Business Outlook and Guidance

We are confident about the prospects for our business in 2009 and will continue to focus on increasing market share by both strengthening and further refining our successful sales and distribution network, building and enhancing our brand image, and making strategic acquisitions that continue to support our growth, said Mr. Yan-Qing Liu, chairman and chief executive officer of China Sky.

In 2009, we expect full year revenue to increase by 40%, or approximately $37.0 million, to $128-$130 million, driven by growth in all of our product sales categories. We expect that net income will increase to $38-$39 million, resulting in net profit margin of approximately 30%. We expect 2009 gross margin to be approximately 74% due to higher raw material costs, Yan-Qing Liu added.

We are pleased to report another quarter of excellent results to start off 2009. We achieved record financial performance in the first quarter with strong increases in revenue and net income as we executed our business strategy and further established ourselves as a leading pharmaceutical company in China, said Yan-Qing Liu, chairman and chief executive officer of China Sky. We continued to refine and enhance our distribution channels during the quarter and signed several distribution agreements for our products and expanded sales of our top-selling Sumei Slim Patch into South Korea and Sudan.

First Quarter 2009 Results

Sales of patch products, including its best-selling Sumei Slim Patch, rose 141% to $9.1 million in the first quarter of 2009, and accounted for 37% of revenue, up from 30% a year ago. Sales of ointments rose 242% year over year to $5.1 million, accounting for 20% of revenue, against 12% of revenue a year ago. Sprays and Bio-engineering products, including the company’s line of diagnostic testing kits, rose 55% and 70%, respectively, each accounting for 12% of revenue during the quarter. In keeping with its strategic goals, the company decreased contract sales of non-manufactured products in 2008 in order to focus on higher margin proprietary products. Contract sales of non-manufactured products were discontinued in the three months ended March 31, 2009.

Gross profit in the first quarter of 2009 was $18.8 million, up 97% over the same period a year ago. Gross margin was 76% of total revenues, a slight decrease against gross margin of 77% for the first quarter of 2008. The decrease was attributable to lower unit selling prices, by which the company expects to maintain its competitiveness. The company was able to negotiate lower purchase prices from its suppliers, which offset the decline in selling prices.

Operating expenses in the first quarter of 2009 were $9.7 million, up 107.1% from $4.7 million in the first quarter of 2008. The increase was mainly the result of higher selling, general and administrative expenses, which were primarily attributable to the increased costs of marketing our products, and higher research and development expenses, primarily due to additional clinical trials for its products and the development of patents to generate continued sales growth.

Operating income was $9.1 million for the first quarter of 2009, up 84.5% from $4.9 million in the first quarter of 2008. Operating margin was 36.4%, against 39.1% in the first quarter of 2008.

Provision for income taxes was $1.8 million in the first quarter of 2009, against $1.0 million in the same period last year.

Financial Condition

As of March 31, 2009, China Sky had $48.8 million in cash and cash equivalents, about $65.9 million in working capital, and no debt. Stockholders’ equity at March 31, 2009, was $102.3 million, a 7.8% increase over the $94.9 million recorded at December 31, 2008.

The company generated $8.5 million in net cash flow from operating activities in the first quarter of 2009, up from $5.2 million in the corresponding period of 2008.

The company is currently constructing a new corporate headquarters which will be completed in 2009 at an additional estimated cost of about $5 million. The company plans to fund the project using internally generated funds.