
            
            (658,350
            )
            
            -Purchase
                of plant and equipment
            
            
            (402,470
            )
            
            (2,098,659
            )Net
                cash used in investing activities
            
            
            (3,145,584
            )
            
            (1,833,706
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Increase
                in restricted cash
            
            
            (505
            )
            
            (5,397
            )Advances
                from shareholders and directors
            
            
            1,170,944
            
            
            124,523Repay
                amounts due to shareholders and directors
            
            
            (1,198,791
            )
            
            (79,674
            )Proceeds
                from related companies
            
            
            27,633
            
            
            594,448Repay
                amounts due to related companies
            
            
            -
            
            
            (9,292
            )Payments
                on non-interest bearing loans from third parties
            
            
            (64,518
            )
            
            (364,906
            )Principal
                payments on short-term loan, interest bearing
            
            
            (39,501
            )
            
            -Proceeds
                from government subsidies
            
            
            -
            
            
            125,570Proceeds
                from convertible debentures, net of debenture expenses
            
            
            3,737,250
            
            
            -Payments
                on convertible debenture
            
            
            (880,259
            )
            
            -Net
                cash provided by financing activities
            
            
            2,752,253
            
            
            385,272EFFECT
                OF EXCHANGE RATE CHANGES ON CASH
            
            
            29,662
            
            
            1,398INCREASE
                IN CASH
            
            
            579,476
            
            
            153,518CASH,
                beginning of year
            
            
            192,016
            
            
            38,498CASH,
                end of year
            
            $
            771,492
            
            $
            192,016SUPPLEMENTAL
                DISCLOSURE INFORMATIONInterest
                paid
            
            $
            2,817
            
            $
            4,121Income
                taxes paid
            
            $
            864,392
            
            $
            853,656Non-cash
                investing and financing transactionsStocks
                issued for services
            
            $
            115,763
            
            $
            1,908,112Warrants
                issued for services
            
            $
            643,277
            
            $
            -Inducement
                cost for debentures converted
            
            $
            634,450
            
            $
            -Inducement
                cost for warrants exercised
            
            $
            279,547
            
            $
            -Debentures
                converted to common stock
            
            $
            2,751,232
            
            $
            -


See
        report of independent registered public accounting firm. The accompanying
        notes are an integral part of this statement.


F-5




SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





Skystar
      Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as The
      Cyber Group Network Corporation (“Cyber”), was incorporated in
      Nevada.





On
      November 7, 2005, the Company completed a stock exchange transaction with the
      stockholders of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Limited
      (“Skystar Cayman”), whereby 48,000,000 shares of Series B preferred stock was
      issued to the stockholders of Skystar Cayman in exchange for 100% of the common
      stock of Skystar Cayman. On February 15, 2006, the Company changed its name
      to
“Skystar Bio-Pharmaceutical Company” to reflect its current business
      operations.





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





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





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




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





Because
      Skystar and Xian Tianxing are under common control, the consolidation of Skystar
      Cayman and Xian Tianxing has been accounted for at historical cost and prepared
      on the basis as if the aforementioned exclusive agreements between Skystar
      and
      Xian Tianxing had become effective as of the beginning of the first period
      presented in the accompanying consolidated financial statements. The Company’s
      consolidated assets do not include any collateral for Xian Tianxing’s
      obligations. The creditors of Xian Tianxing do not have recourse from the
      Company.





See
      report of independent registered public accounting firm.




F-6


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





On
      October 16, 2007, the Company acquired 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 (HKD1,000) cash.





On
      July
      10, 2007, Fortune Time established Sida Biotechnology (Xian) Co., Ltd. (“Sida”)
      with registered capital $5,000,000. Fortune Time invested $2,000,000 into Sida
      on July 20, 2007. Pursuant to the Xian High Technology District approval notice,
      Fortune Times is requried to contribute the remaining balance of $3,000,000
      in
      Sida by July 09, 2009, which is 2 years from business licenses issue date.
      Sida
      was established in a High Technology District, Xian, PRC. Sida’s principle
      business is bio-pharmaceutical research, production and selling activities.
      Sida
      also provides bio-pharmaceutical technology consultation service.





**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.





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, useful lives of plant and equipment and the fair value of stock based
      compensation. Because of the use of estimates inherent in the financial
      reporting process, actual results could differ from those
      estimates.





Fair
      values of financial instruments





The
      Company values its financial instruments as required by Statement of Financial
      Accounting Standard (SFAS) No. 107, “Disclosures about Fair Value of Financial
      Instruments”. The estimated fair value amounts have been determined by the
      Company, using available market information and appropriate valuation
      methodologies. The estimates presented herein are not necessarily indicative
      of
      amounts that the Company could realize in a current market
      exchange.





See
      report of independent registered public accounting firm.


F-7


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





The
      Company’s financial instruments primarily consist of cash, accounts receivable,
      other receivables, accounts payable, accruals, other payables, short-term
      related party borrowings and debentures payable. As of the balance sheet dates,
      the estimated fair values of the financial instruments were not materially
      different from their carrying values as presented due to the short term
      maturities of these instruments and that the interest rates on the borrowings
      approximate those that would have been available for loans of similar remaining
      maturity and risk profile at respective period ends.





Revenue
      recognition





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





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





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





Shipping
      and handling costs related to costs of goods sold are included in selling,
      general and administrative costs which totaled
      $184,766 and $100,846 for the year
      ended December 31, 2007 and 2006, respectively.





Cash





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





Restricted
      cash





The
      Company had restricted cash of
      $74,969 and $69,610 as of Dec ember
      31,
      2007 and December 31, 2006, respectively. The restricted cash was received
      from
      PRC government subsidies and set aside for the specific usages (see Note 9).
      The
      restricted funds are kept as bank deposits. Restricted cash is classified as
      current assets as of December 31, 2007 and December 31, 2006, based on the
      expected period when the funds will be put into their specific
      usages.





Accounts
      and other receivables





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





See
      report of independent registered public accounting firm.


F-8





SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





Inventories





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





Plant
      and equipment





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





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





Management
      assess the carrying value of plant and equipment annually, or more often when
      factors indicating impairment are present, and reduces the carrying value of
      the
      fixed assets by the amount of the impairment. The Company determines the
      existence of such impairment by measuring the expected future cash flows
      (undiscounted and without interest charges) and comparing such amount to the
      asset carrying value. An impairment loss, if exists, is measured as the amount
      by which the carrying amount of the asset exceeds the fair value of the asset.
      Based on its review, management believes that, as of December 31, 2007, there
      were no impairments of its plant and equipment.





Construction
      in progress





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





Intangibles





Land
      use
      rights - Land use rights represent the costs paid to acquire a long-term
      interest to utilize the land underlying the Company’s facility. This type of
      arrangement is common for the use of land in the PRC. The land use rights are
      amortized on the straight-line method over the 50 year term of the land use
      rights.





Technological
      know-how - Purchased technological know-how includes secret formulas,
      manufacturing processes, technical and procedural manuals and is amortized
      using
      the straight-line method over the expected useful economic life of 5 years,
      which reflects the period over which those formulas, manufacturing processes,
      technical and procedural manuals are kept secret to the Company as agreed
      between the Company and the selling party.




See
      report of independent registered public accounting firm.


F-9


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





Impairment
      of intangibles - Management periodically evaluates the carrying value of
      intangibles in accordance with the provisions of SFAS No. 144, “Accounting for
      the Impairment or Disposal of Long-Lived Assets”, which addresses financial
      accounting and reporting for the impairment or disposal of intangible assets.
      SFAS No. 144 requires impairment losses to be recorded in operations when
      indicators of impairment are present and the undiscounted cash flows estimated
      to be generated by those assets are less than the assets’ carrying amounts. In
      that event, a loss is recognized based on the amount by which the carrying
      amount exceeds the fair market value of the long-lived assets. Loss on
      long-lived assets to be disposed of is determined in a similar manner, except
      that fair market values are reduced for the cost of disposal. Based on its
      review, management believes that, as of December 31, 2007, 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. Accumulated other comprehensive income arose from the changes
      in foreign currency exchange rates.





Research
      and development costs





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





Income
      taxes





The
      Company records income taxes pursuant to SFAS No. 109, "Accounting for Income
      Taxes". SFAS No. 109 requires the recognition of deferred income tax liabilities
      and assets for the expected future tax consequences of temporary differences
      between income tax basis and financial reporting basis of assets and
      liabilities. Provision for income taxes consists of taxes currently due plus
      deferred taxes. The Company adopted FASB Interpretation 48, “Accounting for
      Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position
      is recognized as a benefit only if it is “more likely than not” that the tax
      position would be sustained in a tax examination, with a tax examination being
      presumed to occur. The amount recognized is the largest amount of tax benefit
      that is greater than 50% likely of being realized on examination. For tax
      positions not meeting the “more likely than not” test, no tax benefit is
      recorded. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosures, and
      transition. The adoption had no affect on the Company’s financial statements.
      There are no deferred tax amounts at December 31, 2007 and 2006.




The
      Company’s operations are subject to income and transaction taxes in the United
      States and in the PRC jurisdictions. Significant estimates and judgments are
      required in determining the Company’s worldwide provision for income taxes. Some
      of these estimates are based on interpretations of existing tax laws or
      regulations. The ultimate amount of tax liability may be uncertain as a
      result.





The
      Company does not anticipate any events which could cause change to these
      uncertainties.





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





See
      report of independent registered public accounting firm.


F-10


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





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





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





Stock
      based compensation





The
      Company records stock based compensation pursuant to Statement of Financial
      Accounting Standards No. 123R “Accounting for Stock-Based Compensation” (“SFAS
      123”), which defines a fair-value-based method of accounting for stock based
      employee compensation and transactions in which an entity issues its equity
      instruments to acquire goods and services from non-employees. Stock compensation
      for stock granted to non-employees has been determined in accordance with SFAS
      123R and the Emerging Issues Task Force consensus in Issue No. 96-18,
      "Accounting for Equity Instruments that are issued to Other than Employees
      for
      Acquiring, or in Conjunction with Selling Goods or Services" ("EITF 96-18"),
      as
      the fair value of the consideration received or the fair value of equity
      instruments issued, whichever is more reliably measured.





Earnings
      per share





Basic
      earnings per share (“EPS”) is computed by dividing income available to common
      shareholders by the weighted average number of common shares outstanding for
      the
      period. Diluted EPS includes the effect of the common share equivalents of
      the
      Company’s convertible preferred stock outstanding. The Company accounts for a
      stock dividend or split in accordance with SFAS No. 128, “Earnings Per Share”,
      which requires that a stock dividend or split be accounted for retrospectively
      if the stock dividend or split occurs during the period, or retroactively if
      the
      stock dividend or split occurs after the end of the period but before the
      release of the financial statements, by considering it outstanding for the
      entirety of each period presented.




Foreign
      currency translation





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





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





See
      report of independent registered public accounting firm.


F-11


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





This
      quotation of the exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the People's Bank of China or other banks authorized to
      buy
      and sell foreign currencies at the exchange rate quoted by the People's Bank
      of
      China. The rate of exchange quoted by the People’s Bank of China on December
      31, 2007 was $1.00 to RMB7.29. The weighted average translation rate of $1.00
      to
      RMB7.59 and RMB7.96 was applied to the income and cash flow statement amounts
      in
      2007 and 2006, respectively.





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





Related
      parties





Parties
      are considered to be related to the Company if the parties that, directly or
      indirectly, through one or more intermediaries, control, are controlled by,
      or
      are under common control with the Company. Related parties also include
      principal owners of the Company, its management, members of the immediate
      families of principal owners of the Company and its management and other parties
      with which the Company may deal if one party controls or can significantly
      influence the management or operating policies of the other to an extent that
      one of the transacting parties might be prevented from fully pursuing its own
      separate interests. A party which can significantly influence the management
      or
      operating policies of the transacting parties or if it has an ownership interest
      in one of the transacting parties and can significantly influence the other
      to
      an extent that one or more of the transacting parties might be prevented from
      fully pursuing its own separate interests is also a related party.





Recently
      issued accounting pronouncements




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 157, Fair Value
      Measurements” ** (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value under accounting principles generally accepted in the United States (GAAP)
      and expands disclosures about fair value measurements. Fair value is defined
      under SFAS 157 as the exchange price that would be received for an asset or
      paid
      to transfer a liability (an exit price) in the principal or most advantageous
      market for the asset or liability in an orderly transaction between market
      participants on the measurement date. SFAS 157 also establishes a fair value
      hierarchy which requires the Company to maximize the use of observable inputs
      and minimize the use of unobservable inputs when measuring fair value. The
      Company does not expect the adoption of SFAS 157 to have a material impact
      on
      the Company’s financial position or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that  are
      not
      currently required to be measured at fair value. The objective of FAS 159 is
      to
      provide opportunities to mitigate volatility in reported earnings caused
      by  measuring
      related assets and liabilities differently without having to apply hedge
      accounting provisions. FAS 159 also establishes presentation and
      disclosure  requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar types of assets and liabilities.
      SFAS  159
      will
      be effective in the first quarter of fiscal 2009. The Company is evaluating
      the
      impact that this statement will have on its consolidated financial  statements.





See
      report of independent registered public accounting firm.


F-12


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





In
      June
      2007, the
      FASB
      issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
      Payments for Goods or Services Received for use in Future Research and
      Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
      advance payments for goods or services that used or rendered for research and
      development activities should be expensed when the advance payment is made
      or
      when the research and development activity has been performed. The Company
      adopted FSP EITF 07-3 and expensed the research and development as
      incurred.





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





In
      December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
      Combinations* ,
      was
      issued. SFAS No. 141R replaces SFAS No. 141, *Business
      Combinations.* SFAS
      141R
      retains the fundamental requirements in SFAS 141 that the acquisition method
      of
      accounting (which SFAS 141 called the *purchase
      method* )
      be used
      for all business combinations and for an acquirer to be identified for each
      business combination. SFAS 141R requires an acquirer to recognize the assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
      required the cost of an acquisition to be allocated to the individual assets
      acquired and liabilities assumed based on their estimated fair values. SFAS
      141R
      also requires the acquirer in a business combination achieved in stages
      (sometimes referred to as a step acquisition) to recognize the identifiable
      assets and liabilities, as well as the noncontrolling interest in the acquiree,
      at the full amounts of their fair values (or other amounts determined in
      accordance with SFAS 141R). SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. An entity
      may not apply it before that date. The Company is currently evaluating the
      impact that adopting SFAS No. 141R will have on its financial
      statements.




Reclassifications





Certain
      prior period amounts have been reclassified to conform to the current period
      presentation. These reclassifications have no effect on net income or cash
      flows.





**Note
      3 -CONCENTRATIONS AND CREDIT RISK**





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





See
      report of independent registered public accounting firm.


F-13


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





As
      of
      December 31, 2007 and 2006, the Company had deposits in excess of federally
      insured limits (including restricted cash) of $844,773 and $261,446,
      respectively. The Company has not experienced any losses in such accounts and
      believes it is not exposed to any significant risks on its cash in bank
      accounts.





For
      the
      years ended December 31, 2007 and 2006, all of the Company’s sales arose in the
      PRC. In addition, all accounts receivable as of December 31, 2007 and 2006
      also
      arose in the PRC.




No
      major
      customers accounted for more than 10% of the Company’s total revenues and total
      accounts receivable as of and for the year ended December 31, 2007 and 2006,
      respectively.





The
      Company’s three largest vendors accounted for approximately 57.31% of the
      Company’s total purchases for the year ended December 31, 2007, while the
      Company’s three largest vendors accounted for 53.76% of the Company’s total
      purchases for the year ended December 31, 2006.





No
      major
      product accounted for more than 10% of the Company’s total revenues for the year
      ended December 31, 2007. The Company’s two major products accounted for
      approximately 22.69% of the Company’s total revenues for the year ended December
      31, 2006.





**Note
      4 - RESTRICTED CASH**





Restricted
      cash consists of the following as of December 31:





2007
            
            2006Funds
                received from PRC government
            
            $
            74,969
            
            $
            69,610(See
                Note 9)





**Note
      5 - INVENTORIES**





Inventories
      consist of the following at December
      31:


2007
            
            2006Raw
                material
            
            $
            1,761,145
            
            $
            190,926Packing
                materials
            
            
            110,020
            
            
            97,002Work
                in process
            
            
            2,639
            
            
            -Finished
                goods
            
            
            355,041
            
            
            232,242Low
                value consumables
            
            
            13,766
            
            
            8,396Total
            
            $
            2,242,611
            
            $
            528,566





See
      report of independent registered public accounting firm.


F-14


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





**Note
      6 - LOANS RECEIVABLE**





Loans
      receivable consists of the following as of December 31:


2007
            
            2006Others,
                non-interest bearing, unsecured, due on demand
            
            $
            9,152
            
            $
            8,558Shanxi
                Suoang Biotechnological Company, due October 30, 2007, extended to
                March
                31, 2008, annual interest at 7.0%, secured by unrelated company Shanxi
                New
                Resource Co.
            
            
            27,420
            
            
            -Xi’an
                Tiantai Investment Company, due July 31, 2008 (or upon demand), minimum
                annual interest at 7.2%, unsecured
            
            
            383,880
            
            
            -Xi’an
                SilverRiver Automatic Equipment Company, due on March 23, 2008, Annual
                interest rate 0.7%, unsecured.
            
            
            411,300
            
            
            -Shanxi
                Hongye Housing Company, due on demand, non-interest
                bearing.
            
            
            137,100
            
            
            -Total
                loan receivable
            
            $
            968,852
            
            $
            8,558





The
      Company has a long standing business relationship with these companies and
      in
      order to maintain these relationships, they have made these short term loans.
      Total interest received from these short term loans for the year ended December
      31, 2007 and 2006, amounted to $11,850,
      and $0, respectively.





**Note
      7 - PLANT AND EQUIPMENT**





Plant
      and
      equipment consists of the following at December 31 ,
      2007
      and 2006:





2007
            
            2006Building
                and improvements
            
            $
            3,592,519
            
            $
            351,425Plant
                and machinery
            
            
            2,827,591
            
            
            270,621Office
                equipment
            
            
            167,617
            
            
            140,591Vehicles
            
            
            295,995
            
            
            128,134Construction
                in progress
            
            
            5,531,236
            
            
            10,326,391Total
            
            
            12,414,958
            
            
            11,217,162Less:
                accumulated depreciation
            
            
            (620,991
            )
            
            (306,214
            )Plant
                and equipment , net
            
            $
            11,793,967
            
            $
            10,910,948





Construction
      in progress is the construction of a production base which will meet the Good
      Manufacturing Practices Standard (“GMP”). No
      depreciation is provided for construction in progress until such time as the
      assets are completed and placed into service. Maintenance, repairs and minor
      renewals are charged directly to expenses as incurred. Major additions and
      betterment to property and equipment are capitalized.





See
      report of independent registered public accounting firm.


F-15


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





Construction
      on the plant for GMP standard bio-pharmaceutical facility and animal
      laboratory commenced in May 2005 and is expected to be completed at the end
      of 2008.





Depreciation
      expense was $281,894 and $84,365 for the year ended December 31, 2007 and 2006,
      respectively.





**Note
      8 - INTANGIBLES**





Intangibles
      consist of the following as of December 31:





2007
              
              2006Land
                  use rights
              
              $
              354,061
              
              $
              331,077Technological
                  know-how
              
              
              822,600
              
              
              128,100Total
              
              
              1,176,661
              
              
              459,177Less:
                  accumulated amortization
              
              
              (165,425
              )
              
              (122,325
              )Intangible
                  assets, net
              
              $
              1,011,236
              
              $
              336,852


The
      amortization expense for intangibles was $33,135 and $35,405 for the year ended
      December 31, 2007 and 2006, respectively





**Note
      9 - DEFERRED GOVERNMENT GRANT**





The
      amounts represent subsidies for GMP projects granted by the PRC government.
      A
      subsidy in the amount of $641,000 was approved by the PRC government to be
      granted to the Company to construct a new factory which operations will meet
      the
      GMP Standard. In 2003, $516,500 was received by the Company and the remaining
      $124,500 was received in the first quarter of 2006. According to the PRC’s
      government regulations for these types of grants, the funds being granted may
      be
      treated as capital contributed by the company appointed by the PRC government
      (“contributing company”) or as a loan from such company, which the Company will
      be required to repay. However, no agreement has been reached with the
      contributing company regarding the final treatment of this subsidy.





Also
      in
      2003, another subsidy of $256,400 was received for financing the Company’s
      research and development activities. In 2006, the Company applied for and
      utilized $186,644 in paying for the construction of the new plant facility.
      In
      2005, another subsidy of $64,100 was received for the Company’s research and
      development activities. This amount was put into use during the period. As
      of
      December 31, 2007, the Company has not reached a final agreement with the PRC
      government related to the treatment of these two subsidies as either a loan
      or
      capital contribution and the Company does not expect that the final agreement
      will be completed during 2008; therefore, these amounts are carried as
      liabilities in the accompanying financial statements.





**Note
      10 - CAPITAL TRANSACTIONS**





On
      February 15, 2006, the Company effected a one-for-three hundred ninety seven
      (1:397) reverse stock split of the outstanding shares of the Company’s common
      stock. As a result, the total number of outstanding shares of the Company’s
      common stock was reduced from 500,000,000 to 1,260,651 issued and outstanding.





See
      report of independent registered public accounting firm.


F-16


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





On
      February 15, 2006, the Company also effected a one-for-ten (1:10) reverse stock
      split of the Company’s authorized shares of the Company’s preferred stock. As a
      result, the total number of authorized shares was reduced from 500,000,000
      to
      50,000,000.




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





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





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





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




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





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





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





On
      July
      10, 2007, the Company 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 fair market value of the
      Company's common stock as of July 10, 2007 was $1.47 per share and expense
      of
      $115,763 related to these two stock issuances was charged to general and
      administrative expense.





See
      report of independent registered public accounting firm.


F-17


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





In
      the
      fourth quarter of 2007, the Company’s convertible notes holders converted
      $2,751,232 in debentures into 3,278,720 shares of common stock as more fully
      described in Note 11.





In
      the
      fourth quarter of 2007, the Company’s warrant holder exercised 3,100,000
      warrants into 958,181 shares of common stock.





**Note
      11 - CONVERTIBLE DEBENTURES**





On
      February 27, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Agreement”), with several institutional and accredited investors (the
“Purchasers”) pursuant to which the Company sold to the Purchasers $4.075
      million 8% convertible debentures due February 28, 2009 (the “Debentures”), and
      warrants to purchase 4,075,000 shares of the common stock (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 or exercise prices. Additional
      interest of 15% begins in June 2007 and continues through February 2008 after
      which the additional interest increases to 25% through the maturity date of
      the
      note.





The
      transaction closed on February 27, 2007. Gross proceeds from were $4.075
      million, of which $285,250 was paid to Pacific Ridge Capital who served as
      placement agent for the transaction and $52,500 was paid to consultants for
      the
      Purchaser in connection with the transaction. The Company also issued to the
      Placement Agent a warrant to purchase an aggregate of 570,500 shares with an
      exercise price of $1.00 per share with a life of five years. The value of the
      warrants issued to the placement agent was calculated as $643,277 using the
      Binomial Model. The total amount of the cash payments and the fair value of
      the
      warrants amounted to $981,027, which was recorded as deferred debenture
      expenses. These costs will be amortized to interest expense over the two year
      life of the convertibles debentures. For the year ended December 31, 2007,
      $339,045 was amortized to interest expense.




The
      Company determined the value of the warrants using a binomial Model with a
      volatility of approximately 75%, which is calculated by using the historical
      closing prices of the Company’s common stock. According to APB No. 14,
      Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
      EITF-98-5, and EITF-00-27, the Company allocated the proceeds using relative
      fair value method and determined that the convertible debentures were issued
      with a beneficial conversion feature. As a result, on February 27, 2007, the
      allocated value of the warrants amounted to $1,944,425 and the beneficial
      conversion feature amounted to $2,130,575. The allocated value of the warrants
      and beneficial conversion feature totaling $4,075,000, was recorded as discount
      (or reduction in the carrying amount) of convertible debentures and additional
      paid-in capital and will be amortized over the two year life of the convertible
      debentures using the effective interest method. For the year ended December
      31,
      2007, $1,312,763 was amortized as interest expense.





On
      or
      about December 6, 2007, the Company entered into an Amendment, Exchange and
      Waiver Agreement (“Amended Agreement”), effective November 9, 2007, with certain
      of the institutional and accredited investors who entered into a Securities
      Purchase Agreement with the Company on February 27, 2007. Below are highlights
      of the Amendment:





·
            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.





See
      report of independent registered public accounting firm.





F-18


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





·
            The
                Amended Agreement amends the terms of the Warrants held by the
                Participating Purchasers by: (a) changing the Exercise Price from
                $1.20
                per share to $0.95 per share; and (b) granting to the Participating
                Purchasers the right to exercise their Warrants on a cashless
                basis


·
            The
                Amended Agreement is deemed to be: (a) the Company’s notice (the
                “Conversion Notice”) to require conversion of the entire outstanding
                principal of the Debentures held by the Participating Purchasers
                and all
                accrued but unpaid interest thereto; and (b) the Participating Purchasers’
                notice (the “Exercise Notice”) to the Company to exercise all of their
                unexercised Warrants on a cashless
                basis


·
            The
                Amended Agreement amends the Registration Rights Agreement by waiving
                all
                outstanding Registration Damages due to the Purchasers in their entirety.
                Because the outstanding principal amounts of the Debentures held
                by the
                Participating Purchasers, as of the effective date of the Agreement,
                total
                more than seventy-five percent (75%) of the aggregate outstanding
                principal amounts of the outstanding Debentures held by all the Purchasers
                on that date, the amendment to the Registration Rights Agreement
                binds all
                of the Purchasers.





The
      Company evaluated the cost of the amended terms of the warrants and the notes.
      As the amendment reduced the exercise price of the warrants and the conversion
      price of the notes, the difference between the value of the warrants and the
      conversion option at the old prices and their value at the modified prices
      are
      costs for the Company and are charged to income.





The
      inducement cost for the debentures converted is $634,450 for the 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
      purchases at $1.375 per shares on November 9, 2007. The inducement cost for
      the
      warrants exercised is $279,547 for the fiscal year ended December 31, 2007.
      The
      inducement cost for the warrants exercised is calculated using the Binomial
      Model by determining the difference between the original exercise price of
      $1.20
      shares and the reduced exercise price of $0.95.





3,076,120
      shares of common stock were issued upon conversion of debenture notes 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 debenture notes
      with a carry value of $202,600 at the original conversion price of
      $1.00.





In
      accordance with paragraph 21 of EITF 00-27, all unamortized discount at the
      time
      of the conversion must be recognized as interest expense. The unamortized
      discount of the above converted notes is $2,403,480, which has been recorded
      as
      interest expenses in the accompanying consolidated statements of operations.
      The
      unamortized deferred financing costs of $540,167 at conversion of the debentures
      into common stock was also been recorded as interest expenses in the
      accompanying consolidated statements of operations.





As
      of December 31,
      2007, the carrying value of the remaining unconverted debentures was $84,752,
      net of unamortized discount of $398,171. The following is the repayment schedule
      of the principal of the remaining debt at December 31:





See
      report of independent registered public accounting firm.


F-19


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007


Principal repayment Amount2008
              
              $
              414,9902009
              
              
              67,933Thereafter
              
              
              -$
              482,923




In
      connection to the issuance of the debentures, the Company entered into a
      Registration Rights Agreement, in which a registration statement registering
      the
      resale of the common stock underlying the Debentures and Warrants, as well
      as
      certain other shares of the Company's common stock is required to be filed
      with
      the Securities and Exchange Commission not later than April 13, 2007 and be
      declared effective by the SEC not later than May 28, 2007 if there is no SEC
      review of the Registration Statement, and June 27, 2007 if there is an SEC
      review. Failure to meet these deadlines will result in liquidated damages of
      2%
      of the aggregate purchase price of the Debentures and Warrants per month, pro
      rated for partial periods. The Company filed the registration statement on
      June
      1, 2007, however the Registration Statement did not become effective until
      September 25, 2007. Because the Amended Agreement waived all outstanding
      r egistration
      damages, t he
      Company reversed the previously accrued liquidated damages totaling $345,017
      at
      December 31, 2007.




Following
      is a summary of the status of warrants outstanding at December 31, 2007:





Outstanding Warrants
            
            Exercisable WarrantsExercise
              Price
            
            Number
            
            Average
              Remaining
              Contractual
              Life
            
            Average
              Exercise
              Price
            
            Number$1.20
            
            
            975,000
            
            
            2.16
                years
            
            $
            1.20
            
            
            975,000$1.00
            
            
            570,500
            
            
            4.16
                years
            
            $
            1.00
            
            
            570,000Total
            
            
            1,545,500
            
            
            
            
            
            
            
            
            1,545,500





Following
      is a summary of the warrant activity:





Outstanding
                as of December 31, 2005
            
            
            -Granted
            
            
            -Forfeited
            
            
            -Exercised
            
            
            -Outstanding
                as of December 31, 2006
            
            
            -Granted
            
            
            4,645,500Forfeited
            
            
            -Exercised
            
            
            3,100,000Outstanding
                as of December 31, 2007
            
            
            1,545,500





**Note
      12 - STATUTORY RESERVES**





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





See
      report of independent registered public accounting firm.


F-20


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





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





Appropriations
      to the above statutory reserves are accounted for as a transfer from retained
      earnings to statutory reserves. During the year ended
      December 31, 2007, and 2006, the Company made total appropriations to these
      statutory reserves of $873,096, and $415,164, respectively .





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





**Note
      13 - 2006 CONSULTANT STOCK PLAN**





On
      February 22, 2006, the Company adopted the 2006 Consultant Stock Plan (the
      "Plan") under which 1,199,648 shares of common stock are available for issuance
      with respect to awards granted to independent consultants who are crucial to
      the
      future growth and success of the Company and its subsidiaries and affiliates.
      For the year ended December 31, 2006, a total of 600,000 shares were issued
      pursuant to the Plan.





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





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





In
      accordance with SFAS 123R and EITF 96-18, the Company has accounted for the
      consulting agreements based on the fair market value of the Company's common
      stock at the commencement date of the individual consulting agreements. For
      the
      year ended December 31, 2007 and 2006, the Company charged $643,119 and
      1,202,235, respectively, to expense associated with consulting agreements and
      recorded deferred consulting fees of $62,758 at December 31, 2007.





See
      report of independent registered public accounting firm.


F-21


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





The
      deferred consulting fees will be charged to expense amounted to $62,758 for
      the
      year ended December 31, 2008.





**Note
      14 - TAXES**




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





Sida,
      Xian Tianxing and Shanghai Siqiang are subject to PRC’s Enterprise Income Tax.
      Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes is generally
      imposed at a statutory rate of 33%, which comprises 30% national income tax
      and
      3% local income tax. However, the Company has been approved as a new technology
      enterprise and under PRC Income Tax Laws, it is entitled to a preferential
      tax
      rate of 15%.





For
      the
      year ended December 31, 2007 and 2006, the provision for taxes on earnings
      consisted of:





2007
            
            2006Current
                PRC income tax expenseEnterprise
                income tax
            
            $
            1,027,172
            
            $
            494,951





The
      following table reconciles the U.S. statutory rates to the Company's effective
      tax rate as of December 31:




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





The
      estimated tax savings due to the reduced tax rate for the year ended December
      31, 2007 and 2006 amounted to $1,232,606
      and $593,941 ,
      respectively. The net effect on earnings per share if the income tax had been
      applied would decrease the basic earnings per share for year ended December
      31,
      2007 and 2006 from $(0.11) to $(0.20) and from $0.11 to $0.05, respectively.




Skystar
      Bio-Pharmaceutical Company was incorporated in the United States and has
      incurred net operating loss for income tax purpose for 2007. The net operating
      loss carry forwards for United States income tax purposes amounted to $6,368,675
      which may be available to reduce future years’ taxable income. These carry
      forwards will expire, if not utilized, beginning in 2006 and continue through
      2027. Management believes that the realization of the benefits arising from
      this
      loss appears to be uncertain due to Company’s limited operating history and
      continuing losses for United States income tax purposes. Accordingly, the
      Company has provided a 100% valuation allowance at December 31, 2007. The
      valuation allowance at December 31, 2007 was $2,721,430. Management will review
      this valuation allowance periodically and will make adjustments as
      warranted.




See
      report of independent registered public accounting firm.


F-22


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





**Note
      15 - EARNINGS PER SHARE**





The
      Company reports earnings per share in accordance with the provisions of SFAS
      No.
      128, “Earnings per Share.” SFAS No. 128 requires presentation of basic and
      diluted earnings per share in conjunction with the disclosure of the methodology
      used in computing such earnings per share. Basic earnings per share is computed
      by dividing income available to common stockholders by the weighted average
      common shares outstanding during the period. Diluted earnings per share takes
      into account the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised and converted into common stock. The
      weighted average number of common shares outstanding was adjusted to account
      for
      the effects of the share exchange transaction as a reverse acquisition as fully
      described in Note 1.





The
      Company has retroactively adjusted the weighted average number of common shares
      outstanding by deeming that the one-for-three hundred ninety seven (1:397)
      and
      the one for ten (1:10) reverse stock split effective on February 15, 2006 had
      occurred as of the beginning of the earliest period presented.





The
      following demonstrates the calculation for earnings per share:




2007
            
            2006Net
                income for basic earnings per share
            
            $
            (1,956,976
            )
            $
            1,175,142Add:
                Interest expense for convertible note
            
            
            445,569
            
            
            -Minus:
                Discount on convertible debenture
            
            
            (772,400
            )
            
            -Net
                income for diluted earnings per share
            
            $
            (2,283,807
            )
            $
            1,175,142Weighted
                average shares used in basic computation
            
            
            13,453,543
            
            
            11,144,153Diluted
                effect of convertible debentures (as if)
            
            
            651,779
            
            
            -Diluted
                effect of warrants (treasury method)
            
            
            -
            
            
            1,354,233Weighted
                average shares used in diluted computation
            
            
            14,105,322
            
            
            12,498,386Earnings
                per shareBasic
            
            $
            (0.15
            )
            $
            0.11Diluted
            
            $
            (0.16
            )
            $
            0.09





See
      report of independent registered public accounting firm.


F-23


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





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





*Related
      party receivables and payables*




Amounts
      due from and payable to related parties are summarized as follows as of December
      31:





2007
            
            2006Amounts
                due from shareholder:Mr.
                Weibing Lu (1)
            
            $
            59,462
            
            $
            -Amount
                due to shareholder and director:Ms.
                Aixia Wang (1)
            
            $
            1,371Mr.
                Scott Cramer (1)
            
            
            30,245
            
            
            -Total
            
            $
            31,616
            
            $
            -Amount
                due to related companies:TianXing
                Digital Co., Ltd. (2)
            
            $
            17,137
            
            $
            16,025Shanxi
                Xingji Electronics Co. Ltd. (2)
            
            
            32,817
            
            
            -Total
            
            $
            49,954
            
            
            16,025





(1)
            The
                related individuals, Weibing Lu, Aixia Wang, and Scott Cramer are
                all
                shareholders of the Company. Mr. Lu and Mr. Cramer are also the directors
                of the Company, with Mr. Lu additionally being the chief executive
                office.
                The amounts due from and to these individuals were cash advances
                to
                facilitate Company operations or expenses paid by these individuals
                on
                behalf of the Company. These balances are non-interest bearing, unsecured,
                due on demand, and the ultimate manner of settlement is in cash or
                in
                exchange for office premises rental.





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





**Note
      17 - COMMITMENTS AND CONTINGENCIES**





(a)  *Lease
      commitments*





The
      Company recognizes lease expense on a straight line basis over the term of
      the
      lease in accordance to SFAS 13, “Accounting for Leases.” The Company leased
      factory premises for a period of ten years from October 1, 2004 to December
      31,
      2014 with an annual rent of $11,607, which is subject to a 10% increase every
      four subsequent years.





The
      Company leased additional office space from the Company’s CEO, Weibing Lu, for a
      period of five years from January 1, 2007 to December 31, 2011 with an annual
      rent of approximately $21,800 (or RMB 165,600).





The
      Company’s commitments for minimum rental payments under this lease for the next
      five years and thereafter are as follows:





Years
                ending December 31:
            
            20072008
            
            $
            34,7892009
            
            
            35,6732010
            
            
            35,6732011
            
            
            35,6732012
            
            
            13,294Thereafter
            
            
            28,533$
            183,635





See
      report of independent registered public accounting firm.


F-24


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





Rent
      expense for the year ended December 31, 2007 and 2006 amounted to $33,412 and
      $11,545, respectively.





(b)  *Legal
      proceedings*




In
      March
      2006, the Company learned that Gregory Evans (“Plaintiff”) filed suit against
      the Company, R. Scott Cramer, Steve Lowe and David Wassung (“Defendants”) in
      State of Nevada District Court in Clark Country, Nevada, alleging causes of
      action for “Refusing to Call Vote of Shareholders” and “Conversion” on or about
      November 18, 2005. The Company has not been served with a summons or complaint
      in the matter. The Company denies the Plaintiff’s claims and intends to
      vigorously defend against them if such complaint is properly served on the
      Company.





On
      or
      around May 2007, Andrew Chien (“Chien” or "Plaintiff") filed suit against the
      Company, R. Scott Cramer, Steve Lowe, David Wassung and Weibing Lu
      (“Defendants”) in United States District Court for the District of Connecticut,
      alleging causes of action for violation of Sections 10(b) and 20(a) of the
      Securities Exchange Act of 1934.  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.  The Plaintiff agreed to voluntarily
      amend the complaint after the motions were filed, and an amended complaint
      was
      subsequently filed on or around January 4, 2008.  The amended complaint
      dropped Weibing Lu (who is a resident of China and had never been served) as
      a
      defendant.  The remaining Defendants contend that the amended complaint has
      failed to correct the deficiencies of the original, and have filed a renewed
      motion to dismiss for failure to state a claim, also preserving their challenge
      to personal jurisdiction.  The Defendants deny all claims and have
      moved the Court to dismiss the complaint in its entirety in their motion to
      dismiss, which is still pending. The motion to dismiss also requests that the
      Court award sanctions against Chien under the Private Securities Litigation
      Reform Act and other authority in the event the Defendants' motion to dismiss
      the complaint is granted.




Other
      than the above described legal proceeding, the Company is not aware of any
      legal
      proceedings in which purchasers, any director, officer, or any owner of record
      or beneficial owner of more than five percent of any class of voting securities
      of the Company, or any affiliate of purchaser, or of any such director, officer,
      affiliate of the Company, or security holder, is a party adverse to Company
      or
      has a material interest adverse to the Company. No provision has been made
      in
      the consolidated financial statements for the above contingencies.




*(c)*
            *Ownership
                of leasehold property*





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





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





See
      report of independent registered public accounting firm.


F-25


SKYSTAR
      BIO-PHARMACEUTICAL COMPANY AND SUBSIDARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





**Note
      18 - SUBSEQUENT EVENTS**





On
      March
      10, 2008, the Company was 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 majority
      shareholders of Xian Tianxing. 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. The Company was 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.





See
      report of independent registered public accounting firm.


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