**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**Form
      10-KSB**





(Mark
      One)





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE FISCAL YEAR ENDED:**DECEMBER
                31, 2006**





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 No. 000-28153**





**SKYSTAR
      BIO-PHARMACEUTICAL COMPANY**


(Exact
      name of small business issuer as specified in it charter)


**Nevada**
            
            **33-0901534**(State
                or other jurisdiction of
            
            (IRS
                Employerincorporation
                or organization)
            
            Identification
                No.)





**Rm.
      10601, Jiezuo Plaza, No.4, Fenghui Road South,**


**Gaoxin
      District, Xian Province, P.R. China**




(Address
      of principal executive offices)





**(8629)
      8819-3188**


(Issuer’s
      telephone number)





Securities
      registered pursuant to Section 12(b) of the Act:




Title
                of each class
            Name
                of each exchange on which registeredNone
            None




Securities
      registered pursuant to Section 12(g) of the Act:





Common
      stock, $0.001 par value


(Title
      of
      Class)





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





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





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





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





The
      issuer's revenues for the fiscal year ended December 31, 2006: $
      9,934,296.





As
      of
      March 21, 2007, the aggregate market value of the Common Stock held by
      non-affiliates, approximately 4,900,951 shares of Common Stock, was
      approximately $7,057,370 based on an average of the bid and ask prices of
      approximately $1.44 per share of Common Stock on such date.





The
      number of shares outstanding of the issuer's Common Stock, $.001 par value,
      as
      of March 21, 2007 was 12,795,549 shares.





Documents
      Incorporated By Reference: None.





Transitional
      Small Business Disclosure Format (check one): Yes oNo x







**TABLE
      OF CONTENTS**


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


**FOR
      YEAR ENDED DECEMBER 31, 2006**





PagePART
                IItem
                1.
            Description
                of Business
            
            4Item
                2.
            Description
                of Property
            
            9Item
                3.
            Legal
                Proceedings
            
            11Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            11PART
                IIItem
                5.
            Market
                for Registrant's Common Equity and Related StockholderMatters
            
            12Item
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            
            13Item
                7.
            Financial
                Statements
            
            31Item
                8.
            Changes
                in and Disagreements on Accounting and Financial
                Disclosure
            
            32Item
                8A.
            Controls
                and Procedures
            
            32Item
                8B.
            Other
                Information
            
            32PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            
            33Item
                10.
            Executive
                Compensation
            
            35Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
            
            37Item
                12.
            Certain
                Relationships and Related Transactions
            
            39Item
                13.
            Exhibits
            
            40Item
                14.
            Principal
                Accountant Fees and Services
            
            41Signatures
            
            
            43




(REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK)




2


**CAUTION
      REGARDING FORWARD-LOOKING INFORMATION**





All
      statements contained in this Annual Report on Form 10-KSB (“Form 10-KSB”) for
      Skystar Bio-Pharmaceutical Company, other than statements of historical facts,
      that address future activities, events or developments are forward-looking
      statements, including, but not limited to, statements containing the words
      “believe,” “anticipate,” “expect” and words of similar import. These statements
      are based on certain assumptions and analyses made by us in light of our
      experience and our assessment of historical trends, current conditions and
      expected future developments as well as other factors we believe are appropriate
      under the circumstances. However, whether actual results will conform to the
      expectations and predictions of management is subject to a number of risks
      and
      uncertainties that may cause actual results to differ materially.





Such
      risks include, among others, the following: international, national and local
      general economic and market conditions: our ability to sustain, manage or
      forecast our growth; raw material costs and availability; new product
      development and introduction; existing government regulations and changes in,
      or
      the failure to comply with, government regulations; adverse publicity;
      competition; the loss of significant customers or suppliers; fluctuations and
      difficulty in forecasting operating results; changes in business strategy or
      development plans; business disruptions; the ability to attract and retain
      qualified personnel; the ability to protect technology; and other factors
      referenced in this and previous filings.





Consequently,
      all of the forward-looking statements made in this Form 10-KSB are qualified
      by
      these cautionary statements and there can be no assurance that the actual
      results anticipated by management will be realized or, even if substantially
      realized, that they will have the expected consequences to or effects on our
      business operations. As used in this Form 10-KSB, unless the context requires
      otherwise, “we” or “us” or “Skystar” or the “Company” means Skystar
      Bio-Pharmaceutical Company and its subsidiaries.





3


**PART
      I**





**Item
                1.**
            **Description
                of Business.**





**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.





On
      September 20, 2005, the Company 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
      Registrant 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, the
      Company issued shares of the Registrant’s Series B Preferred Stock (the “CGPN
      Shares”) to the Skystar Cayman Shareholders in exchange for 100% of the common
      stock of Skystar. The CGPN Shares issued are convertible, in the aggregate,
      into
      a number of shares of the Company’s common stock that would equal 89.5% of the
      outstanding shares of the Company’s common stock, if the shares were to be
      converted on the Closing Date. In addition, on the Closing Date, Skystar Cayman
      was to pay the Company an amount equal to $120,000, which was used to pay
      liabilities of the Company.





The
      closing of the Share Exchange Transaction (the “Closing”) occurred on November
      7, 2005 (the “Closing Date”).  From and after the Closing Date, the
      Company’s 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 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 has not conducted any substantive operations
      of its own and conducts its primary business operations through its variable
      interest entity (“VIE”), Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian
      Tianxing”). The People’s Republic of China (“PRC”) 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.”





Xian
      Tianxing was incorporated on July 3, 1997 in the PRC as a limited liability
      company without shares. On December 31, 2003, the Company restructured from
      a
      limited liability company without shares to a joint stock company limited by
      shares.




The
      paid-in capital of Xian Tianxing was funded by the majority shareholders of
      Skystar. PRC law currently has limits on foreign ownership of certain companies.
      To comply with these foreign ownership restrictions, on October 28, 2005,
      Skystar 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 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,
      irrevocably granted Skystar 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. Through these contractual arrangements, Skystar
      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.




4




As
      a
      result of these contractual arrangements, which obligates Skystar to absorb
      a
      majority of the risk of loss from Xian Tianxing’s activities and enable Skystar
      to receive a majority of its expected residual returns, the Company believes
      Xian Tianxing is a VIE under FASB Interpretation No. 46R (“FIN 46R”),
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”,
      because the equity investors in Xian Tianxing do not have the characteristics
      of
      a controlling financial interest and the Company should be considered the
      primary beneficiary of Xian Tianxing. Accordingly, the Company consolidates
      Xian
      Tianxing’s results, assets and liabilities in the accompanying financial
      statements.





On
      December 19, 2005, the Board 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 (“Name Change”) to our
      current name, Skystar Bio-Pharmaceutical Company, (2) a 1-for-397 reverse stock
      split (the “Reverse Split”); and a (3) decrease in the authorized common stock
      of the Company from 500,000,000 to 50,000,000 shares (the “Authorized Share
      Amendment”). The Certificate of Amendment and Certificate of Change to our
      Articles of Incorporation to effect the Name Change, Reverse Split and the
      Authorized Share Amendment was filed with Nevada’s Secretary of State on
      February 15, 2006.





**Recent
      Developments**





As
      discussed more fully in our Current Report on Form 8-K filed on March 5, 2007,
      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 in aggregate principal amount of 8% convertible debentures due February
      28, 2009 (the “Debentures”), and warrants to purchase 4,075,000 shares of
      the common stock of the Company (the “Warrants”), in a private placement
      pursuant to Regulation D under the Securities Act of 1933 (the “Transaction”).
      Pursuant to a Registration Rights Agreement the Company executed with the
      Purchasers on February 27, 2007, the Company agreed to register all shares
      of
      common stock underlying the conversion of the Debentures and exercise of the
      Warrants in a resale registration statement (the “Registration Statement”). The
      Transaction closed on February 28, 2007. Gross proceeds from the sale to the
      Company were $4.075 million, of which $285,250 was paid to Pacific Ridge Capital
      who served as placement agent for the transaction and $52,500 were paid to
      counsel for the Purchasers in connection with the transaction. The Company
      also
      issued to the Placement Agent a warrant to purchase an aggregate of 570,500
      shares with an exercise price of $1.00 per share and will have an expiration
      date of February 28, 2012. The Company plans to use the proceeds from the
      Transaction for general corporate purposes including for the completion of
      the
      construction of its new manufacturing facilities.





**CONTRACTUAL
      ARRANGEMENTS WITH XIAN TIANXING AND ITS SHAREHOLDERS**




Our
      relationships with Xian Tianxing and its shareholders are governed by a series
      of contractual arrangements. Under PRC laws, each of Skystar Cayman and Xian
      Tianxing is an independent legal entity and neither of them is exposed to
      liabilities incurred by the other party. Other than pursuant to the contractual
      arrangements between Skystar Cayman and Xian Tianxing, Xian Tianxing does not
      transfer any other funds generated from its operations to Skystar Cayman. On
      October 28, 2005, we entered into the following contractual arrangements:




Consulting
      Services Agreement .
      Pursuant to the exclusive consulting services agreement between Skystar Cayman
      and Xian Tianxing, Skystar Cayman has 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 sends employees to Xian Tianxing for whom Xian Tianxing bears the
      costs and expenses. Under this agreement, Skystar Cayman owns the intellectual
      property rights developed or discovered through research and development
      providing the Services for Xian Tianxing. Xian Tianxing pays a quarterly
      consulting service fees in Renminbi (“RMB”) to Skystar Cayman that is equal to
      all of Xian Tianxing’s revenue for such quarter.




5





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





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





Option
      Agreement *.*  ** Under
      the
      option agreement 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 has sole discretion to decide when to exercise the option, whether in
      part or in full. The term of this agreement is ten (10) years from October
      28,
      2005 and may be extended prior to its expiration by written agreement of the
      parties.




Proxy
      Agreement *.* Pursuant
      to the proxy agreement 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. The
      parties entered into a proxy agreement where Xian’s Majority Shareholders have
      agreed to irrevocably grant a person to be designated by Skystar Cayman with
      the
      right to exercise Xian’s Majority Shareholders’ voting rights and their other
      rights 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 its Article of
      Association, including but not limited to the rights to sell or transfer all
      or
      any of his equity interests of the Company, and appoint and vote for the
      directors and Chairman as the authorized representative of the shareholders
      of
      Company. The term of this Proxy Agreement is ten (10) years from the October
      28,
      2005 and may be extended prior to its expiration by written agreement of the
      parties.




6





**XIAN
      TIANXING BIO-PHARMACEUTICAL CO., LTD.**





As
      discussed above, our operations are conducted through Xian Tianxing
      Bio-Pharmaceutical Co., Ltd. (hereafter “Xian Tianxing”) (formerly Xian Tianxing
      Science and Technology Development Co., Ltd.), a joint stock company
      incorporated in Xi'an, China in July 1997. After nine (9) years of development,
      we have become a high-tech enterprise with registered capital of RMB 42,000,000,
      and are engaged in research, development, production, marketing and sales of
      bio-pharmaceutical and veterinary products. Our business divisions include
      a
      bio-pharmaceutical products division, a veterinary drugs division, a fodder
      or
      feed additive division, and a microorganism preparation division.





**PRINCIPAL
      PRODUCTS OR SERVICES AND THEIR MARKETS**





Currently,
      we have four major lines of products:





1.
            Our
                Bio-pharmaceutical veterinary vaccine line currently includes over
                10
                different products;2.
            Our
                Veterinary Medicine line for poultry and livestock currently includes
                over
                40 products;





3.
            Our
                Feed Additives line currently includes over 10 products;
                and4.
            Our
                Micro-organism products line currently includes over 10
                products.





Among
      the
      Company’s prominent products is DLV chicken vaccine for prevention of avian
      coccidiosis disease. DLV chicken vaccine has won a number of accreditation
      and
      awards from PRC national authorities. It is safe, effective and easy to
      administer, and has proved to save costs by 60% as compared to using chemical
      medicines. With ongoing research and development, management expects that the
      Company will continue to introduce new products to the market.




**DISTRIBUTION
      METHODS OF THE PRODUCTS OR SERVICES AND OUR CUSTOMERS**




The
      Company has a distribution network covering 16 provinces in the PRC. Currently,
      we have approximately two hundred and eighty (280) distribution agents
      throughout the PRC. The Company will continue to establish more representative
      offices and engage additional distribution agents in order to strengthen its
      distribution network.





The
      Company recognizes the importance of branding as well as packaging. All of
      our
      Company’s products bear a uniform brand but we also brand and package our
      products with specialized designs to differentiate the different categories
      of
      the Company’s products.





We
      conduct promotional marketing activities to publicize and enhance the Company’s
      image as well as to reinforce the recognition of the Company’s brand name
      include:





1.
            publishing
                advertisements and articles in national as well as specialized and
                provincial newspapers, magazines, and in other media, including the
                Internet;





2.
            participation
                in national meetings, seminars, symposiums, exhibitions for
                bio-pharmaceutical and other related
                industries;





3.
            organizing
                cooperative promotional activities with distributors;
                and





4.
            sending
                direct mail to major farms.





Our
      Company currently has over four hundred (400) customers in sixteen (16)
      provinces in the PRC.




**COMPETITION**




We
      have
      three major competitors in the PRC: Jielin Bio-Tech Production Co., Ltd., Qilu
      Animal Health Production Co., Ltd., and Zhongmu Industrial Joint Stock Co.,
      Ltd.
      These companies have more assets and have a larger market share. The Company
      is
      able to compete with these competitors because of its location in Northwest
      China, its unique products and its lower prices. Other than these three
      competitors, most of other competitors produce only one or two products. The
      Company produces a complete series of forage additive products and veterinary
      medicine products.




7




**SOURCES
      AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS**




Shanghai
      Yino Technology Development Co., Ltd.,  Wan
      Shou
      Bei Lu Zhong Kui Cao Yao Xing , Shaanxi
      Jin Wei Gong Mao Co., Ltd, Hebei Wei Yun Dong Wu Yao Co., Ltd and Shaanxi
      Yongfeng Su Ye Ke Ji Co., Ltd. collectively supplied over fifty percent (50%)
      of
      the raw materials we used to manufacture our products. The Company designs,
      creates prototypes and manufactures its products at its manufacturing facilities
      located at Xi’an city, Shang’xi province, PRC. Our principal raw materials
      include Chinese herbs, such as Huoxiang, Huanglian, and Zhang Red Flowers.
      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.





**PATENTS,
      TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
      CONTRACTS**





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” and “Star Pigeon” are our registered trademarks in the PRC.




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 the PRC and
      abroad is uncertain and evolving and could involve substantial risks to us.





**GOVERNMENT
      APPROVAL AND REGULATION OF THE COMPANY’S 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 the PRC 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.





**RESEARCH
      AND DEVELOPMENT**




We
      place
      great emphasis on product research and development. In cooperation with Shanghai
      Poultry Verminosis and Institution and Shanxi Microbial Institute, the Company
      has established two research and development centers. 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 will 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.




8




2.
            Development
                of protein technology and enzyme mechanism.
                Introducing the technology in polypeptides, the Company is cooperating
                with relevant research institutes to develop new products to cure
                piglet
                diarrhea. The products will 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.
                The
                Company is also developing complex enzyme preparations as new feed
                additives and aims to use anti-inflammatory enzyme, polyase, and
                cellulose
                to form the best combination that will effectively dissolve and cause
                the
                additive to be absorbed in the feed. This will greatly improve the
                absorption rate of the feed, thereby reducing the ratio of usage
                of feed
                versus meat, while concurrently reducing the incidence of disease
                in
                livestock and poultry.





3.
            Development
                of non-pathogenic micro-organisms.
                The Company is 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. Microorganism preparations will prove to
                be
                effective cure and prevention for livestock disease, and will greatly
                reduce the use of antibiotic and other
                drugs.





4.
            Development
                of veterinary medicines for pets.
                We believe that the pet markets have been fast growing along with
                the
                growing economy in the PRC. We believe that this niche is being overlooked
                by local manufacturers. To take advantage of this opportunity, we
                have
                over 20 products of veterinary medicines for pets that are in the
                course
                of development.





In
      2005,
      the Company spent approximately $56,000 or approximately 0.94% of the Company’s
      2005 revenue on research and development of bio-pharmaceutical products. In
      2006, the Company spent approximately $153,000 or approximately 1.57% of the
      Company’s 2006 revenue on research and development of products.




**COSTS
      AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS**




In
      compliance with PRC environmental regulations, the Company spent approximately
      $167,000 in 2005, and Nil in 2006, mainly for the wastewater treatment in
      connection with our production facilities.




**EMPLOYEES**




In
      2005,
      the Company had 163 employees, of which 158 worked as full time employees.
      In
      2006, the Company has 180 employees, 175 of which are full time employees.




**Item
                2.**
            **Description
                of Property.**




The
      Company’s headquarters is currently located in approximately 345 square meters
      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.





**Existing
      Production Facilities**





Currently,
      the Xian Tianxing has four plants that are located at San Qiao, Xi’an city,
      Shanxi Province, PRC. The Company owns these 4 plants and has obtained a prepaid
      land use right to acquire a long-term interest to utilize the land underlying
      the property facility. In addition, Xian Tianxing entered into a tenancy
      agreement for the lease of factory premises for a period of ten years from
      October 1, 2004 to September 30, 2014. The annual rent for the factory premises
      is $10,361 and is also subject to a 10% increase every four subsequent years.
      The Company’s production facilities are described as follows:





1.
            Bio-pharmaceutical
                plant.
                Constructed according to national Good Manufacturing Practice (“GMP”)
                standards, this plant occupies an of area of approximately 2,000
                square
                meters and has an annual production capacity of vaccines for approximately
                2 billion livestock and poultry.




9




2.
            Veterinary
                medicine plant.
                Also constructed according to national GMP standards, this plant
                occupies
                an area of approximately 1,000 square meters and has a production
                capacity
                of approximately 2 billion bottles of liquid preparations and 300
                tons of
                powder preparations.





3.
            Microorganism
                plant.
                Occupying an area of approximately 380 square meters, this production
                plant is run in cooperation with experts from Japan Kato Microbiology
                Institute, Microbiology Institute of Shanxi Province and Northwest
                Agro-Forestry Sci-tech University.





4.
            Feed
                additive plant.
                This production facility occupies an area of approximately 380 square
                meters.





We
      believe that the general physical condition of the plants and production
      facilities of the company can completely satisfy our current production needs
      of
      the company in terms of quantity and production quality.





**Expansion
      of Production Facilities**





In
      2003,
      the Xian Tianxing received approval from the State Council of China to expand
      its production facilities and construct a new Good Manufacturing Practice
      (“GMP”) standard plant. The Company's total investment in this project thus
      far is estimated at RMB 82,000,000 (US$10,501,000). Xian Tianxing has been
      accredited as a high-tech enterprise, and the Company’s expansion project has
      gained full support of both Shanxi provincial government and Xian municipal
      government.





The
      construction work commenced in late 2004 and is expected to be completed by
      the
      end of 2007. The new plant when completed will occupy approximately 45 hectares
      and have a total area of approximately 14,100 sq. meters,
      comprising:





1.
            a
                factory that will produce veterinary medicines and occupies an area
                of
                approximately 4,200 square meters;





2.
            a
                microorganism factory for probiotic production will occupy an area
                of
                approximately 1,000 square meters;





3.
            a
                building for quality control, research and development, and administration
                that occupies an area of approximately 3,400 square
                meters;





4.
            a
                GMP standard bio-pharmaceutical factory with a total area of about
                4,500
                square meters and three production lines for active bacteria, inactivated
                vaccines, and coccidiosis vaccines;
                and





5.
            an
                animal laboratory complying ABSL-2 requirements will occupy an area
                of
                approximately about 1,000 sq.
                meters.





Xian
      Tianxing’s administration building, the veterinary medicine factory, the
      bio-pharmaceutical factory and the first phase of the microorganism factory
      have
      already been completed. The microorganism factory and the animal laboratory
      are
      expected to be completed by the end of 2007. The veterinary medicine and the
      bio-pharmaceutical factories are being submitted to PRC Ministry of
      Agriculture’s Veterinary Drugs GMP Inspection Committee (“GMP Inspection
      Committee”) for inspection and approval. Upon completion, the microorganism
      factory will also be submitted to the GMP Inspection Committee for inspection
      and approval.




10




We
      believe that the current facilities occupied by the Company and its subsidiaries
      will be able to meet the Company’s operational needs for the coming three to
      five years.




**Item
                3.**
            **Legal
                Proceedings.**





Other
      than the legal proceeding described below, 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:





Gregory
      Evans v. The Cyber Group Network Corp., et al. (District Court, Clark County, State of Nevada, Case No. A513378).  The
      Company has 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 County, 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.




**Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**





The
      Company did not submit any matters to a vote of the shareholders in the fourth
      quarter of fiscal year 2006.





11




**PART
      II**





**Item
                5.**
            **Market
                for Common Equity and Related Stockholder
                Matters.**




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.





**Common
      Stock**




**Quarter
                Ended**
            
            **High
                Bid**
            
            **Low
                Bid**December
                31, 2006
            
            $
            2.60
            
            $
            1.20September
                30, 2006
            
            $
            2.11
            
            $
            1.80June
                30, 2006
            
            $
            2.70
            
            $
            1.10March
                31, 2006*
            
            $
            5.578
            
            $
            1.60December
                31, 2005
            
            $
            0.0175
            
            $
            0.0060September
                30, 2005
            
            $
            0.0185
            
            $
            0.0023June
                30, 2005
            
            $
            0.0046
            
            $
            0.0015March
                31, 2005
            
            $
            0.0060
            
            $
            0.0022





*
      Increase in stock price commencing in the first quarter of the Company’s 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.





**HOLDERS**





As
      of
      December 31, 2006, there were approximately 182 stockholders of record of our
      common stock and there was 1 stockholder of record of our 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.





**RECENT
      SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES;
      REPURCHASE OF EQUITY SECURITIES**





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.




12





On
      February 15, 2006, the Company also affected 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.




In
      October 2006, the Company issued a total of 44,350
      shares of the Company's common stock to consultants.





In
      November 2006, the Company issued a total of 95,000 shares of the Company’s
      common stock to a consultant and a non-executive director.





In
      December 2006, the Company issued another 50,000 shares of the Company’s common
      stock to a consultant.





The
      Company did not repurchase any of its outstanding equity securities during
      the
      fourth quarter of the year ended December 31, 2006.




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




The
      following management’s discussion and analysis should be read in conjunction
      with our consolidated financial statements and the notes thereto and the other
      financial information appearing elsewhere in this item. In addition to
      historical information, the following discussion contains certain
      forward-looking statements within the “safe harbor” provisions of the Private
      Securities Litigation Reform Act of 1995. These statements relate to our future
      plans, objectives, expectations and intentions. These statements may be
      identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
      terms or terminology, or the negative of such terms or other comparable
      terminology. 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 Annual Report on Form 10-KSB. 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 (“Skystar” or the “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, the Company changed its name to “The Cyber Group Network Corporation”. On
      February 15, 2006, the Company further changed its name to “Skystar
      Bio-Pharmaceutical Company” to reflect its current business
      operations.





On
      November 7, 2005, the Company acquired Skystar Bio-Pharmaceutical (Cayman)
      Holdings Co., Ltd (“Skystar Cayman”) and, as a result, Skystar Cayman’s variable
      interest entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Limited (“Xian
      Tianxing”) by way of the exchange of 48,000,000 shares of the Company’s 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.




13





Having
      no
      substantive operation of its own, Skystar Cayman, through its VIE, Xian
      Tianxing, engages in research, development, production, marketing and sales
      of
      bio-pharmaceutical and veterinary products in the People’s Republic of China
      (“China” or the “PRC”). Please see “Contractual Arrangements with Xian Tianxing
      and its Shareholders” above and Note 1 to our consolidated financial statements
      included in this report for the contractual arrangements between Skystar Cayman
      and Xian Tianxing and their impact on our consolidated financial
      statements.





**Critical
      Accounting Policies**





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




·
            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.  ·
            Impairment
                of long-lived assets: We test impairment for long-lived assets, including
                amortizable intangibles, whenever events or changes in circumstances
                indicate that the carrying amount of an asset may not be recoverable.
                Undiscounted cash flow analyses are used to assess long-lived asset
                impairment. If an assessment indicates impairment, the impaired asset
                is
                written down to its fair market value based on the best information
                available. Estimated fair market value is generally measured with
                discounted estimated future cash flows. Considerable management judgment
                is necessary to estimate undiscounted and discounted future cash
                flows.  ·
            Contingencies
                and litigation: We evaluate contingent liabilities including threatened
                or
                pending litigation in accordance with SFAS No. 5, “Accounting for
                Contingencies” and record accruals when the outcome of these matters is
                deemed probable and the liability is reasonably estimable. We make
                these
                estimates based on the facts and circumstances and in some instances
                based
                in part on the advice of outside legal counsel.  ·
            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, goods are delivered to the customers and the customer assumes
                risk
                or loss, the selling price is fixed or determinable, and collectibility
                is
                reasonably assured. Sales are net of value added tax (VAT), sales
                rebates
                and returns.




14




**Results
      of Operations - Year ended December 31, 2006 as compared to year ended December
      31, 2005**





REVENUES.
      All of our revenue is derived from the sale of bio-pharmaceutical and veterinary
      products in the PRC. During the year ended December 31, 2006, we had revenues
      of
      $9,796,324 as compared to revenues of $5,939,416 during the year ended December
      31, 2005, an increase of approximately 65%. In general, this increase is
      attributable to our increased sales volume, partially offset by a decline in
      per
      unit selling price. The increase in sales volume is mainly attributable to
      the
      increase in number of our promotional activities. We believe that our sales
      will
      continue to grow because we are strengthening our sales force and launching
      new products.





GROSS
      PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
      manufacturing overhead, were $5,420,652 for the year ended December 31, 2006
      as
      compared to $3,014,430 for the year ended December 31, 2005. Gross profit was
      $4,375,672 for the year ended December 31, 2006 as compared to $2,924,986 for
      the year ended December 31, 2005, representing gross margins of approximately
      45% and 49%, respectively. The decrease in our gross profit margin is
      attributable to the increase of the cost of raw materials and decrease in
      selling price. We believe that this is a short term trend as we can improve
      our
      cost control by obtaining better pricing through bulk purchase of raw materials.
      Additionally, we are working on improving our formulas to reduce the amount
      of
      raw materials used.





SELLING
      EXPENSES. Selling expenses, which consist of commission, advertising and
      promotion expenses, freight charges and salaries totaled $475,504 for the year
      ended December 31, 2006 as compared to $374,473 for the year ended December
      31,
      2005, an increase of approximately 27%. We believe that our selling
      expenses will increase as we increase our sales teams and revenues.





GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $881,223 for the year ended December 31, 2006 as compared to $341,081 for the
      year ended December 31, 2005, an increase of approximately 159%. This increase
      is primarily attributable to the expansion of our operations and the
      professional fees relating to compliance with our duties under the U.S.
      securities laws and regulations as a reporting company.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, totaled $131,371 for the year ended
      December 31, 2006 as compared to $56,489 for the year ended December 31, 2005,
      an increase of approximately 133%. The increase is attributable to our
      continuing efforts to introduce new products. In 2005, we had 40 products.
      In
      2006, the number of products we offer increased to 42 products.





NET
      INCOME. Skystar had a net income of $1,175,142 for the year ended December
      31,
      2006 as compared to $1,467,518 for the year ended December 31, 2005. The
      decrease in net income is attributable primarily to an increase in cost relating
      to compliance with U.S. securities laws and regulations as a reporting company.
      Skystar management believes that net income will increase as Skystar introduces
      new products and increases sales.





**Liquidity**





For
      the year ended December 31, 2006, we generated cash from operating activities
      of
      $1,600,554, as compared to $3,292,836 for the year ended December 31, 2005.
      The
      decrease is primarily attributable to repayment of tax payables. We used
      $1,120,132 in investing activities for 2006 as compared to $5,163,143 for 2005.
      The expenditure in investing activities for 2006 consisted of, among others,
      payment of $2,098,659 for the purchases of property, plant and equipment and
      construction in progress as the construction of our new plant has been in full
      swing and is expected to be completed at the end of 2007. On the other hand,
      we
      used $328,302 in financing activities for 2006 (as compared to $1,805,147
      generating from financing activities for 2005), which, among others, consisted
      of repayment of $364,906 as non-interest bearing loan from a third party to
      us.




As
      of
      December 31, 2006, the Company had cash of $192,016. Our total current assets
      were $999,174 and our total current liabilities were $1,538,244, which resulted
      in a net working capital deficiency of $539,070. On February 27, 2007, we
      entered into a Securities Purchase Agreement (the “Agreement”), with several
      institutional and accredited investors (the “Purchasers”) pursuant to which we
      sold to the Purchasers $4.075 million in aggregate principal amount of 8%
      convertible debentures due February 28, 2009 (the “Debentures”), and warrants to
      purchase 4,075,000 shares of the common stock of the Company (the “Warrants”),
      in a private placement pursuant to Regulation D under the Securities Act of
      1993
      (the “Transaction”). We believe that we have sufficient cash flow to meet the
      obligations on a timely basis in the foreseeable future.




15





We
      had
      capital expenditure commitments outstanding as of December 31, 2006 in the
      amount of $1,372,787 in relation to the construction of a new plant which will
      meet the Good Manufacturing Practices Standard and $259,511 in relation to
      the
      purchase of machinery. The new plant and machinery will enable us to consolidate
      our existing operations and to expand the production capacity for our
      bio-pharmaceutical business.





**Capital
      Resources**





As
      described more fully above in Item 1 (Description of Business) under the heading
      "Recent Developments," on February 28, 2007, the Company raised $4.075 million
      from several institutional and accredited investors in a private placement
      transaction (the “Transaction”). We intend to use the proceeds from the
      Transaction for general corporate purposes including for the completion of
      the
      construction of our new plant and for acquisition of new equipment for the
      plant.





**Plan
      of Operations**





Over
      the
      next 12 months, we plan to continue to market and sell the company’s products
      and to develop new products.





In
      addition, as described more fully above in Item 2 (Description of Property),
      in
      2003, the Company received approval from the State Council of China to expand
      its production facilities and construct a new Good Manufacturing Practice
      (“GMP”) standard plant. The Company’s total investment in this project thus far
      is estimated at 82,000,000 RMB (US$ 10,501,000). The construction work commenced
      in late 2004 and is expected to be completed by the end of 2007. The new plant
      will occupy approximately 45 hectares and have a total area of approximately
      14,100 sq. meters.





**Product
      Research and Development**





As
      described more fully above, we believe that Xian Tianxing will be developing
      several 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 within the next 12 months.





**Off-Balance
      Sheet Arrangements**





The
      Company had pledged a leasehold office building with a net book value of
      $251,308 as of December 31, 2005 to a bank as the security against the bank
      borrowings of Shaanxi Xingji Electronic Sci-Tech Company Limited (“Shaanxi
      Xingji”), a company owned by the wife of Mr. Weibing Lu, a director and the
      Chief Executive Officer of the Company. This pledge arrangement was entered
      into
      by Xian Tianxing, because from time to time, the company owned by Mr. Lu’s wife
      has extended non-interest bearing loans to Xian Tianxing as short-term finances
      for Xian Tianxing.  The Company terminated this pledge arrangement in
      connection with Shaanxi Xingji in 2006.




The
        Company has given a guarantee for the bank borrowing of a third party to
        the
        extent of $32,025 as of December 31, 2006.


Other
      than the arrangement described above, we have not entered into any other
      financial guarantees or other 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 shareholder’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.





16





**Exchange
      Rates**





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





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




**2006**
            
            **2005**Assets
                and liabilities, as of December 31
            
            
            USD0.12820:RMB1
            
            
            USD0.124:RMB1Amounts
                included in the statements of operations and cash flows for the years
                ended December 31
            
            
            USD0.12557:RMB1
            
            
            USD0.122: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.




**RISK
      FACTORS**





***FACTORS
      THAT MAY AFFECT FUTURE PERFORMANCE***




Before
      investing in our common stock you should carefully consider the following risk
      factors, the other information included herein and the information included
      in
      our other reports and filings.  Our business, financial condition, and the
      trading price of our common stock could be adversely affected by these and
      other
      risks.




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




We
      have a
      limited operating history. Xian Tianxing commenced operations in 1997 and first
      achieved profitability in the quarter ended 1999. Accordingly, you should
      consider our future prospects in light of the risks and uncertainties
      experienced by early stage companies in evolving industries such as the
      bio-pharmaceutical industry in China. Some of these risks and uncertainties
      relate to our ability to:




·
            maintain
                our position as one of the market leaders in
                China;




17




·
            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;





·
            respond
                to competitive market conditions;




·
            respond
                to changes in our regulatory
                environment;





·
            manage
                risks associated with intellectual property
                rights;




·
            maintain
                effective control of our costs and
                expenses;





·
            raise
                sufficient capital to sustain and expand our
                business;




·
            attract,
                retain and motivate qualified personnel;
                and




·
            upgrade
                our technology to support additional research and development of
                new
                products.




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





***We
      Must Obtain Additional Financing to Execute Our Business
      Plan***




The
      revenues from the production and sale of bio-pharmaceutical products and the
      projected revenues from these products are not adequate to support our expansion
      and product development programs.  We will need substantial 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.  We will seek
      additional funds through public or private equity or debt financing, strategic
      transactions and/or from other sources.  We could enter into collaborative
      arrangements for the development of particular products that would lead to
      our
      relinquishing some or all rights to the related technology or
      products.




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
      Success Depends On Collaborative Partners, Licensees and Other Third Parties
      Over Whom We Have Limited Control***




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 milestone payments
      and
      royalties that, in some instances, could be substantial, 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.




18




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.




***The
      Profitability of Our Products Will Depend in Part on Our Ability to Protect
      Proprietary Rights and 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




·
            the
                patents of others will not impede our ability to do business;
                or




·
            third
                parties will not be able to circumvent our
                patents.




19




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.




***We
      May Encounter Difficulties in Manufacturing our
      Products***




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 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. 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.




***We
      Could 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 our share price
      to
      decrease.




20




***We
      May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
      Necessary to Commercialize Our Products***




The
      PRC
      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 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.




21




***Our
      Products May Not 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.




***Our
      Operations and the Use of Our Products Could Subject Us to Damages Relating
      to
      Injuries or Accidental Contamination***




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 successfully 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. We are not insured with respect to this
      liability. If we choose to obtain product liability insurance but 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.





***We
      have no business liability or disruption insurance coverage.***





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.





***Our
      Success Depends On Attracting and Retaining 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.




22





**Risks
      Related to Our Corporate Structure**




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




There
      are
      substantial uncertainties regarding the interpretation and application of PRC
      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
      shareholders. We are considered a foreign person or foreign invested enterprise
      under PRC law. As a result, we are subject to PRC 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
      PRC
      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 PRC 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 PRC laws or regulations. As
      a
      result, we may be subject to sanctions, including fines, and could be required
      to restructure our operations or cease to provide certain services. Any of
      these
      or similar actions could significantly disrupt our business operations or
      restrict us from conducting a substantial portion of our business operations,
      which could materially and adversely affect our business, financial condition
      and results of operations.




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




The
      PRC
      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
      PRC
      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 PRC 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.




23




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




The
      PRC
      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 website and our online advertising business
      in China. We have contractual arrangements with Xian Tianxing and its
      shareholders 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 PRC regulations, we cannot assure you that
      the
      PRC government would agree that these operating arrangements comply with PRC
      licensing, registration or other regulatory requirements, with existing policies
      or with requirements or policies that may be adopted in the future. If the
      PRC
      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 shareholders may not be
      as
      effective in providing control over these entities as direct ownership.***




Since
      PRC
      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 PRC law, which
      may not be effective. In addition, we cannot assure you that either of Xian
      Tianxing’s shareholders would always 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.




**Risks
      Related to Doing Business in China**




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




24





***If
      PRC 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
      PRC
      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
      PRC
      Income Tax Laws, it is entitled to a preferential tax rate of 15%. If the PRC
      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 are subject to restrictions on making payments to us.***




We
      are a
      holding company incorporated in the Cayman Islands and do not have any assets
      or
      conduct any business operations other than our 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 PRC government also imposes controls on the conversion of 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 PRC 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 PRC 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 PRC legal system is based on written statutes. Prior court
      decisions may be cited for reference but have limited precedential value.




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





***You
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based on United States
      or other foreign laws against us, our management or the experts named in 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
      PRC
      counsel has advised us that the PRC does not have treaties with the United
      States or many other countries providing for the reciprocal recognition and
      enforcement of judgment of courts.




25





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




The
      PRC
      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 PRC
      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 PRC 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 the PRC 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 PRC 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 shareholders.




***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 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 SARS or another epidemic
      or outbreak. China reported a number of cases of SARS in April 2004. Any
      prolonged recurrence of SARS or other 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.




***We
      may be subject to new income
      tax.***




Beginning
      January 1, 2008, the new Chinese Enterprise
      Income Tax (“EIT”)
      law will replace the
      existing laws for Domestic Enterprises (“DES”) and Foreign
      Invested
      Enterprises (“FIEs”). The new standard
      EIT
      rate of 25% will replace the 33% rate currently applicable to both DES and
      FIEs.
      The Company is currently evaluating the effect of the new EIT law will have
      on
      its financial position.




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




***To
      Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will 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 the company’s
      operations.




26





***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 Need to Sell Your Shares to Raise Money or Otherwise
      Desire to Liquidate Your Shares.***





The
      Company cannot predict the extent to which an active public market for its
      common stock will develop or be sustained. However, the Company does not rule
      out the possibility of applying for listing on the Nasdaq National Market or
      other exchanges.




Our
      common shares have historically been sporadically or “thinly-traded” on the
“Over-the-Counter 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 shareholders 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
      lack 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-adverse 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 Form 10-KSB. 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. However, the Company does not rule out the possibility of applying
      for listing on the Nasdaq National Market or other exchanges.




27





Shareholders
      should be aware that, according to SEC Release No. 34-29093, 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 shareholders
      and
      affiliated entities.***




Our
      principal shareholders and their affiliated entities will own approximately
      81%
      of our outstanding ordinary shares, representing approximately 81% of our voting
      power. These shareholders, 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 shareholders
      and their affiliated entities, elections of our board of directors will
      generally be within the control of these shareholders and their affiliated
      entities. While all of our shareholders are entitled to vote on matters
      submitted to our shareholders for approval, the concentration of shares and
      voting control presently lies with these principal shareholders and their
      affiliated entities. As such, it would be difficult for shareholders 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 shareholders will be viewed favorably by all shareholders 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
      shareholders, 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
      shareholders against our directors and officers even though such actions, if
      successful, might otherwise benefit our company and shareholders.




28





***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 rule changes as well as
      proposed legislative initiatives following the Enron bankruptcy 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.





***Past
      Activities Of The Company And Its Affiliates May Lead To Future Liability For
      The Company.***





Prior
      to
      our entry into the contractual arrangements with Xian Tianxing on October 28,
      2005, the Company engaged in businesses unrelated to its current operations.
      Although the CGPN Shareholders are providing 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 the Company.




***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.




29




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 shareholders.***




We
      believe that our current cash and cash equivalents, anticipated cash flow from
      operations and the net proceeds from this offering will be sufficient to meet
      our anticipated cash needs for the near 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
      shareholders. The incurrence of indebtedness would result in increased debt
      service obligations and could result in operating and financing covenants that
      would restrict our operations. We cannot assure you that financing will be
      available in amounts or on terms acceptable to us, if at all.





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




We
      are
      subject to reporting obligations under the U.S. securities laws. The Securities
      and Exchange Commission, or 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 the company’s 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 the company’s 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.




***We
      will incur increased costs as a result of being a public company.***




As
      a
      public company, we will incur significant legal, accounting and other expenses
      that we did not incur as a private company. In addition, the Sarbanes-Oxley
      Act,
      as well as new rules subsequently implemented by SEC have required changes
      in
      corporate governance practices of public companies. We expect these new rules
      and regulations to increase our legal, accounting and financial compliance
      costs
      and to make certain corporate activities more time-consuming and costly. In
      addition, we will incur additional costs associated with our public company
      reporting requirements. We are currently evaluating and monitoring developments
      with respect to these new rules, and we cannot predict or estimate the amount
      of
      additional costs we may incur or the timing of such costs.





30




**Item
                7.**
            **Financial
                Statements.**





The
      information required by Item 7 and an index thereto commences on the next
      page.





31




**SKYSTAR
      BIO-PHARMACEUTICAL COMPANY**


**(Formerly
      known as The Cyber Group Network Corporation)**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




PageREPORTS
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
            
            F-2CONSOLIDATED
                BALANCE SHEET
            
            F-3CONSOLIDATED
                STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
            
            F-4CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS’ EQUITY
            
            F-5CONSOLIDATED STATEMENTS
                OF CASH FLOWS
            
            F-6NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            F-7




F-1


REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors and Stockholders of
 Skystar
        Bio-Pharmaceutical Company and Subsidiary
 
 We
        have
        audited the accompanying consolidated balance sheets of Skystar
        Bio-Pharmaceutical Company and Subsidiary as of December 31, 2006 and 2005,
        and
        the related consolidated statements of income and other comprehensive income,
        shareholders’ equity, and cash flows for each of the years in the two-year
        period ended December 31, 2006. These consolidated financial statements are
        the
        responsibility of the company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with 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 financial statements referred to above present fairly, in all
        material respects, the financial position of Skystar Bio-Pharmaceutical Company
        and Subsidiary as of December 31, 2006 and 2005, and the results of its
        operations and its cash flows for each of the years in the two-year period
        ended
        December 31, 2006 in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 
 /s/
        Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Walnut,
        California
 May
        17,
        2007




F-2




SKYSTAR
                BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARYCONSOLIDATED
                BALANCE SHEETSAS
                OF DECEMBER 31, 2006 AND 2005




A
                S S E T S


2006
              
              2005CURRENT
                  ASSETS:Cash
              
              $
              192,016
              
              $
              38,498Restricted
                  cash
              
              
              69,610
              
              
              62,000Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $14,426 and $71,613 as ofDecember
                  31, 2006 and 2005, respectively
              
              
              131,599
              
              
              247,354Inventories
              
              
              528,566
              
              
              175,687Deposits
                  and prepaid expenses
              
              
              29,944
              
              
              15,179Loans
                  receivable
              
              
              8,558
              
              
              261,640Amounts
                  due from shareholders
              
              
              -
              
              
              122,966Amounts
                  due from a related company
              
              
              -
              
              
              587,016Other
                  receivables
              
              
              38,881
              
              
              28,008Total
                  current assets
              
              
              999,174
              
              
              1,538,348PLANT
                  AND EQUIPMENT, net
              
              
              10,910,948
              
              
              8,564,360OTHER
                  ASSETS:Prepaid
                  land use right, net
              
              
              311,212
              
              
              307,421Intangible,
                  net
              
              
              25,640
              
              
              49,600Total
                  other assets
              
              
              336,852
              
              
              357,021Total
                  assets
              
              $
              12,246,974
              
              $
              10,459,729L
                  I A B I L I T I E S   A N D   S H A R E H O L D E R
                  S'   E Q U I T YCURRENT
                  LIABILITIES:Interest-bearing
                  short-term loan
              
              $
              38,460
              
              $
              37,200Non-interest
                  bearing loan from third party
              
              
              62,818
              
              
              421,104Accounts
                  payable
              
              
              71,223
              
              
              9,692Accrued
                  expenses and other
              
              
              523,892
              
              
              135,300Taxes
                  payable
              
              
              218,231
              
              
              1,811,405Other
                  payables
              
              
              607,595
              
              
              64,496Amount
                  due to related companies
              
              
              16,025
              
              
              24,676Amount
                  due to shareholders
              
              
              -
              
              
              78,678Total
                  current liabilities
              
              
              1,538,244
              
              
              2,582,551Deferred
                  government grant
              
              
              961,500
              
              
              806,000Total
                  liabilities
              
              
              2,499,744
              
              
              3,388,551CONTINGENCY
                  LIABILITIESSHAREHOLDERS'
                  EQUITY:Preferred
                  stock, $0.001 par value, 50,000,000 shares authorized,
                  2,000,000series
                  "A" shares issued and outstanding as of December 31, 2006and
                  2005, respectively; Nil and 48,000,000 series "B" shares issued
                  andoutstanding
                  as of December 31, 2006 and 2005, respectively
              
              
              2,000
              
              
              50,000Common
                  stock, $0.001 par value, 50,000,000 and 500,000,000 sharesauthorized
                  as of December 31, 2006 and 2005, respectively;12,795,549
                  and 1,260,651 shares issued and outstanding as ofDecember
                  31, 2006 and 2005, respectively
              
              
              12,795
              
              
              1,261Paid-in-capital
              
              
              6,246,325
              
              
              4,301,747Deferred
                  compensation
              
              
              (705,877
              )
              
              -Statutory
                  reserves
              
              
              779,624
              
              
              364,460Retained
                  earnings
              
              
              2,952,343
              
              
              2,192,365Accumulated
                  other comprehensive income
              
              
              460,020
              
              
              161,345Total
                  shareholders' equity
              
              
              9,747,230
              
              
              7,071,178Total
                  liabilities and shareholders' equity
              
              $
              12,246,974
              
              $
              10,459,729


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 SUBSIDIARYCONSOLIDATED
                STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
                THE YEARS ENDED DECEMBER 31, 2006 AND
                2005




2006
              
              2005REVENUE
              
              $
              9,796,324
              
              $
              5,939,416COST
                  OF SALES
              
              
              5,420,652
              
              
              3,014,430GROSS
                  PROFIT
              
              
              4,375,672
              
              
              2,924,986RESEARCH
                  AND DEVELOPMENT COST
              
              
              131,371
              
              
              56,489SELLING
                  EXPENSES
              
              
              475,504
              
              
              374,473GENERAL
                  AND ADMINISTRATIVE EXPENSES
              
              
              881,223
              
              
              341,081AMORTIZATION
                  OF DEFERRED COMPENSATION
              
              
              1,202,235
              
              
              -INCOME
                  FROM OPERATIONS
              
              
              1,685,339
              
              
              2,152,943MERGER
                  TRANSACTION EXPENSE
              
              
              -
              
              
              513,414OTHER
                  EXPENSE (INCOME), net
              
              
              15,246
              
              
              (66,047
              )INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              1,670,093
              
              
              1,705,576PROVISION
                  FOR INCOME TAXES
              
              
              494,951
              
              
              238,058NET
                  INCOME
              
              
              1,175,142
              
              
              1,467,518OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              298,675
              
              
              161,345COMPREHENSIVE
                  INCOME
              
              $
              1,473,817
              
              $
              1,628,863EARNINGS
                  PER SHARE:-
                  Basic
              
              $
              0.11
              
              $
              1.16-
                  Diluted
              
              $
              0.09
              
              $
              0.13WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES:-
                  Basic
              
              
              11,144,153
              
              
              1,260,651-
                  Diluted
              
              
              12,498,386
              
              
              10,935,509


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 SUBSIDIARYCONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITYFOR
                THE YEARS ENDED DECEMBER 31, 2006 AND
                2005


AccumlatedPreferred
                  stock
              
              Common
                  stock
              
              
              
              
              
              Retained
                  earnings
              
              otherPaid-in
              
              Deferred
              
              Statutory
              
              
              
              comprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              Compensation
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2004
              
              
              50,000,000
              
              
              50,000
              
              
              1,260,651
              
              
              1,261
              
              
              2,764,787
              
              
              -
              
              
              163,396
              
              
              925,911
              
              
              -
              
              
              3,905,355Capital
                  contribution by orginal shareholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,536,960
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,536,960Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              161,345
              
              
              161,345Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,467,518
              
              
              -
              
              
              1,467,518Additions
                  to paid in capital
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Adjustment
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              201,064
              
              
              (201,064
              )
              
              -
              
              
              -BALANCE,
                  December 31, 2005
              
              
              50,000,000
              
              $
              50,000
              
              
              1,260,651
              
              $
              1,261
              
              $
              4,301,747
              
              $
              -
              
              $
              364,460
              
              $
              2,192,365
              
              $
              161,345
              
              $
              7,071,178Share
                  conversion
              
              
              (48,000,000
              )
              
              (48,000
              )
              
              10,745,548
              
              
              10,745
              
              
              37,255
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Share
                  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
              
              $
              9,747,230


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 SUBSIDIARY




CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005


2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              1,175,142
              
              $
              1,467,518Adjustments
                  to reconcile net income to cashprovided
                  by operating activities:Allowance
                  for doubtful accounts
              
              
              (57,187
              )
              
              -Depreciation
                  and amortization
              
              
              119,770
              
              
              118,703Loss
                  on disposal of fixed assets
              
              
              -
              
              
              4,517Amortization
                  of deferred compensation
              
              
              1,202,235
              
              
              -Change
                  in assets and liabilitiesAccounts
                  receivable, trade
              
              
              178,774
              
              
              472,190Inventories
              
              
              (339,811
              )
              
              (181
              )Deposits
                  and prepaid expenses
              
              
              (13,958
              )
              
              142,223Other
                  receivables
              
              
              (9,721
              )
              
              294,503Accounts
                  payable
              
              
              59,947
              
              
              (1,533
              )Deposits
                  from customers
              
              
              -
              
              
              (13,959
              )Accrued
                  expenses and other payables
              
              
              905,949
              
              
              (19,652
              )Taxes
                  payables
              
              
              (1,620,586
              )
              
              828,507Net
                  cash provided by operating activities
              
              
              1,600,554
              
              
              3,292,836CASH
                  FLOWS FROM INVESTING ACTIVITIES:(Increase)
                  decrease in restricted cash
              
              
              (5,397
              )
              
              183,000Proceeds
                  from loans receivable
              
              
              264,953
              
              
              950,272Proceeds
                  from other investments
              
              
              -
              
              
              244,000Proceeds
                  from disposal of property, plant & equipment
              
              
              -
              
              
              862Cash
                  acquired from reverse acquisition
              
              
              -
              
              
              250Proceeds
                  from shareholders
              
              
              124,523
              
              
              633,539Proceeds
                  from related company
              
              
              594,448
              
              
              -Payments
                  to related company
              
              
              -
              
              
              (577,548
              )Purchase
                  of property, plant and equipment
              
              
              (2,098,659
              )
              
              (6,597,518
              )Net
                  cash used in investing activities
              
              
              (1,120,132
              )
              
              (5,163,143
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESAmount
                  due to shareholders
              
              
              (79,674
              )
              
              53,009Amount
                  due to related companies
              
              
              (9,292
              )
              
              13,054Non-interest
                  bearing loan from third party
              
              
              (364,906
              )
              
              421,104Proceeds
                  from government subsidies
              
              
              125,570
              
              
              62,000Capital
                  contribution in cash by stockholders
              
              
              -
              
              
              1,255,980Net
                  cash (used in) provided by financing activities
              
              
              (328,302
              )
              
              1,805,147EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              1,398
              
              
              54,052INCREASE
                  (DECREASE) IN CASH
              
              
              153,518
              
              
              (11,108
              )CASH,
                  beginning of year
              
              
              38,498
              
              
              49,606CASH,
                  end of year
              
              $
              192,016
              
              $
              38,498


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




F-6


SKYSTAR
        BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2006


**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 under the
        name “Hollywood Entertainment Network, Inc.” on September 24, 1998. On May 23,
        2000, the Company changed its name to “The Cyber Group Network Corporation”. On
        February 15, 2006, the Company further changed its name to “Skystar
        Bio-Pharmaceutical Company” to reflect its current business
        operations.
 
 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 the Company’s Series B
        preferred stock was issued to the stockholders of Skystar Cayman in exchange
        for
        100% of the common stock of Skystar Cayman. The 48,000,000 shares of Series
        B
        preferred stock issued to the stockholders of Skystar Cayman shall be
        convertible, in aggregate, into a number of shares of the Company’s common stock
        that would equal 89.5% of the outstanding shares of the Company’s common stock,
        if the shares were to be converted on the closing date of the stock exchange
        transaction which was November 7, 2005. In addition, Skystar Cayman paid
        $120,000 to Cyber, which was used to pay liabilities of Cyber.
 
 In
        connection with the stock exchange transaction, the Company appointed four
        new
        directors, Mr. Weibing Lu, Mr. Wei Wen, Mr. Xinya Zhang and Ms. Erna Gao,
        to the
        Company’s board of directors. Furthermore, concurrent with the closing of the
        stock exchange transaction, all of the Company’s former officers and a director,
        Mr. David Wassung resigned their positions and Mr. Weibing Lu was appointed
        the
        new chief executive officer, Ms. Erna Gao the new chief financial officer,
        and
        Mr. Wei Wen the new secretary.
 
 The
        stock
        exchange transaction has been accounted for as a reverse acquisition and
        recapitalization of the Company whereby Skystar Cayman is deemed to be the
        accounting acquirer (legal acquiree) and the Company to be the accounting
        acquiree (legal acquirer). The accompanying consolidated financial statements
        are in substance those of Skystar Cayman, with the assets and liabilities,
        and
        revenues and expenses, of the Company being included effective from the date
        of
        the stock exchange transaction. The Company is deemed to be a continuation
        of
        the business of Skystar Cayman. 2,000,000 shares of the Company’s preferred
        stock and 500,000,000 shares of its common stock outstanding prior to the
        stock
        exchange have been accounted for at their net book value at the time of the
        transaction.
  See
          report of independent registered public accounting firm
  F-7
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 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 of 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 variable interest entity (“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.
  See
          report of independent registered public accounting firm
  F-8
 
  SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
              31, 2006
 
 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 to the general
        credit of the Company.
 
 **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 subsidiary, Skystar Cayman, and its variable interest entity,
        Xian
        Tianxing. All significant inter-company transactions and balances between
        the
        Company, its subsidiary and VIE 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 and useful lives of fixed assets. 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.
  The
        Company’s financial instruments primarily consist of cash, accounts receivable,
        other receivables, accounts payable, accruals, other payables and short-term
        related party borrowings. 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 year ends.
   See
        report of independent registered public accounting firm




F-9
 
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2006


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 $69,610 and $62,000 as of December 31, 2006
        and
        December 31, 2005, respectively. The restricted cash was received from the
        PRC
        government subsidies and set aside for the specific usages (see Note 11).
        The
        restricted funds are kept as bank deposits. Restricted cash is classified
        as
        current assets as of December 31, 2006 and December 31, 2005, based on the
        expected period when the funds will be put into their specific
        usages.
 
 Accounts
        and other receivables
 
 Accounts
        and other receivables are recorded at net realizable value consisting of
        the
        carrying amount less an allowance for uncollectible accounts, as needed.
 
 The
        Company uses the aging method to estimate the valuation allowance for
        anticipated uncollectible receivable balances. Under the aging method, bad
        debt
        percentages determined by management based on historical experience as well
        as
        current economic climate are applied to customers’ balances categorized by the
        number of months the underlying invoices have remained outstanding. The
        valuation allowance balance is adjusted to the amount computed as a result
        of
        the aging method. When facts subsequently become available to indicate that
        the
        allowance provided requires an adjustment, then the adjustment will be
        classified as a change in estimate.
 
 See
          report of independent registered public accounting firm
  F-10
 
  SKYSTAR
              BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
              31, 2006
 
 Inventories
 
 Inventories
        are stated at the lower of cost, as determined on a first-in, first-out basis,
        or market. Costs of inventories include purchases and related costs incurred
        in
        bringing the products to their present location and condition.
 
 Property,
        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
                    yearsMachinery
                    and equipment
                
                10
                    yearsComputer,
                    office equipment and furniture
                
                5
                    yearsAutomobiles
                
                5
                    years
 
 The
        carrying value of property, plant and equipment is assessed annually and
        when
        factors indicating impairment is present, the carrying value of the fixed
        assets
        is reduced by the amount of the impairment. The Company determines the existence
        of such impairment by measuring the expected future cash flows (undiscounted
        and
        without interest charges) and comparing such amount to the net asset carrying
        value. An impairment loss, if exists, is measured as the amount by which
        the
        carrying amount of the asset exceeds the fair value of the asset.
 
 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.
 
 Land
        use rights
 
 The
        Company has recorded as land use rights 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 term of the land use rights
        of 50
        years.
   See
        report of independent registered public
        accounting firm
  F-11
 
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 Intangibles
        - 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.
 
 Impairment
        of Long-Lived Assets
 
 The
        Company periodically evaluates the carrying value of long-lived assets to
        be
        held and used 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 long-lived assets.
        SFAS No. 144 requires impairment losses to be recorded on long-lived assets
        used
        in operations when indicators of impairment are present and the undiscounted
        cash flows estimated to be generated by those assets are less than the assets’
carrying amounts. In that event, a loss is recognized based on the amount
        by
        which the carrying amount exceeds the fair market value of the long-lived
        assets. Loss on long-lived assets to be disposed of is determined in a similar
        manner, except that fair market values are reduced for the cost of disposal.
        Based on its review, the Company believes that, as of December 31, 2006,
        there
        were no significant impairments of its long-lived 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.
 
 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.
   See
        report of independent registered public
        accounting firm


F-12
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 *(**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.
 
 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 has adopted 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. There are
        no
        deferred tax amounts at December 31, 2006 and 2005.
 
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        affect on the Company’s financial statements.
 
 The
        charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantively enacted by the balance sheet date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probable that
        taxable profit will be available against which deductible temporary differences
        can be utilized.
 
 
 See
        report of independent registered public
        accounting firm
  F-13
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 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 has adopted 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 United States dollar (“U.S. dollars”) for financial reporting
        purposes. The Company’s subsidiary and VIE maintain their books and records in
        their functional currency, being the primary currency of the economic
        environment in which their operations are conducted.
  See
        report of independent registered public
        accounting firm
  F-14
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  In
        general, for consolidation purposes, the Company translates the subsidiary’s and
        VIE’s assets and liabilities into U.S. dollars using the applicable exchange
        rates prevailing at the balance sheet date, and the statement of income and
        cash
        flows are translated at average exchange rates during the reporting
        period. As a result, amounts related to assets and liabilities reported on
        the statement of cash flows will not necessarily agree with changes in the
        corresponding balances on the balance sheet. Equity accounts are translated
        at
        historical rates. Adjustments resulting from the translation of the subsidiary’s
        and VIE’s financial statements are recorded as accumulated other comprehensive
        income.
 
 This
        quotation of the exchange rates does not imply free convertibility of RMB
        to
        other foreign currencies. All foreign exchange transactions continue to take
        place either through the People's Bank of China or other banks authorized
        to buy
        and sell foreign currencies at the exchange rate quoted by the People's Bank
        of
        China. The rate of exchange quoted by the People’s Bank of China on December 31,
        2006 was US$1.00 = RMB7.8003. The weighted average translation rate of US$1.00
        =
        RMB7.9637 was applied to income statement accounts.
 
 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.
   See
        report of independent registered public
        accounting firm
 F-15
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 Recently
        issued accounting pronouncements
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 155, “Accounting for Certain Hybrid Financial Instruments”, which
        amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
        Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishments of Liabilities”. SFAS No. 155 provides
        guidance to simplify the accounting for certain hybrid instruments by permitting
        fair value remeasurement for any hybrid financial instrument that contains
        an
        embedded derivative, as well as clarifies that beneficial interests in
        securitized financial assets are subject to SFAS No. 133. In addition, SFAS
        No.
        155 eliminates a restriction on the passive derivative instruments that a
        qualifying special-purpose entity may hold under SFAS No. 140. SFAS No. 155
        is
        effective for all financial instruments acquired, issued or subject to a
        new
        basis occurring after the beginning of an entity’s first fiscal year that begins
        after September 15, 2006. We do not expect the adoption of SFAS 155 to have
        a material impact on the consolidated financial statements.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements” (SAB 108). SAB 108
        provides guidance on the consideration of the effects of prior year
        misstatements in quantifying current year misstatements for the purpose of
        a
        materiality assessment. SAB 108 establishes an approach that requires
        quantification of financial statement errors based on the effects of each
        on a
        company’s balance sheet and statement of operations and the related financial
        statement disclosures. Early application of the guidance in SAB 108 is
        encouraged in any report for an interim period of the first fiscal year ending
        after November 15, 2006. We do not expect the adoption of SAB 108 to have a
        material impact on our consolidated results of operations and financial
        condition.
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced
        guidance for using fair value to measure assets and liabilities. This standard
        also responds to investors’ requests for expanded information about the extent
        to which companies measure assets and liabilities at fair value, the information
        used to measure fair value, and the effect of fair value measurements on
        earnings. The standard applies whenever other standards require (or permit)
        assets or liabilities to be measured at fair value. The standard does not
        expand
        the use of fair value in any new circumstances. SFAS 157 is effective for
        financial statements issued for fiscal years beginning after November 12,
        2007, and interim periods within those fiscal years. Early adoption is
        permitted. We are currently evaluating whether the adoption of SFAS157 will
        have
        a material effect on our consolidated results of operations and financial
        condition.
   See
        report of independent registered public
        accounting firm
  F-16
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  In
        February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
        Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
        Option for Financial Assets and Financials Liabilities — Including an Amendment
        of FASB Statement No. 115. This standard permits measurement of certain
        financial assets and financial liabilities at fair value. If the fair value
        option is elected, the unrealized gains and losses are reported in earnings
        at
        each reporting date. Generally, the fair value option may be elected on an
        instrument-by-instrument basis, as long as it is applied to the instrument
        in
        its entirety. The fair value option election is irrevocable, unless a new
        election date occurs. SFAS No. 159 requires prospective application and also
        establishes certain additional presentation and disclosure requirements.
        The
        standard is effective as of the beginning of the fiscal year that begins
        after
        November 15, 2007. The Company is currently evaluating the provisions
        of SFAS No. 159 to determine the potential impact, if any, the adoption will
        have on the Company’s financial statements.
 
 **Note
        3 -**  **CONCENTRATIONS
        AND CREDIT RISK**
 
 Financial
        instruments that potentially expose the Company to concentrations of credit
        risk
        consist of cash and accounts receivable and other receivables as of December
        31,
        2006 and December 31, 2005. The Company performs ongoing evaluations of its
        cash
        position and credit evaluations to ensure collections and minimize
        losses.
 
 As
        of
        December 31, 2006 and December 31, 2005, the Company’s bank deposits were all
        placed with banks in the PRC where there is currently no rule or regulation
        in
        place for obligatory insurance to cover bank deposits in the event of bank
        failure.
 
 For
        the
        period ended December 31, 2006 and year ended December 31, 2005, all of the
        Company’s sales arose in the PRC. In addition, all accounts receivable as at
        December 31, 2006 and December 31, 2005 also arose in the PRC.
 
 The
        Company’s three largest customers accounted for approximately 1.64%, of the
        Company’s total revenues for year ended December 31, 2006, while the Company’s
        three largest customers accounted for 2.2% of the Company’s total revenues for
        the year ended December 31, 2005.
 
 The
        Company’s three largest vendors accounted for approximately 53.76% of the
        Company’s total purchases for the year ended December 31, 2006, while the
        Company’s three largest vendors accounted for 57.27% of the Company’s total
        purchases for the year ended December 31, 2005.
   See
        report of independent registered public
        accounting firm
  F-17
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  The
        Company’s three major products accounted for approximately 29.5% of the
        Company’s total revenues for year ended December 31, 2006, while the Company’s
        three major products accounted for 29.6% of the Company’s total revenues for the
        year ended December 31, 2005.
 
 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.
 
 **Note
        4 - RESTRICTED CASH**
 
 Restricted
        cash consists of the following as of December 31:
 2006
                
                2005Funds
                    received from PRC government subsidies
                
                $
                69,610
                
                $
                62,000(see
                    Note 10)
 
 **Note
        5 - INVENTORIES**
 
 Inventories
        consist of the following at December 31, 2006 and 2005, respectively:
 2006
                
                2005Raw
                    materials
                
                $
                190,926
                
                $
                85,563Packing
                    materials
                
                
                97,002
                
                
                42,552Finished
                    goods
                
                
                232,242
                
                
                47,172Low
                    value consumables
                
                
                8,396
                
                
                400Total
                
                $
                528,566
                
                $
                175,687
  **Note
        6 - LOANS RECEIVABLE**
 
 The
        loans
        receivable of $8,558 and $261,640 as of December 31, 2006 and December 31,
        2005
        respectively are unsecured, non-interest bearing and for terms less than
        one
        year. 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.
   See
        report of independent registered public
        accounting firm
  F-18
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  **Note
        7 - PLANT AND EQUIPMENT, NET**
 
 Plant
        and
        equipment consists of the following at December 31, 2006 and 2005:
 2006
                
                2005Buildings
                    and improvements
                
                $
                351,425
                
                $
                323,591Plant
                    and machinery
                
                
                270,621
                
                
                221,475Office
                    equipment
                
                
                140,591
                
                
                126,540Vehicles
                
                
                128,134
                
                
                110,972Construction
                    in progress
                
                
                10,326,391
                
                
                7,998,171Total
                
                
                11,217,162
                
                
                8,780,749Less:
                    accumulated depreciation
                
                
                (306,214
                )
                
                (216,389
                )Plant
                    and equipment, net
                
                $
                10,910,948
                
                $
                8,564,360
  Construction
        in progress included above was the construction of a production base which
        operations will meet the Good Manufacturing Practices Standard (“GMP Standard”).
        The construction work commenced in late 2004 and completed in February, 2007.
        The Company obtained certificate of GMP on January 8, 2007 and Manufacture
        permit on February 7, 2007. The new factory has been in the process of test
        production since the beginning of 2007. The Company
        anticipates that the new factory can generate sufficient cash flows and
        therefore management has concluded there is no impairment loss on the
        construction in progress.
 
 The
        depreciation expense was $ 84,343
        and $92,941 for the years ended December 31, 2006 and 2005, respectively.
 
 In
        2005,
        the Company pledged its leasehold office building at net book value of $251,308
        at December 31, 2005 to an unrelated third party as the security against
        a
        non-interest bearing loan (see Note 17c). The security was released in
        2006.
 
 **Note
        8 - INTANGIBLES**
 
 The
        Company has recorded as land use rights the costs paid to acquire a long-term
        interest to utilize the land underlying the Company’s facilities. This type of
        arrangement is common for the use of land in the PRC. The land use rights
        are
        being amortized using the straight-line method over the term of the land
        use
        rights of 50 years. The total cost of the land use rights as of December
        31,
        2006 and December 31, 2005 amounted to $311,212 and $307,421, net of accumulated
        amortization of $19,865 and $12,550, respectively
   See
        report of independent registered public
        accounting firm
  F-19
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 Intangibles
        consist of the following as of December 31:
 2006
                
                2005Land
                    use rights
                
                $
                331,077
                
                $
                319,971Technological
                    know-how
                
                
                128,100
                
                
                123,948Total
                
                
                459,177
                
                
                443,919Less:
                    accumulated amortization
                
                
                (122,325
                )
                
                (86,898
                )Intangible
                    assets, net
                
                $
                336,852
                
                $
                357,021
  The
        amortization expense for intangibles was $35,427 and $26,155 for the years
        ended
        December 31, 2006 and 2005, respectively.
 
 **Note
        9 - INTEREST-BEARING SHORT-TERM LOAN**
 
 The
        short-term loan of $38,460 and $37,200 as of December 31, 2006 and 2005,
        respectively, was for a term of one year from August 10, 2005 to August10,
        2006,
        is secured by a guarantee given by a third party, and bears interest at 0.8835%
        per month. During the third quarter, the short term loan was renewed for
        a term
        of one year from August 10, 2006 to August10, 2007, is secured by a guarantee
        given by a third party and bears interest at 0.92625% per month.
 
 Interest
        expense for the years ended December 31, 2006 and 2005 amounted to $4,135
        and
        $3,982, respectively.
 
 **Note
        10 - DEFERRED GOVERNMENT GRANT**
 
 The
        amounts represent subsidies for GMP projects granted by the PRC government.
        A
        subsidy in the amount of $641,000 was approved by the PRC government to be
        granted to the Company for the purpose of constructing a new factory which
        operations will meet the GMP Standard. In 2003, $516,500 was received by
        the
        Company and the remaining $124,500 was received in the first quarter of 2006.
        According to the PRC’s government regulations for these types of grants, the
        funds being granted may be treated as capital contributed by the company
        appointed by the PRC government (“contributing company”) or as a loan from such
        company, which the Company will be required to repay. However, no agreement
        has
        been reached with the contributing company regarding the final treatment
        of this
        subsidy.
 
  See
        report of independent registered public
        accounting firm


F-20
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 Also
        in
        2003, another subsidy of $256,400 was received for financing the Company’s
        research and development activities. In 2006, the Company applied and utilized
        $186,644 in paying for the construction of the new plant facility. Because
        the
        Company expects that the final arrangement with the Government may not be
        confirmed within the year 2006.
 
 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. Since
        the final treatment of these funds may not be confirmed in 2006.
 
 **Note
        11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**
 
 Income
        taxes paid for the year ended December 31, 2006 and 2005 amount to $853,656
        and
        $0 respectively.
 
 Interest
        paid amount to $4,121 and $8,815 for the year ended December 31, 2006 and
        2005,
        respectively.
 
 Non
        cash
        financing transactions included 789,350 shares of common stock issued for
        future
        services to independent consultants , see note 14.
  Additionally
        in 2005, a shareholder contributed
        leasehold improvements to $268,620. This was reported as contributed
        capital.
 
 **Note
        12 - CAPITAL TRANSACTIONS**
 
 On
        November 7, 2005, the Company completed a stock exchange transaction with
        the
        stockholders of Skystar Cayman, as more fully described in Note 1.
 
 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.
 
 On
        February 15, 2006, the Company also affected 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.
   See
        report of independent registered public
        accounting firm
 F-21
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 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 14.
  In
        November 2006, the Company issued a total of 139,350 shares of the Company’s
        common stock to consultants and non-executive director, as more fully described
        in Note 14.
 
 In
        November 2006, the Company issued another 50,000 shares of the Company’s common
        stock to a consultant whereas the shares were fully transferred in January
        2007
        as more fully described in Note 14.
 
 **Note
        13 - STATUTORY RESERVES**
 
 Statutory
        reserves represent restricted retained earnings
  Based
        on
        the legal formation of the entities, Tianxing is required to set aside 10%
        of
        its net income as reported in its statutory accounts on an annual basis to
        the
        Statutory Surplus Reserve Fund. Once the total Statutory Surplus Reserve
        reaches
        50% of the registered capital of the respective subsidiaries, further
        appropriations are discretionary. The Statutory Surplus Reserve can be used
        to
        increase the registered capital and eliminate future losses of the respective
        companies under PRC GAAP. The Company’s Statutory Surplus Reserve is not
        distributable to shareholders except in the event of liquidation.
 
 Before
        January 1, 2006, Tianxing is 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.
        If
        the PRC subsidiaries provided the Statutory Surplus Welfare Fund, such amount
        shall be determined at the discretion of its board of directors.
 
 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.
 
  See
        report of independent registered public
        accounting firm
 F-22
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 
 Appropriations
        to the above statutory reserves are accounted for as a transfer from retained
        earnings to statutory reserves. During the years ended December 31, 2006,
        2005, the Company made total appropriations to these statutory reserves of
        $415,164, and $201,064, 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
        14 - 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 789,350 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.
 
 On
        October 24, 2006, the Company entered into three-month consulting agreement
        with
        another 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. These shares were issued pursuant to the 2006 consultant
        stock plan. The fair market value of the Company's common stock as of October
        24, 2006 was $1.75 per share.
   See
        report of independent registered public
        accounting firm
  F-23
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  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. These
        shares were issued pursuant to the 2006 consultant stock plan. 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. These shares were
        issued
        pursuant to the 2006 consultant stock plan. 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. These shares were issued
        pursuant to the 2006 consultant stock plan. 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. These shares were
        issued
        pursuant to the 2006 consultant stock plan. The fair market value of the
        Company's common stock as of December 11, 2006 was $1.75 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, 2006 ,
        the
        Company charged $ 1,202,235 to
        expense associated with consulting agreements and recorded deferred consulting
        fees of $ 705,877
        a t December
        31, 2006 .
   See
        report of independent registered public
        accounting firm
  F-24
 
  SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  The
        deferred consulting fees will be charged to expenses as follows:
 
 Year
        ending December 31
 Amount2007
                
                $
                643,1482008
                
                
                62,729Total
                
                $
                705,877
  
  **Note
          15 - TAXES**
  Income
        taxes
 
 The
        Company is registered in the State of Nevada whereas its subsidiary, Skystar
        is
        a tax exempted company incorporated in the Cayman Islands and conducts all
        of
        its business through its PRC VIE, Xian Tianxing.
 
 Xian
        Tianxing is 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%.
 
 The
        provision for taxes on earnings consisted of:
 2006
                
                2005Current
                    PRC income tax expenseenterprise
                    income tax
                
                $
                494,951
                
                $
                238,058
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate as of December 31:
 
 2006
                
                2005U.S.
                    Statutory rate
                
                
                34.0
                %
                
                34.0
                %Foreign
                    income not recognized in USA
                
                
                (34.0
                )
                
                (34.0
                )China
                    income taxes
                
                
                15.0
                
                
                15.0Total
                    provision for income taxes
                
                
                15.0
                %
                
                15.0
                %
  The
        estimated tax savings due to the reduced tax rate for the years ending December
        31, 2006 and, 2005 amounted to $593,941and $285,669, respectively. The net
        effect on earnings per share if the income tax had been applied would decrease
        earnings per share for December 31, 2006 and 2005 to $0.05 and $0.23,
        respectively
 Taxes
          payable
 
 Taxes
          payable at December 31 consisted of the following:
 
 2006
                
                2005VAT
                    tax payable
                
                $
                103,489
                
                $
                1,224,455Income
                    tax payable
                
                
                103,290
                
                
                454,126Others
                
                
                11,452
                
                
                132,824Total
                    taxes payable
                
                $
                218,231
                
                $
                1,811,405
  See
        report of independent registered public
        accounting firm
  F-25
 
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
  Skystar
        Bio-Pharmaceutical Company was incorporated in the United States and has
        incurred net operating loss for income tax purpose for 2006. The net operating
        loss carry forwards for United States income tax purposes amounted to $1,635,532
        which any be available to reduce future years’ taxable income. These carry
        forwards will expire, if not utilized, through 2026. 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, 2006. The valuation allowance at December
        31, 2006 was $556,081. Management will review this valuation allowance
        periodically and make adjustment as warranted.
  Beginning
          January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law will replace
          the existing laws for Domestic Enterprises (“DES”) and Foreign Invested
          Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate
          currently applicable to both DES and FIEs. The Company is currently evaluating
          the effect of the new EIT law will have on its financial position.
 **Note
        16 - EARNINGS PER SHARE**
 
 Basic
        earnings per share (EPS) for the years ended December 31, 2006 and 2005 were
        determined by dividing net income for the years by the weighted average number
        of common shares outstanding. Diluted earnings per share for the years ended
        December 31, 2006 and 2005 included the effect of 48,000,000 shares of the
        Company’s series “B” convertible preferred stock, which were issued pursuant to
        the stock exchange transaction on November 7, 2005, as fully described in
        Note
        1, and conferred with the right of conversion into common shares that equal
        89.5% of the total issued and outstanding common stock, as more fully described
        in Note 12. 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)
        reverse stock split effective on February 15, 2006 had occurred as of the
        beginning of the earliest period presented.
  The
          Company has retroactively adjusted the weighted average number of preferred
          shares outstanding by deeming that the one-for-ten (1:10) reverse stock
          split
          effective on Februray 15, 2006 had occurred as of the beginning of the
          earliest
          period presented.
 The
        reconciliations of the denominators of the basic and diluted EPS computations
        are as follows:
 2006
                
                2005Net
                    income for basic and diluted earnings per share
                
                $
                1,175,142
                
                $
                1,467,518Weighted
                    average shares used in basic computation
                
                
                11,144,153
                
                
                1,260,651Diluted
                    effect of warrants and convertible note
                
                
                1,354,233
                
                
                9,674,858Weighted
                    average shares used in diluted computation
                
                
                12,498,386
                
                
                10,935,509Earnings
                    per shareBasic
                
                $
                0.11
                
                $
                1.16Diluted
                
                $
                0.09
                
                $
                0.13
  **Note
        17 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS**
 
 (a)  *Related
        party receivables and payables*
 Amounts
        receivable from and payable to related parties are summarized as
        follows:
   See
        report of independent registered public
        accounting firm
  F-26
 
 SKYSTAR
            BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
            31, 2006
 2006
                
                2005Amounts
                    due from shareholders:Mr.
                    Wei Wen, also a director of the Company
                
                
                -
                
                
                21,503Mr.
                    Weibing Lu, also a director of the Company
                
                
                -
                
                
                101,463Total
                
                $
                -
                
                $
                122,966Amount
                    due to shareholders:Ms.
                    Aixia Wang
                
                
                -
                
                
                8,618Mr.
                    Wucai Ji
                
                
                -
                
                
                63,860Mr.
                    Yuantai Wang
                
                
                -
                
                
                6,200Total
                
                $
                -
                
                $
                78,678Amount
                    due from a related companyShaanxi
                    Xingji Electronic Sci-Tech Company Limited ("Shaanxi Xingji")
                    (see (b) (i)
                    (ii) (iii)
                
                $
                -
                
                $
                587,016Amount
                    due to a related company:TainXing
                    digital-a company owned by a director
                
                $
                16,025
                
                $
                24,676
  (b)  *Amount
        due from Shaanxi Xingji*
  (i)  The
        wife
        of a shareholder and director, Mr. Weibing Lu, is the shareholder of Shaanxi
        Xingji.
 
 (ii)  The
        amount of $587,016 as of December 31, 2005 due from Shaanxi Xingji was
        non-interest bearing, unsecured and has no fixed repayment date. In 2006,
        Shaanxi Xingji repaid the amount in full in 2006.
 
 (iii)  The
        amount of $24,676 due to Shaanxi Xingji with interest bearing at 0.8835%
        per
        month as of December 31, 2005 was fully repaid in 2006 with funds provided
        by a
        third party.
 
 (c)  *Security
        against bank borrowings of a related company*
 
 The
        Company has pledged a leasehold improvement office building with net book
        value
        of $251,308 at December 31, 2005 to a bank as the security against the bank
        borrowings of a related party. The security was released in 2006.
 
 (d)  *Issuance
        common stock to a non-executive director*
 
 The
        Company issued 70,000 shares of common stock as salary to a non-executive
        director on November 15, 2006.
   See
        report of independent registered public accounting firm
  F-27
  SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2006
 **Note
        18 - COMMITMENTS AND CONTINGENCIES**
 
 (a)  *Lease
        commitments*
 
 The
        Company recognizes lease expense on a straight line basis over the term of
        the
        lease in accordance to SFAS. 13“Accounting for leases.” The Company has entered
        into a tenancy agreement for the lease of factory premises for a period of
        ten
        years from October 1, 2004 to September 30, 2014 with an annual rent of $10,767,
        which is subject to a 10% increase every four subsequent years. The Company’s
        commitments for minimum rental payments under this lease for the next five
        years
        and thereafter are as follows:
 Year
                    ending December 31:
                
                2006
                
                20052007
                
                $
                10,836
                
                $
                10,4932008
                
                
                11,107
                
                
                10,4932009
                
                
                11,920
                
                
                11,5412010
                
                
                11,920
                
                
                11,7232011
                
                
                11,920
                
                
                11,723Thereafter
                
                
                35,163
                
                
                42,38392,866
                
                
                98,356
  Rent
        expense for the year ended December 31, 2006 and 2005 amounted to $11,545
        and
        $10,411, respectively.
  (b)  *Legal
        proceedings*
  The
        Company has 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.
  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 )*Capital commitments*
 
 We
          had
          capital expenditure commitments outstanding as of December 31, 2006 in
          the
          amount of $1,372,787 in relation to the construction of a new plant which
          will
          meet the Good Manufacturing Standard and $259,511 in relation to the purchase
          of
          machinery.
 
 ( d)*Bank guarantee*
 
 The
          Company has given a guarantee for the bank borrowing of a third party to
          the
          extent of $32,025 as of December 31, 2006.
   See
        report of independent registered public
        accounting firm
  F-28
 SKYSTAR
          BIO-PHARMACEUTICAL COMPANY AND SUBSIDARY
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2006
 (e) *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 had
        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 need to be vacated
        as
        illegitimate ownership. Management believes that this possibility while present
        is very remote. As a result, no provision has been made in the financial
        statements for this potential occurrence.
 
 **Note
        19 - SUBSEQUENT EVENT**
 
 On
        February 27, 2007, the Company entered into a Securities Purchase Agreement
        (the
“Agreement”), with several institutional and accredited investors (the
“Purhcasers”) pursuant to which the Company sold to the Purchasers $4.075
        million in aggregate principal amount of 8% convertible debentures due February
        28, 2009 (the “Debentures”), and warrants to purchase 4,075,000 shares of the
        common stock of the Company (the “Warrants”), in a private placement pursuant to
        Regulation D under the Securities Act of 1993 (the “Transaction”). Pursuant to a
        Registration Rights Agreement, the Company agreed to register all shares
        of
        common stock underlying the conversion of the Debentures and exercise of
        the
        Warrants in a resale registration statement (the “Registration Statement”). The
        transaction closed on February 27, 2007. Gross proceeds from the sale to
        the
        Company were $4.075 million, of which $285,250 was paid to Pacific Ridge
        Capital
        who served as placement agent for the transaction and $52,500 were paid to
        counsel for the Purchaser in connection with the transaction. The Company
        also
        issued to the Placement Agent as a warrant to purchase an aggregate of 570,500
        shares with an exercise price of $1.00 per share and will have an expiration
        date of February 28, 2012.






See report of independent registered public accounting
      firm




F-29




**Item
                8.**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.**




As
      reported in a Form 8-K Current Report filed with the Commission on January
      19,
      2006 and as amended in a Form 8-K/A filed on January 27, 2006, the Company
      changed its independent accountants from Weinberg & Company, P.A. to GC
      Alliance Limited, effective January 18, 2006. Thereafter, as reported in a
      Form 8-K Current Report filed with the Commission on February 27, 2006 and
      amended in a Form 8-K/A filed on March 3, 2006, the Company then changed its
      independent accountants from GC Alliance Limited to Moore Stephens Wurth Frazer
      and Torbet LLP, effective February 21, 2006. Thereafter, as reported in a Form
      8-K Current Report filed with the Commission on March 6, 2007 and amended in
      a
      Form 8-K/A filed on March 8, 2007, the Company then changed its independent
      accountants from Moore Stephens Wurth Frazer and Torbet LLP to Schwartz Levitsky
      Feldman LLP, Chartered Accountants, effective March 6, 2007.  Thereafter,
      as reported in a Form 8-K Current Report filed with the Commission on April
      30,
      2007, the Company changed its independent accountants from Schwartz Levitsky
      Feldman LLP, Chartered Accountants to Moore Stephens Wurth Frazer and Torbet
      LLP, effective April 26, 2007.




**Item
                8A.**
            **Controls
                and Procedures.**





As
      of the
      end of the period covered by this report, we carried out an evaluation of the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act).
      This evaluation was carried out under the supervision and with the participation
      of our management, principally our Chief Executive Officer and Chief Financial
      Officer. Based upon this evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that our disclosure controls and procedures
      were effective as of the end of the period covered by this report to ensure
      that
      information required to be disclosed by us in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in Securities and Exchange Commission rules and
      forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial
      Officer.





During
      the last fiscal quarter to which this report relates, there were no changes
      in
      the Company’s internal controls or other factors that could significantly affect
      these controls subsequent to the date of their evaluation and there were no
      corrective actions with regard to deficiencies and material weaknesses.





**Item
                8B.**
            **Other
                Information.**





None.





32




**PART
      III**





**Item
                9.**
            **Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act.**




**DIRECTORS
      AND EXECUTIVE OFFICERS**





The
      following tables set forth information regarding the Company’s current executive
      officers and directors of the Company. The Board of Directors is comprised
      of
      only one class. Except as otherwise described below, all of the directors will
      serve until the next annual meeting of stockholders or until their successors
      are elected and qualified, or until their earlier death, retirement, resignation
      or removal. Also provided herein are brief descriptions of the business
      experience of each director and executive officer during the past five years
      and
      an indication of directorships held by each director in other companies subject
      to the reporting requirements under the federal securities laws.





**Name**
            
            **Age**
            
            **Position**
            
            **Director
                Since**Weibing
                Lu, Chief Executive Officer
            
            44
            
            Chief
                Executive Officer and
              Chairman
                of the Board of
              Directors
            
            FeFebruary
                2006Erna
                Gao, Chief Financial Officer
            
            50
            
            Chief
                Financial Officer and
              Director
            
            February
                2006Wei
                Wen, Secretary
            
            41
            
            Secretary
                and Director
            
            February
                2006Xinya
                Zhang
            
            58
            
            Director
            
            February
                2006R.
                Scott Cramer
            
            43
            
            Director
            
            October
                2001




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





Mr.
      Weibing Lu, Chief Executive Officer, is 44 years old. Mr. 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 of 1997, he set up Xian Tianxing Science and Technology
      Development Co., Ltd. In December of 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, Chief Financial Officer, is 50 years old. Ms. 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 2001 to 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.





33





***Wei
      Wen, Secretary and Director***





Mr.
      Wei
      Wen, Director, is 41 years old. Mr. 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 & 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. in 1997. After the reorganization of the
      company in December of 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, Director, is 58 years old. Mr. 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 of 1997, he joined Xian Tianxing Science and Technology
      Development Co., Ltd. and was appointed as the company’s Vice General Manager.
      Since the company’s reorganization in December of 2003, Mr. Zhang has served as
      Vice General Manager of Xian Tianxing Bio-Pharmaceutical Co., Inc.





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





Mr.
      R.
      Scott Cramer, Director, is 43 years old. Mr. Cramer was previously the Chairman,
      Chief Executive Officer and Chief Financial Officer of The Cyber Group and
      remains on our Board of Directors. Mr. Cramer is currently the President of
      Cramer & Associates, a firm specializing in retirement management, estate
      planning and investments. Mr. Cramer has held this position for many years
      and
      has built a solid standing in the investment field.





**Family
      Relationships**





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





**Involvement
      in Certain Legal Proceedings**





There
      are
      no orders, judgments, or decrees of any governmental agency or administrator,
      or
      of any court of competent jurisdiction, revoking or suspending for cause any
      license, permit or other authority to engage in the securities business or
      in
      the sale of a particular security or temporarily or permanently restraining
      any
      of our officers or directors from engaging in or continuing any conduct,
      practice or employment in connection with the purchase or sale of securities,
      or
      convicting such person of any felony or misdemeanor involving a security, or
      any
      aspect of the securities business or of theft or of any felony. Nor are any
      of
      the officers or directors of any corporation or entity affiliated with us so
      enjoined.





**Code
      of Ethics**


For
        the
        year ended December 31, 2006, we did not have a formal written code of ethics
        applicable to our principal executive officer and principal financial officer,
        because the board of directors has not determined it to be immediately necessary
        from a management perspective to adopt a formal code at this time. However,
        we
        plan to adopt and approve a formal written code of ethics in the near
        future.




**Audit
      Committee and Audit Committee Financial Expert**





The
      Company does not have a separately designated audit committee of our Board,
      as
      it is not required to, and the functions customarily delegated to this committee
      are performed by the full Board. As the Company does not maintain an audit
      committee, it does not have an audit committee “financial expert” within the
      meaning of Item 407(d)(5) of Regulation SB.




34




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





Section
      16(a) of the Exchange Act requires the Company’s officers, directors, and
      persons who beneficially own more than 10% of the Common Stock to file reports
      of ownership and changes in ownership with the Commission. These reporting
      persons also are required to furnish the Company with copies of all Section
      16(a) forms they file. Based solely on the Company’s review of these reports or
      written representations from certain reporting persons, during the fiscal year
      ended December 31, 2004, and during the current fiscal year, the Company
      believes that all filing requirements applicable to the Company’s officers,
      directors, greater-than-ten-percent beneficial owners and other persons subject
      to Section 16(a) of the Exchange Act were met, except that director R. Scott
      Cramer, and former directors Steve Lowe and David Wassung were not able to
      file
      their Form 3 within 10 days after each of them was elected or appointed an
      officer and/or director of the Company nor were they able to file Form 4’s or
      Form 5’s in connection with transactions that occurred in the last fiscal year
      and/or in the current fiscal year.




**Item
                10.**
            **Executive
                Compensation.**




**SUMMARY
      COMPENSATION TABLE**





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,
            
            
            2006
            
            
            7,091
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            7,091current
                CEO (1)
            
            
            2005
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-R.
                Scott Cramer,
            
            
            2006
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/Aformer
                CEO and CFO (2)
            
            
            2005
            
            
            60,000
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            60,000





(1)
            In
                connection with the Share Exchange Transaction (described in Item
                1 above)
                (the “Transaction”), Mr. Lu became the Company’s Chief Executive Officer
                on November 7, 2005, but he did not receive any compensation in 2005.





(2)
            In
                connection with the Transaction, Mr. Cramer resigned as the Company’s
                Chief Executive Officer and Chief Financial Officer on November 7,
                2005
                but remains as a Company director.





35




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





OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END**OPTION
                AWARD**
            
            **STOCK
                AWARD**Name
            
            Number
                of Securities Underlying Unexercised Options
              (Exercisable)
              (#)
            
            Number
                of Securities Underlying Unexercised Options
              (Unexercisable)
              (#)
            
            Equity
                Incentive Plan Awards:Number
                of Securities Underlying Unexercised Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Exercise Date
            
            Number
                of Shares or Units of Stock That Have Not Vested(#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested($)
            
            Equity
                Incentive Plan Awards
              Number
                of Unearned Shares, Units or Other Rights That Have Not
                Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not VestedWeibing
                Lu
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-





**Employment
      Agreements, Termination of Employment and Change-in-Control Arrangements**





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.





**Compensation
      of Directors**





During
      the most recent fiscal year, our directors were compensated as
      follows:




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)
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Erna
                Gao (1)
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Wei
                Wen (1)
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Xinya
                Zhang (1)
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-R.
                Scott Cramer (2)
            
            
            2006
            
            
            -0-
            
            
            126,000
            (4)
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            126,000Steve
                Lowe (2) (3)
            
            
            2006
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-




36




(1)
            In
                connection with theShare
                Exchange Transaction (described in Item 1 above) (the “Transaction”),these
                persons became directors of the Company on November 7, 2005. After
                the
                change in control that occurred as a result of the Transaction, we
                do not
                have any compensation arrangements with our
                directors.





(2)
            Prior
                to the closing of the Transaction, the Company issued common stock
                to
                these persons as compensation for all accrued amounts owed to them
                as
                directors and/or officers.After
                the change in control that occurred as a result of the Transaction,
                we do
                not have any compensation arrangements with our
                directors.





(3)
            Steve
                Lowe resigned from his position as a director of the Company effective
                at
                the close of business on October 6, 2006. Mr. Lowe’s resignation was not
                the result of any disagreement with or dispute over issues involving
                the
                management of the Company.





(4)
            On
                November 15, 2006, the Company issued 70,000 shares of common stock
                to the
                Cramer Family Trust as salary to R. Scott Cramer. These shares were
                issued
                pursuant to the 2006 consultant stock plan. The fair market value
                of the
                Company's common stock as of November 15, 2006 was $1.8 per
                share.




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




The
      following table sets forth, as of March 21, 2007, certain information regarding
      the ownership of the Company’s capital stock by the following persons on such
      date: each of the directors and executive officers, each person who is known
      to
      be a beneficial owner of more than 5% of any class of our voting stock, and
      all
      of our officers and directors as a group. Unless otherwise indicated below,
      to
      our knowledge, all persons listed below had sole voting and investing power
      with
      respect to their shares of capital stock, except to the extent authority was
      shared by spouses under applicable community property laws.





Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission and generally includes voting or investment power with
      respect to securities. Shares of our common stock subject to options, warrants
      or convertible securities exercisable or convertible within 60 days of March
      21,
      2007 were 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, and was
      based on 12,795,549 shares of the Common Stock issued and outstanding on a
      fully
      diluted basis, as of March 21, 2007. ******




**Title
                of**
              **Class**
            
            **Name
                and Address**
              **of**
              **Beneficial
                Owners****(1)**
            
            **Amount**
              **of
                Beneficial Ownership**
            
            **Percent**
              **of**
              **Class****(2)**Common
                Stock
            
            Upform
                Group Limited (3)
            
            5,065,415
            
            39.59%Common
                Stock
            
            Clever
                Mind International Limited (4)
            
            2,176,953
            
            17.01%Common
                Stock
            
            Weibing
                Lu, Director and Chief Executive Officer (3)
            
            5,065,415
            
            39.59%Common
                Stock
            
            Wei
                Wen, Director (4)
            
            2,176,953
            
            17.01%Common
                Stock
            
            Xinya
                Zhang, Director (3)
            
            5,065,415
            
            39.59%Common
                Stock
            
            Erna
                Gao, Director and Chief Financial Officer
            
            -0-
            
            0%Common
                Stock
            
            R.
                Scott Cramer, Director (5)
            
            652,231
            
            5.10%All
                officers and directors as a group(5
                total)
            
            7,894,598
            
            61.70%





(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.




37




(2)
            The
                number of outstanding shares of common stock of Skystar is based
                upon
                shares 12,795,549 outstanding as March 21, 2007. Figures may vary
                slightly
                due to rounding.





(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 shareholder 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)
            Clever
                Mind International Limited’s (“Clever Mind”) address is: Sea Meadow House,
                Blackburne Highway, P.O. Box 116, Road Town, Tortola, British Virgin
                Islands. Wei 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. Thus, the
                number of shares reported herein as beneficially owned by Mr. Wen
                includes
                the shares held by Clever Mind.





(5)
            R.
                Scott Cramer address is: 1012 Lewis Dr., Winter Park, FL 32789. 
                Includes 578,438 shares held by the Cramer Family Trust of which
                Mr.
                Cramer is the sole trustee and sole primary
                beneficiary.





**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**




**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
            
            
            2,693,100
            (1)TOTAL
            
            
            0
            
            
            0
            
            
            2,693,100





(1)
            As
                of December 31, 2006, the Company had the following two (2) equity
                compensation plans in effect: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 by either 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,
                2006,
                there are 2,093,452 shares of our common stock remaining available
                for
                future issuance under the 2002 Plan.




38




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, 2006, there are 599,648
                shares of our common stock remaining available for future issuance
                under
                the 2002 Plan.





**Item
                12.**
            **Certain
                Relationships and Related Transactions, and Director
                Independence**





**RELATED
      TRANSACTIONS**





Set
      forth
      below are the related party transactions between Xian Tianxing’s shareholders,
      officers and/or directors, and Xian Tianxing, with whom Skystar has contractual
      arrangements which give Skystar the ability to substantially influence Xian
      Tianxing’s daily operations and financial affairs, appoint its senior executives
      and approve all matters requiring shareholder approval.





(a)
            Related
                party receivables and payables





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


2006
              
              2005Amounts
                  due from shareholders:Mr.
                  Wei Wen, also a director of the Company
              
              $
              -
              
              $
              21,503Mr.
                  Weibing Lu, also a director of the Company
              
              
              -
              
              
              101,463Total
              
              
              
              
              $
              $122,966Amounts
                  due to shareholders:Ms.
                  Aixia Wang
              
              $
              -
              
              $
              8,618Mr.
                  Wucai Ji
              
              
              -
              
              
              63,860Mr.
                  Yuantai Wang
              
              
              -
              
              
              6,200Total
              
              $
              -
              
              $
              78,678Amount
                  due from a related companyShaanxi
                  Xingji Electronic Sci-Tech Company Limited(“Shaanxi Xingji”) (see (b)(i) to (ii) below)
              
              $
              -
              
              $
              587,016Amount
                  due to a related company:Tian
                  Xing Digital - a company owned by a director
              
              $
              16,013
              
              $
              24,676
  39





Balances
      with shareholders and related companies represent advances to or loans from
      the
      respective shareholders or related companies. These balances, except Shaanxi
      Xingji (see (b)(ii) below), are interest free and unsecured and have no fixed
      repayment date. It is expected that the balances will be received or repaid
      within one year.





(b)
            Amount
                due from/to Shaanxi Xingji:




(i)
            The
                wife of a shareholder and director, Mr. Weibing Lu, is the shareholder
                of
                Shaanxi Xingji.





(ii)
            The
                amount of $587,016 as of December 31, 2005 due from Shaanxi Xingli
                was non-interest bearing, unsecured and has no fixed repayment
                date. Shaanxi Xingli repaid the amount in full in
                2006.(iii)
            The
                amount of $24,676 due to Shaanxi Xingli with interest bearing at
                0.8835%
                per month as of December 31, 2005 was fully repaid in 2006 with funds
                provided by a third party.





(c)
            Security
                against bank borrowings of a related
                company





The
      Company had pledged a leasehold improvement office building with net book value
      of $251,308 at December 31, 2005 to a bank as the security against the bank
      borrowings of Shaanxi Xingli, which from time to time provided Xian Tianxing
      with non-interest bearing loans for short term finances. The security was
      released in 2006.





(d)
            Issuance
                common stock to a non-executive
                director





The
      Company issued 70,000 shares of common stock as salary to a non-executive
      director on November 15, 2006.





**Director
      Independence**





The
      Company does not have a separately designated audit, compensation or nominating
      committee of our Board, as it is not required to, and the functions customarily
      delegated to these committees are performed by the full Board. We have
      determined, however, that none of our directors is “independent” as that term is
      defined in Section 4200 of the NASD Marketplace Rule.





**Item
                13.**
            **Exhibits.**




**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 (6)3.3
            
            Company
                Bylaws (5)16.1
            
            Letter
                from Weinberg & Company, P.A. (6)16.2
            
            Letter
                from GC Alliance Limited (7)16.3
            
            Letter
                from Moore Stephens Wurth Frazer & Torbet LLP (8)16.4
            
            Letter
                from Schwartz Levitsky Feldman LLP (9)23.1
            
            Consent
              of Moore Stephens Worth Frazer and Torbet LLP (10)31.1
            
            Section 302
                Certification by the Corporation’s Chief Executive Officer
                (10)31.2
            
            Section 302
                Certification by the Corporation’s Chief Financial Officer
                (10)32.1
            
            Section 906
                Certification by the Corporation’s Chief Executive Officer
                (10)32.2
            
            Section 906
                Certification by the Corporation’s Chief Financial Officer
                (10)


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)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)
  
 (1)
              Incorporated
                  by reference from the Registrant’s Current Report on Form 8-K/A filed on
                  June 1, 2000.


40




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




**Item
                14.**
            **Principal
                Accountant Fees and
                Services.**





**CHANGE
      OF AUDITOR**


Weinberg
        & Company performed the audit for the fiscal year ended December 31, 2004
        and it reviewed the Company’s unaudited financial statements through the quarter
        ended September 30, 2005, but it was dismissed as the Company’s principal
        independent auditor effective January 18, 2006. GC Alliance Limited was engaged
        to perform audit services for the Company on January 18, 2006, but it was
        dismissed as the Company’s principal independent auditor effective February 21,
        2006. Moore Stephens was engaged to perform audit services for the Company
        on
        February 21, 2006, but it was dismissed as the Company’s principal independent
        auditor effective March 6, 2007. Moore Stephens performed the audit for the
        fiscal year ended December 31, 2005 and it reviewed the Company’s unaudited
        financial statements through the quarter ended September 30, 2006 during
        this
        engagement. Schwartz Levitsky Feldman LLP, Charter Accountants (“Schwartz
        Levitsky”) was engaged to perform audit services for the Company on March 6,
        2007, but it was dismissed as the Company’s principal independent auditor
        effective April 26, 2007. Schwartz Levitsky did not complete the audit for
        the
        fiscal year ended December 31, 2006. On April 26, 2007, the
        Company re-engaged Moore Stephens to perform audit services for the year
        ended December 31, 2006. The following are the services provided and the
        amount
        billed:




**AUDIT
      FEES**




The
      aggregate fees billed by GC Alliance Limited for professional services rendered
      for the audit of Skystar Cayman in connection with the Share Exchange
      Transaction was $105,000.




41


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, 2006, was $150,000.





The
      aggregate fees billed by 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.





**AUDIT
      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 year ended December 31, 2006.





**TAX
      FEES**





For
      the
      years ended December 31, 2006 and December 31, 2005, there were $6,000 billed
      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.





**PRE-APPROVAL
      POLICIES AND PROCEDURES**





Prior
      to
      engaging its accountants to perform particular services, our Board of Directors
      obtains an estimate for the service to be performed. All of the services
      described above were approved by the Board of Directors in accordance with
      its
      procedure.





***[SIGNATURES
      PAGE FOLLOWS]***





42


**SIGNATURES**





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


**SKYSTAR
                BIO-PHARMACEUTICAL COMPANY**
              (Registrant)Date: May 18, 2007
            By:
            /s/
              Weibing LuWeibing
                Lu
              Chief
                Executive Officer Date:
              May 18, 2007
            By:
            /s/
              Erna
              GaoErna
                Gao
              Chief
                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
            
            May
                18, 2007Weibing
                Lu/s/
                Erna Gao
            
            Chief
                Financial Officer / Director
            
            May
                  18, 2007Erna
                Gao/s/
                Wei Wen
            
            Secretary
                / Director
            
            May
                  18, 2007Wei
                Wen/s/
                Xinya Zhang
            
            Director
            
            May
                  18, 2007Xinya
                Zhang/s/
                R. Scott Cramer
            
            Director
            
            May
                  18, 2007R.
                Scott Cramer





43