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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended June 30, 2011

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ____________to ________________

Commission File No. 000-33097

CHINA KANGTAI CACTUS BIO-TECH INC.
(Name of Small Business Issuer in its Charter)

Nevada	87-0650263
(State or Other Jurisdiction of	(I.R.S. Employer I.D. No.)
incorporation or organization)

99 Taibei Road
Limin Economic and Technological Development Zone
Harbin, Heilongjiang Province, People’s Republic of China
(Address of Principal Executive Offices)

(86) 451-57351189 ext 126
(Registrant’s Telephone Number, Including International Code and Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]             No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]             No [  ]

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

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
(Do not check if a smaller reporting company)

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

Yes [  ]                 No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 15, 2011 the issuer had outstanding 22,355,527shares of common stock, $0.001 par value.

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CHINA KANGTAI CACTUS BIO-TECH INC.
FORM 10-Q

Quarterly Period Ended June 30, 2011

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	1
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six months ended June 30, 2011 and 2010 (Unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2011 and 2010 (Unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements as of June 30, 2011	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	(Removed and Reserved)	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
SIGNATURES		37

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PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

		June 30,			December 31,
		2011			2010
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	4,025,502		$	2,630,035
Accounts receivable, net of reserve for allowances, returns, and doubtful accounts of $1,045,724          and $1,004,027, respectively		9,982,058			7,416,090
Inventories		2,917,194			1,385,531
Prepaid expenses		4,487			1,644
Other receivables		-			500
Total Current Assets		16,929,241			11,433,800
Property, plant and equipment, net of accumulated depreciation of $2,442,772 and $2,637,629, respectively		7,502,275			7,928,050
Other Assets
Land use rights, net of accumulated amortization of $1,115,236 and $881,720, respectively		19,595,002			19,390,976
Intangible assets, net of accumulated amortization of $2,236,269 and $1,601,418, respectively		9,318,948			9,714,809
Total Assets	$	53,345,466		$	48,467,635
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	229,594		$	306,025
Note payable		936,056			916,696
Taxes payable		1,179,970			1,551,198
Other payable - related party		36,633			-
Total Current Liabilities		2,382,253			2,773,919
Estimated liability for equity-based financial instruments with characteristics of liabilities:
Designated as Series A convertible Preferred Stock (0 and 50,000 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively)		-			51,500
Warrants		-			469,705
Total		-			521,205
Total Liabilities		2,382,253			3,295,124
Commitments and Contingencies		-			-
Stockholders' Equity
Preferred stock, par value $.001 per share; authorized 200,000,000 shares; issued and outstanding: 0 and 50,000 shares, respectively (included in liabilities)		-			-
Common stock, par value $.001 per share; authorized 200,000,000 shares, issued or issuable and outstanding: 22,355,527 and 22,255,527 shares at June 30, 2011 and December 31, 2010, respectively		22,356			22,256
Additional paid-in capital		14,355,427			14,259,777
Retained earnings
Appropriated		5,862,602			5,253,700
Unappropriated		25,408,534			21,322,790
Accumulated other comprehensive income (Foreign currency translation adjustments)		5,314,294			4,313,988
Total stockholders' equity		50,963,213			45,172,511
Total Liabilities and Stockholders' Equity	$	53,345,466		$	48,467,635

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

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China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Net Sales	$	9,506,484		$	8,733,409		$	15,956,836		$	14,252,443
Cost of Sales		(6,257,536	)		(5,424,835	)		(10,310,318	)		(9,464,697	)
Gross Profit From Sales		3,248,948			3,308,574			5,646,518			4,787,746
Production Revenue from Shandong
Qingdao Processing Agreement, Net of Company  raw material costs and processing fees incurred to Shandong Qingdao totaling $1,426,125 and $1,523,310 for the three and six months ended June 30, 2011, respectively		1,257,490			-			1,372,475			-
Total Gross Profit		4,506,438			3,308,574			7,018,993			4,787,746
Operating Expenses
Selling expenses		38,956			33,804			69,254			58,415
Provision for (reduction in) reserve for allowances, returns and doubtful accounts		17,411			-			20,333			(31,146	)
Research and development		23,243			104,015			23,243			104,015
General and administrative expenses		239,333			745,188			357,978			987,390
Depreciation		23,938			19,074			45,338			38,107
Amortization of land use rights		17,419			9,534			34,636			19,068
Amortization of intangible assets		294,021			100,353			584,639			134,634
Total operating expenses		654,321			1,011,968			1,135,421			1,310,483
Income from Operations		3,852,117			2,296,606			5,883,572			3,477,263
Other Income (Expense)
Interest income		1,500			96			2,043			243
Imputed interest expense		(13,956	)		(13,295	)		(27,750	)		(26,590	)
Income (expense) from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values		99,780			1,435,280			475,205			2,951,195
Loss on disposal of property and equipment		(150,542	)		(419	)		(150,542	)		(419	)
Total Other Income (Expenses)		(63,218	)		1,421,662			298,956			2,924,429
Income before Income Tax		3,788,899			3,718,268			6,182,528			6,401,692
Income tax expense		(959,475	)		(716,923	)		(1,487,882	)		(1,047,709	)
Net Income Attributable to Common
Stockholders	$	2,829,424		$	3,001,345		$	4,694,646		$	5,353,983
Net Income Per Common Share
Basic	$	0.13		$	0.14		$	0.21		$	0.26
Diluted	$	0.13		$	0.14		$	0.21		$	0.25
Weighted Average Number of Common Shares Used to Compute
Earnings per Common Share:
Basic		22,336,296			20,989,569			22,314,643			20,658,372
Diluted		22,336,296			22,094,538			22,320,997			21,706,021
Comprehensive Income:
Net income	$	2,829,424		$	3,001,345		$	4,694,646		$	5,353,983
Foreign currency translation
adjustment		638,167			255,261			1,000,306			329,300
Comprehensive Income	$	3,467,591		$	3,256,606		$	5,694,952		$	5,683,283

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

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China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

For the Six Months Ended June 30, 2011 (Unaudited) and the Year Ended December 31, 2010

		Common Stock
		$0.001 par value						Additional			Unappropriated			Appropriated			Accumulated other
								paid-in			retained			retained			comprehensive
		Shares			Amount			capital			earnings			earnings			income			Total
Balance at December 31, 2009		20,024,024		$	20,024		$	11,003,276		$	10,903,711		$	3,881,804		$	2,827,176		$	28,635,991
Stock issued in connection with investment agreement (Note 13)		1,000,000			1,000			784,678			-			-			-			785,678
Cost incurred relating to stock issued in connection with investment agreement (Note13)		-			-			(42,000	)		-			-			-			(42,000	)
Stock issued for financing cost		15,000			15			13,035			-			-			-			13,050
Cashless exercise of stock options		238,503			239			(239	)		-			-			-			-
Stock issued for consulting services		103,000			103			231,997			-			-			-			232,100
Exercise of B warrants		750,000			750			1,700,250			-			-			-			1,701,000
Exercise of $1.00 stock options		125,000			125			124,875			-			-			-			125,000
Stock option expense		-			-			390,275			-			-			-			390,275
Imputed interest on note payable		-			-			53,630			-			-			-			53,630
Transfer to statutory and staff welfare reserves		-			-			-			(1,371,896	)		1,371,896			-			-
Net income for the years ended December 31, 2010		-			-			-			11,790,975			-			-			11,790,975
Currency translation adjustment		-			-			-			-			-			1,486,812			1,486,812
Balance at December 31, 2010		22,255,527			22,256			14,259,777			21,322,790			5,253,700			4,313,988			45,172,511
Conversion of Series A Preferred Stock to common stock		50,000			50			45,950			-			-			-			46,000
Stock issued for consulting services		50,000			50			21,950			-			-			-			22,000
Imputed interest on note payable		-			-			27,750			-			-			-			27,750
Transfer to statutory and staff welfare reserves		-			-			-			(608,902	)		608,902			-			-
Net income for the three months ended June 30, 2011		-			-			-			4,694,646			-			-			4,694,646
Currency translation adjustment		-			-			-			-			-			1,000,306			1,000,306
Balance at June 30, 2011 (Unaudited)		22,355,527		$	22,356		$	14,355,427		$	25,408,534		$	5,862,602		$	5,314,294		$	50,963,213

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

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China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010

(Unaudited)

		2011			2010
Cash Flows from Operating Activities
Net income	$	4,694,646		$	5,353,983
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
(Income) expense from revaluation of Series A Preferred Stock and              A, B, C, and D warrants with characteristics of liabilities at fair values		(475,205	)		(2,951,195	)
Issuance of shares in consideration for various services		22,000			217,800
Issuance of options in consideration for legal services		-			390,275
Imputed interest		27,750			26,590
Provision for (reduction in) allowances, returns and doubtful accounts		20,333			(31,146	)
Depreciation - cost of sales		286,112			196,352
Depreciation - operating expenses		45,338			38,107
Amortization of land use rights -cost of sales		178,952			170,287
Amortization of land use rights- operating expenses		34,636			19,068
Amortization of intangible assets		584,639			134,634
Loss on disposal of property and equipment		150,542			419
Changes in operating assets and liabilities:
Increase in accounts receivable		(2,607,665	)		(2,448,045	)
(Increase) decrease in inventories		(1,531,663	)		1,117,415
Increase in prepaid expenses		(2,843	)		(9,823	)
Increase in other receivables		-			(10,632	)
Collection of other receivable		-			3,747,926
Decrease in accounts payable and accrued liabilities		(76,431	)		(93,756	)
(Decrease) increase in taxes payable		(371,228	)		210,111
Net cash provided by operating activities		979,913			6,078,370
Cash Flows from Investing Activities
Purchase of intangible assets		-			(7,981,624	)
Purchase of property, plant and equipment					(1,327	)
Proceeds from sale of property and equipment		110,669
Collection of other receivables from related party		500			244,636
Net cash provided by (used in) investing activities		111,169			(7,738,315	)
Cash Flows from Financing Activities
Proceeds from related party		36,633			-
Repayment to related party		-			(5,042	)
Cash exercise of options		-			125,000
Exercise of B warrants		-			750,000
Net cash provided by financing activities		36,633			869,958
Effect of exchange rate changes on cash and cash equivalents		267,752			151,875
Increase in cash and cash equivalents		1,395,467			(638,112	)
Cash and cash equivalents, beginning of period		2,630,035			2,918,068
Cash and cash equivalents, end of period	$	4,025,502		$	2,279,956
Supplemental disclosures of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	1,740,308		$	861,631

4

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS

China Kangtai Cactus Bio-Tech Inc. (“US China Kangtai”) was incorporated in Nevada on March 16, 2000 as InvestNet, Inc. (“InvestNet”).

China Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”) was incorporated in the British Virgin Islands (“BVI”) on November 26, 2004. Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”), a company with limited liability, was incorporated in the People’s Republic of China (“PRC”) on December 30, 1998.

US China Kangtai and BVI China Kangtai are investment holding companies and Harbin Hainan Kangda’s principal activities are planting and developing new types of cactus, producing and trading in cactus health foods and other cactus related products in the PRC.

In 2004, BVI China Kangtai acquired Harbin Hainan Kangda. In 2005, US China Kangtai acquired BVI China Kangtai.

On September 26, 2006, Harbin Hainan Kangda acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a PRC company with limited liability previously owned by two stockholders, for $1,475,000 in cash. Taishan Kangda grows and sells cactus.

On February 14, 2011, Harbin Hainan Kangda entered into a Cooperation Procession Agreement with Shandong Qingdao Cigarette Factory (“Shandong Qingdao”). See Note 17.

US China Kangtai, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda are hereafter collectively referred to as the “Company”.

The accompanying consolidated financial statements include the financial statements of US China Kangtai and its 100% owned subsidiaries, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda. All significant inter-company accounts and transactions have been eliminated in consolidation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States and are expressed in US dollars.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities, note payable, taxes payable and other payable. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments and based on interest rates of comparable instruments.

5

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation

The functional currency of US China Kangtai and BVI China Kangtai is the United States dollar. The functional currency of Harbin Hainan Kangda and Taishan Kangda is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the United States dollar.

Harbin Hainan Kangda and Taishan Kangda assets and liabilities were translated into United States dollars at period-end exchange rates, $0.15472 and $0.15152 at June 30, 2011 and December 31, 2010, respectively. Harbin Hainan Kangda and Taishan Kangda revenues and expenses were translated into United States dollars at weighted average exchange rates, $0.15378 and $0.14650, for the three months ended June 30, 2011 and 2010, respectively. Resulting translation adjustments were recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations. There were no material foreign currency transaction gains or losses for the three and six months ended June 30, 2011 and 2010.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and demand deposit accounts with banks. The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.

Accounts receivable

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. A reserve for allowances and doubtful accounts is established and recorded based on historical experience and the aging of the related accounts receivable.

Inventories

Inventories of cactus stock include trees and palms whose cost consists of seeds and an allocation of fertilizers, direct labor and overhead costs such as depreciation, rent, freight and fuel, among others. Inventories of cactus stock are stated at the lower of cost or market value, cost being calculated on the weighted average basis.

Other raw materials are stated at the lower of cost or market value, cost being determined on a first in, first out method.

Work in progress and finished goods are stated at the lower of cost or market value, cost being determined on a first in, first out method.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets (40 years for buildings, 12 years for plant equipment and machinery, 10 years for motor vehicles, and 8 years for furniture and office equipment).

6

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangible and Other Long-Lived Assets

Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments. Land use rights are being amortized on a straight-line basis over the remaining term of the related agreements, which range from 30 to 50 years. Other intangible assets consist of patents, licenses and trademarks. Patents, licenses and trademarks are amortized over their expected useful economic lives, which range from 4 to 15 years.

The Company reviews its long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.

Revenue Recognition

The Company recognizes revenue upon delivery of the products, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable.

Advertising Costs

Advertising costs are expensed as incurred. There were no significant advertising expenses for the three and six months ended June 30, 2011 and 2010.

Research and Development

Research and development costs related to both present and future products are expensed as incurred. Research and development expenses for the three months ended June 30, 2011 and 2010 were $23,243 and $104,015, respectively; and $23,243 and $104,015 for the six months ended June 30, 2011 and 2010, respectively.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation- Stock Compensation”.

In addition to requiring supplemental disclosures, ASC 718, Compensation – Stock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FASB Accounting Standards Codification (“ASC”) 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.

7

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements by applying enacted statutory tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted net income per common share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options, warrants, and convertible preferred stock) outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per common share are excluded from the calculation.

The following table provides a reconciliation of common shares used in the basic net income per common share and diluted net income per common share computations for the three and six months ended June 30, 2011 and 2010.

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Weighted average shares outstanding - basic		22,336,296			20,989,569			22,314,643			20,658,372
Series A convertible preferred stock		-			50,000			6,354			50,000
Incremental common shares from stock options and warrants		-			1,054,969			-			997,649
Weighted average shares outstanding - diluted		22,336,296			22,094,538			22,320,997			21,706,021

The Company uses the treasury stock method to account for the dilutive effect of unexercised stock options and warrants in diluted net income per common share. Anti-dilutive common shares related to stock options and warrants excluded from the computation of diluted net income per common share were 1,100,000 and 1,100,000, respectively, for the three and six months ended June 30, 2011 and 0 for the three and six months ended June 30, 2010.

Segment Information

The Company operates in one segment, the sale of products made from cactus plants. The Company sells its products through approximately 16 PRC distributors.

Statements of Cash Flows

In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

8

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INTERIM FINANCIAL STATEMENTS

The unaudited condensed financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 were prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited condensed financial statements were prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2011 and the results of operations and cash flows for the periods ended June 30, 2011 and 2010. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and six months ended June 30, 2011 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2011. The balance sheet at December 31, 2010 was derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited condensed financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2010 as included in our report on Form 10-K/A, as filed with the SEC on April 15, 2011.

NOTE 4 – SIGNIFICANT ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS

In December 2009, Harbin Hainan Kangda completed the acquisition of land use rights for 50 years to property located in Langbei Village Baisha Town, Guangdong Province, PRC, covering an area of 181,854 square meters pursuant to an Asset Purchase Agreement dated August 25, 2009 with the local government. The purchase price for the land use rights was 66,376,800 RMB ($10,269,819 translated at the June 30, 2011 exchange rate), which commencing January 1, 2010 is being amortized on a straight line basis over the 50 years term of the rights. See Note 7.

In May 2010, Harbin Hainan Kangda completed the acquisition of various patents relating to cactus use in manufacturing cattle, hog and fish feed pursuant to a Patent Transfer Agreement dated January 20, 2010 with Heilongjiang Institute of Biological Development. The purchase price for the patents was 54,112,700 RMB ($8,372,317 translated at the June 30, 2011 exchange rate), which commencing April 10, 2010 is being amortized on a straight line basis over the 15 year term of the patents. See Note 8.

In December 2010, Harbin Hainan Kangda completed the acquisition of certain assets (consisting of land use rights for 50 years to property located in Raoping County, Guangdong Province, PRC covering an area of 12,144 square meters, three buildings, machinery and equipment used in the manufacture of cigarettes, and eight trademarks relating to cigarettes) pursuant to an Asset Purchase Agreement dated June 28, 2010 with Dadi Tobacco Trade Center. The total purchase price was 35,000,000 RMB ($5,415,200 translated at the June 30, 2011 exchange rate), which the Company allocated to the assets based on appraisals as follows:

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The trademarks expire in September 2014. The Company expects that it will renew these trademarks in March 2014 (PRC trademark law requires renewal of trademarks a half year earlier before the expiration date).

Commencing January 1, 2011, the buildings are being depreciated on a straight line basis over their 40 years estimated useful life, the plant equipment and machinery are being depreciated on a straight line basis over their 12 years estimated useful life, the land use rights are being amortized on a straight line basis over the 50 years term of the rights and the trademarks are being amortized on a straight line basis over their 46 months remaining registered lives.

NOTE 5 - INVENTORIES

At June 30, 2011 and December 31, 2010, inventories consisted of:

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

At June 30, 2011 and December 31, 2010, property, plant and equipment, net consisted of:

Depreciation expense was $331,450 and $234,459 for the six months ended June 30, 2011 and 2010, respectively, of which $286,112 and $196,352 were included in cost of sales, respectively. Depreciation expense was $154,458 and $117,250 for the three months ended June 30, 2011 and 2010, respectively, of which $130,590 and $98,176 were included in cost of sales, respectively.

In the second quarter of 2011, the Company sold certain beverage production equipment for $110,669 cash. The net carrying value at the equipment on the date of sale was $259,734 ($843,772 cost, $584,038 accumulated depreciations). Accordingly, the Company recognized a loss on disposal of property and equipment of $150,542 and a $1,477 foreign currency translation adjustment.

NOTE 7 - LAND USE RIGHTS

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2011 and December 31, 2010, land use rights, net, consisted of:

Amortization of land use rights was $213,588 and $189,355 for the six months ended June 30, 2011 and 2010, respectively, of which $178,952 and $170,287, respectively, were included in cost of sales. Amortization of land use rights was $108,030 and $94,678 for the three months ended June 30, 2011 and 2010, respectively, of which $90,612 and $85,144, respectively, were included in cost of sales.

The expected amortization of the above land use rights for each of the five succeeding years ending June 30, and in the aggregate, are as follows:

NOTE 8 - INTANGIBLE ASSETS

At June 30, 2011 and December 31, 2010, intangible assets, net consisted of:

In January 2010, the Company purchased a group of cactus patents for cattle, hog and fish feed for 54,112,700 RMB ($8,372,317 translated at the June 30, 2011 exchange rate) under a “Patent Transfer Agreement” which provided for the Company to make 4 installment payments to the transferor of the patent, as follows: 25% at the end of January 2010; 25% at the end of March 2010; 20% at the end of June 2010; and 30% at the end of August 2010.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The agreement also placed certain requirements on the Transferor concerning timely providing the materials necessary so that title to the patent could promptly be received by the Company. In addition, the agreement provided for penalties on the Company if it failed to make timely payments to the transferor, whom in such event had the right to rescind the contract and have returned all materials related to the patent. The agreement provided for penalties on the transferor if they were tardy as well.

The Company paid 43,000,000 RMB ($6,652,960 translated at the June 30, 2011 exchange rate) in cash, which amount exceeded payments required by the agreement, through March 31, 2010. The additional payments were the result of an informal agreement between the Transferor and the Company based upon a timely delivery of materials by the Transferor to facilitate the transfer of title to the Company, which occurred on April 21, 2010. The patent period granted by the PRC governmental authority commenced on April 10, 2010 and expires on April 10, 2025. The Company paid the remaining 11,112,700 RMB ($1,719,357 translated at the June 30, 2011 exchange rate) to the Transferor in May 2010. Prior to the Patent Transfer Agreement, the Company had been using the patents on an experimental basis since 2008.

The three patents were created pursuant to a Research and Development Agreement entered into between the Chief Executive Officer and Director of the Company (20.5% Company Stockholder), the General Manager and Director of the Company (18.3% Company Stockholder) and the Heilongjiang Institute of Biological Development (the “Institute”) on March 20, 2003, whereby the Institute completed the research to develop the patents and bore the costs of developing them and the aforementioned Company individuals were to register these patents and transfer their title to the Institute. That transfer took place on September 16, 2005, with no further consideration paid by the Institute. The Company purchased the 3 patents in 2010 from the Institute, a privately held Chinese entity engaged in similar ongoing patent research for other Chinese entities. The Institute has no common ownership with the Company’s Officer/Director or General Manager/Director (significant Company stockholders), or their families, or others employed by the Company or stockholders in it.

Intangible assets amortization expense was $584,639 and $134,634 for the six months ended June 30, 2011 and 2010, respectively. Intangible assets amortization expense was $294,021 and $100,353 for the three months ended June 30, 2011 and 2010, respectively.

The expected amortization of the above intangible assets for each of the five succeeding years ending June 30, and in the aggregate, is as follows:

NOTE 9 - NOTE PAYABLE

Note payable at June 30, 2011 and December 31, 2010 consisted of:

		2011			2010
Note payable to a financial institution, interest free, unsecured and due on demand	$	936,056		$	916,696

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The note payable of $936,056 (6,050,000 RMB) is due to a PRC provincial government financial institution which made the loan to the Company to promote the commercial cultivation of cactus. The loan was made to the Company on an interest-free and unsecured basis and is repayable on demand. Imputed interest is calculated at 6% per annum on the amount due. Total imputed interest recorded as additional paid-in capital amounted to $27,750 and $26,590 for the six months ended June 30, 2011 and 2010, respectively.

NOTE 10 – TAXES PAYABLE

Taxes payable at June 30, 2011 and December 31, 2010 consisted of:

NOTE 11 – ESTIMATED LIABILITY FOR EQUITY-BASED FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF LIABIILTIES

Effective January 1, 2009, in accordance with EITF Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”, the Company reclassified the fair values at January 1, 2009 of the outstanding Series A Convertible Preferred Stock and the warrants comprising the March 21, 2008 and the July 16, 2008 sales of units (see Note 12) from stockholders’ equity to liabilities, as follows:

Since at January 1, 2009 the carrying value of the outstanding financial instruments was $690,000, the Company recognized a cumulative effect adjustment resulting from a change in accounting principle of $18,760, or a net of $671,240. Accordingly, the unappropriated retained earnings balance at December 31, 2008 was increased from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.

The characteristics which require classification of the Series A Preferred Stock and warrants as liabilities are the Company’s obligations to reduce the conversion price of the Series A Preferred Stock and the exercise price of the warrants in the event that the Company sells, grants, or issues any shares, options, warrants, or any convertible instrument at a price below the $0.60 current conversion price of the Series A Preferred Stock or the current exercise prices of the warrants. As a result, the Company remeasures the fair values of these financial instruments each quarter, adjusts the liability balances, and reflects changes in operations as “income (expense) from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values”.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2011 and December 31, 2010, the fair values of the financial instruments consisted of:

		2011						2010
		Shares / Warrants			Fair Value			Shares / Warrants			Fair Value
		(Unaudited)
Series A Convertible Preferred Stock		-		$	-			50,000		$	51,500
B warrants		-			-			750,000			153,975
C warrants		500,000			-			500,000			171,550
D warrants		600,000			-			600,000			144,180
Total warrants		1,100,000			-			1,850,000			469,705
Total Financial Instruments		1,100,000		$	-			1,900,000		$	521,205

Below is a reconciliation of the change in the fair values of the financial instruments from January 1, 2009 through June 30, 2011.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Shares /
		Warrants			Fair Value
Balance, January 1, 2009		5,000,000		$	671,240
Revaluation credited to operations		-			(262,725	)
Balance, March 31, 2009		5,000,000			408,515
Revaluation charged to operations		-			1,761,440
Balance, June 30, 2009		5,000,000			2,169,955
Conversion of Series A Preferred Stock to Common Stock		(416,667	)		(666,667	)
Revaluation charged to operations		-			2,738,135
Balance, September 30, 2009		4,583,333			4,241,423
Conversion of Series A Preferred Stock to Common Stock		(683,333	)		(1,282,500	)
Exercise of A warants		(1,250,000	)		(1,589,895	)
Revaluation charged to operations		-			3,689,332
Balance, December 31, 2009		2,650,000			5,058,360
Exercise of B warrants		(475,000	)		(612,750	)
Revaluation credited to operations		-			(1,515,915	)
Balance, March 31, 2010		2,175,000			2,929,695
Exercise of B warrants		(275,000	)		(338,250	)
Revaluation credited to operations		-			(1,435,280	)
Balance, June 30, 2010		1,900,000			1,156,165
Revaluation credited to operations		-			(505,305	)
Balance, September 30, 2010		1,900,000			650,860
Revaluation credited to operations		-			(129,655	)
Balance, December 31, 2010		1,900,000			521,205
Expiration of B warrants		(750,000	)		-
Conversion of Series A Preferred Stock to Common Stock		(50,000	)		(46,000	)
Revaluation credited to operations		-			(375,425	)
Balance, March 31, 2011		1,100,000			99,780
Revaluation credited to operations		-			(99,780	)
Balance, June 30, 2011 - (Unaudited)		1,100,000		$	-

The Series A Convertible Preferred Stock was valued based on the trading price of the Company’s common stock. The warrants were valued using the Black-Scholes option pricing model with a 100% expected volatility assumption regarding the trading price of the Company’s common stock.

NOTE 12 - SERIES A CONVERTIBLE PREFERRED STOCK

On March 21, 2008, the Company entered into a Preferred Stock Purchase Agreement (the “Purchase Agreement”) with T Squared Investments LLC (the “Investor”) to sell in a private placement to the Investor for an aggregate purchase price of $500,000, (i) 833,333 shares of the Company’s newly designated Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) for $0.60 per share (the “Shares”), (ii) warrants to purchase up to 1,250,000 shares of Company common stock exercisable for a period of three years at an exercise price of $0.75 per share (the “A Warrants”) or an aggregate exercise price of $937,500 if all of the A Warrants were exercised, and (iii) warrants to purchase up to 1,500,000 shares of Company common stock exercisable for a period of three years at an exercise price of $1.00 per share (the “B Warrants”), or an aggregate exercise price of $1,500,000 if all the B Warrants were exercised. The Company issued the Shares, the A Warrants and B Warrants on the same day. Westernking Financial Service acted as the sole placement agent in the transaction for a fee of $30,000 (6% of the gross proceeds).

The Company also entered into a Registration Rights Agreement with the Investor, pursuant to which the Company was obligated to file and have declared effective by the SEC a registration statement registering the resale of the Shares and Common Stock issuable upon the conversion of the Series A Preferred Stock and the exercise of the A Warrants and B Warrants. If the registration statement was not declared effective by the SEC by August 28, 2008, the Registration Rights Agreement provided for the Company to issue to the Investor as liquidated damages an additional 1,000 shares of Series A Preferred Stock for each day thereafter not declared effective (subject to a maximum of 250,000 shares). On October 17, 2008, the SEC declared effective the Company’s registration statement on Form S-1. On October 15, 2008, the Company issued 46,000 shares of common stock to the investor in consideration for the waiver of liquidated damages.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Series A Preferred Stock had no voting or dividend rights, was entitled to a liquidation preference of $0.60 per share, and each share was convertible into one share of Company common stock at the option of the holder (which was adjustable to more shares if certain “defined EPS” performance thresholds were not met for the six months ended September 30, 2008 or the year ended December 31, 2008; however, the performance thresholds were met). In addition, the Investor had the right to participate in any subsequent funding by the Company on a pro-rata basis at 100% of the offering price for a three month period following the closing. In addition, the conversion price of the Series A Preferred Stock and the exercise price of the warrants were to be reduced in the event of any stock splits or stock dividends or in the event that the Company sells, grants, or issues any shares, options, warrants, or any convertible instrument at a price below the $0.60 current conversion price of the Series A Preferred Stock or the current exercise prices of the warrants.

The Company recorded as a $196,500 deemed dividend and as a $196,500 increase in additional paid-in capital, the beneficial conversion feature allocated to the convertible preferred stock only ($196,500) based on a relative allocation of the fair values of the convertible preferred stock ($625,000), the A warrants ($477,250) and the B warrants ($488,250) to the gross actual proceeds received ($500,000). The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.75 per share, exercise price of $0.75 per share for the A warrants, exercise price of $1.00 per share for the B warrants, term of 3 years, expected volatility of 74%, and risk-free interest rate of 4%.

On July 16, 2008, the Company sold to the Investor, for an aggregate purchase price of $250,000, an additional 416,667 shares of Series A Preferred Stock, warrants to purchase up to 500,000 shares of Company common stock exercisable for a period of three years at an exercise price of $0.9375 per share, and warrants to purchase up to 600,000 shares of Company common stock exercisable for a period of three years at an exercise price of $1.25 per share. The Company recorded as a $126,250 deemed dividend and as a $126,250 increase in additional paid-in capital, the beneficial conversion feature allocated to the convertible preferred stock only ($126,250) based on a relative allocation of the fair values of the convertible preferred stock ($287,083) and the warrants ($281,580) to the gross actual proceeds received ($250,000). The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.689 per share, exercise prices of $0.9375 and $1.25 per share, term of 3 years, expected volatility of 71.4%, and risk-free interest rate of 4%.

Below is a summary of the deemed dividends for the year ended December 31, 2008:

On October 27, 2008, the Company issued 100,000 shares of common stock to the Investor for the conversion of 100,000 shares of Series A Preferred Stock. On September 10, 2009, the Company issued 416,667 shares of common stock to the Investor for the conversion of 416,667 shares of Series A Preferred Stock. On October 22, 2009, the Company issued 433,333 shares of common stock to the Investor for the conversion of 433,333 shares of Series A Preferred Stock. On November 23, 2009, the Company issued 250,000 shares of common stock to the Investor for the conversion of 250,000 shares of Series A Preferred Stock. On January 24, 2011, the Company issued 50,000 shares of common stock to the Investor for the conversion of the remaining 50,000 shares of Series A Preferred Stock then outstanding.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In November and December 2009, the Investor exercised 916,666 A warrants in a cashless exercise and received 598,006 shares of common stock.

In October 2009, the Investor exercised 333,334 A warrants at a price of $0.75 per share, or $250,000 total, and was issued 333,334 shares of common stock on January 18, 2010.

In February 2010, the Investor exercised 475,000 B warrants at a price of $1.00 per share, or $475,000 total.

During April and May 2010, the Investor exercised a total of 275,000 B warrants at a price of $1.00 per share, or $275,000 total.

NOTE 13 – STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK; AND OTHER COMMON STOCK ISSUANCES

Options and Warrants

A summary of stock option and warrant activity for the six months ended June 30, 2011 and the years ended December 31, 2010, 2009 and 2008 follows:

The 400,000 stock options granted in 2008 were all issued to the Company’s law firm (“Crone”) for services rendered.

On March 10, 2008, the Company granted 250,000 options to Crone, all exercisable at $1.00 per share to March 10, 2012, and expensed the $59,225 fair value of these options at March 10, 2008 (estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.41 per share, exercise price of $1.00 per share, term of 4 years, expected volatility of 100%, and risk-free interest rate of 4%).

On December 31, 2008, the Company granted 150,000 options to Crone, all exercisable at $0.30 per share to December 31, 2012, and expensed the $31,410 fair value of these options at December 31, 2008 (estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.29 per share, exercise price of $0.30 per share, term of 4 years, expected volatility of 107%, and risk-free interest rate of 2%).

In July 2009, pursuant to a cashless exercise amendment, 107,059 options were converted by Crone into 107,059 shares of common stock and the remaining 42,941 options were cancelled. The Company expensed the $32,118 exercise amount relating to the 107,059 shares.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On January 26, 2010, the Company issued 76,738 shares of its common stock to Crone in a cashless exercise of 125,000 stock options exercisable at a price of $1.00 per share and the remaining 48,262 options were cancelled.

On February 25, 2010, the Company issued 475,000 shares of its common stock to the Investor at a price of $1.00 per share pursuant to a cash exercise of B warrants.

On March 3, 2010, the Company issued 125,000 shares of its common stock to Crone pursuant to a cash exercise of 125,000 stock options at a price of $1.00 per share.

In April 2010, the Company granted 250,000 options to Crone, all exercisable at $0.60 per share to March 10, 2012, and expensed the $390,275 fair value of these options at April 1, 2010, which was included within General and administrative expenses during the three months ended June 30, 2010 (estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $2.10 per share, exercise price of $0.60 per share, term of 30 days, expected volatility of 100%, and risk-free interest rate of 2%).

On June 21, 2010, pursuant to a cashless exercise, 161,765 options exercisable at $0.60 per share were converted by Crone into 161,765 shares of common stock and the remaining 88,235 options were cancelled.

On April 20, 2010 and May 25, 2010, the Company issued a total of 275,000 shares of its common stock to the Investor pursuant to cash exercises of B warrants at a price of $1.00 per share.

There are no stock options outstanding as of June 30, 2011.

Warrants outstanding at June 30, 2011 consisted of:

Date			Number			Number			Exercise			Expiration
Granted			Outstanding			Exercisable			Price			Date
July 16, 2008			500,000			500,000		$	0.9375			July 16, 2011
July 16, 2008			600,000			600,000		$	1.2500			July 16, 2011
Total - (Unaudited)			1,100,000			1,100,000

Other Common Stock Issuances

On February 8, 2010, the Company issued 40,000 shares of its common stock to a consulting firm pursuant to a consulting agreement dated September 1, 2009 (see “Consulting Agreements” in Note 16).

On April 20, 2010, the Company issued 50,000 shares of its common stock to an individual for consulting services rendered. The Company recorded the $125,000 estimated fair value of the shares (based on the market closing price of $2.50 on April 20, 2010) as a general and administrative expense in the three months ended June 30, 2010.

On October 1, 2010, the Company issued 13,000 shares of its common stock to an investor relations firm for consulting services rendered. The Company recorded the $14,300 estimated fair value of the shares (based on the market closing price of $1.10 on October 1, 2010) as a general and administrative expense in the three months ended December 31, 2010.

On December 17, 2010, the Company issued 15,000 shares of its common stock to an investment firm for consulting services rendered pursuant to the Investment Agreement (see Note 16). The Company recorded the $13,050 estimated fair value of the shares (based on the market closing price of $0.87 on December 31, 2010) as a general and administrative expense in the three months ended December 31, 2010.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On December 17, 2010, the Company issued 1,000,000 shares of its common stock to an investment firm pursuant to the Investment Agreement (see Note 16). The Company received net proceeds from the investment firm of $742,678 ($784,678 gross based on a price of $0.785678 per share, less $42,000 fees and costs charged by the investment firm).

On January 24, 2011, the Company issued 50,000 shares of common stock to the Investor in exchange for the conversion of the remaining 50,000 shares of Series A Preferred Stock outstanding.

On May 6, 2011, the Company issued 50,000 shares of its common stock to a financial advisor for consulting services to be rendered in 2011 (see Note 16). The Company recorded the $22,000 estimated fair value of the shares (based on the nearest closing price of $0.44 per share on May 6, 2011) as a general and administrative expense in the three months ended June 30, 2011.

NOTE 14 - RESTRICTED NET ASSETS

Relevant PRC statutory laws and regulations permit payments of dividends by Harbin Hainan Kangda and Taishan Kangda only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of after-tax income should be set aside prior to payments of dividends as a reserve fund. As a result of these PRC laws and regulations, Harbin Hainan Kangda and Taishan Kangda are restricted in their ability to transfer a portion of their net assets in the form of dividends, loans or advances, which restricted portion, amounted to $12,358,776 and $11,736,178 at June 30, 2011 and December 31, 2010, respectively.

NOTE 15 - INCOME TAXES

The Company is subject to current income taxes on an entity basis on taxable income arising in or derived from the tax jurisdiction in which each entity is domiciled.

US China Kangtai was incorporated in the United States and is subject to United States income tax. No United States income taxes were provided in the six months ended June 30, 2011 and 2010 since US China Kangtai had taxable losses in those periods.

At June 30, 2011, US China Kangtai had an unrecognized deferred United States income tax liability relating to undistributed earnings of Harbin Hainan Kangda. These earnings are considered to be permanently invested in operations outside the United States. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. Determination of the amount of the unrecognized deferred United States income tax liability with respect to such earnings is not practicable.

Based on management’s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of approximately $397,000 ($350,000 at December 31, 2010) attributable to the future utilization of the approximately $1,133,000 net operating loss carry forward of US China Kangtai as of June 30, 2011 will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at June 30, 2011. The Company will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carry forward expires in varying amounts from year 2020 to year 2031.

Current United States income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BVI China Kangtai was incorporated in the BVI and is not subject to tax on income or on capital gains.

Harbin Hainan Kangda and Taishan Kangda were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Harbin Hainan Kangda located its factories in a special economic region in Harbin, the PRC. This economic region allowed foreign owned enterprises a two-year income tax exemption beginning in the first year after they become profitable, being 2005 and 2006, and a 50% income tax reduction for the following three years, being 2007 to 2009. Harbin Hainan Kangda was approved as a wholly owned foreign enterprise in March 2005. The effective income tax rate was 15% for the years ended December 31, 2009 and 2008. The income tax rate was increased to 25% beginning from January 1, 2010.

The provision for income taxes differs from the amount computed by applying the statutory United States federal income tax rate of 35% to income before income taxes. The sources of the difference follow:

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Expected tax at 35%	$	1,326,115		$	1,301,394		$	2,163,885		$	2,240,592
Non-taxable income from revaluation of Series A Preferred
Stock and A, B, C, and D warrants with characteristics of liabilities at fair value		(34,923	)		(502,348	)		(166,322	)		(1,032,918	)
Tax effect of unutilized losses of US China Kangtai and BVI China Kangtai		35,533			186,626			46,640			49,948
Tax effect of PRC income taxed at lower rate		(367,250	)		(268,749	)		(556,321	)		(209,913	)
Actual provision for income taxes	$	959,475		$	716,923		$	1,487,882		$	1,047,709

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Operating lease commitments

The Company leased 10 farm sheds on April 10, 2008. The lease payment is RMB 28,000 (approximately $4,332) per annum. The lease is to expire on April 10, 2013.

The Company leased 1,487 mu (approximately 245 acres) land for growing cactus from third parties under operating leases on April 1, 2008. The lease payment is RMB 14,871 (approximately $2,301) per annum from April 1, 2008 to March 31, 2018 and RMB 23,794 (approximately $3,681) from April 1, 2018 to March 31, 2038.

Rental expenses for all operating leases for the six months ended June 30, 2011 and 2010 were approximately $3,317 and $3,136, respectively.

At June 30, 2011, future minimum rental commitments under all non-cancellable operating leases are due as follows:

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Consulting Agreements

The Company entered into a six months investor relations consulting contract on July 1, 2009 (which was terminated by the Company in September 2010). Under the contract, the Company was obligated to pay the consultant a fee of $5,000 per month, consisting of $2,500 in cash and $2,500 in Company restricted common stock. The contract was to be automatically renewed for six months unless either of the two parties gave 30 days written notice of termination. On October 1, 2010, the Company issued 13,000 shares of Company restricted common stock to this investor relations consulting firm. The stock was valued at $1.10 per share based on the closing price on October 1, 2010. The Company is still using this consulting firm currently.

The Company entered into a one year consulting agreement with a consulting firm on September 1, 2009 (which expired September 30, 2010). Under the agreement, the Company was obligated to pay the consultant a monthly cash retainer of $2,000 paid quarterly, of which the first 3 months was due upon signing of the contract. In addition, the Company was obligated to issue a total of 80,000 shares of its common stock to the consultant semi-annually; the first 40,000 shares were issued February 9, 2010. As a result of the Company’s dissatisfaction with the services of the consulting firm, the Company has advised the consulting firm that it does not expect to issue the remaining 40,000 shares.

Effective September 16, 2010, the Company entered into a consulting agreement with another consulting firm. The agreement provided for monthly compensation to the consultant of $5,000. The term of the agreement was 5 months, but either party was able to terminate the agreement on 30 days written notice to the other party. The service contract was terminated.

In April 2010, the Company retained an unrelated individual as a financial advisor of the Company. As compensation to the advisor, the Company is to issue 50,000 shares of its common stocks to the financial advisor each year in April until the service agreement has been mutually terminated. On April 20, 2010, the Company issued 50,000 shares of its common stock to this individual for consulting services to be rendered in 2010. The Company recorded the $125,000 estimated fair value of the shares (based on the market closing price of $2.50 on April 20, 2010) as a general and administrative expense in the three months ended June 30, 2010. On May 6, 2011, the Company issued 50,000 shares of its common stock to this individual for consulting services to be rendered in 2011.

Consulting fees totaling $37,000 and $250,730, respectively, were included in general and administrative expenses for the six months ended June 30, 2011 and 2010, respectively.

Investment agreements

On July 9, 2010, the Company entered into an Investment Agreement (the “Investment Agreement”) with Kodiak Capital Group, LLC (“Kodiak”) pursuant to which the Company has agreed to issue and sell to the Investor, and Kodiak has agreed to purchase from the Company, up to that number shares of the Company’s common stock having an aggregate purchase price of $1,000,000 (the “Financing”). Pursuant to the Investment Agreement, the price per share will be determined once the Company submits a written notice (the “Put Notice”) to Kodiak stating the dollar amount in U.S. dollars the Company intends to sell to Kodiak and will be at a price equal to 83% of the volume-weighted average price of the Company’s common stock five (5) days immediately preceding the date of the Put Notice and five (5) days immediately following the date of the Put Notice. Under the Investment Agreement, the Company may not deliver the Put Notice until after the resale of the Shares has been registered with the Securities and Exchange Commission. Additionally, provided that the Investment Agreement does not terminate earlier, the Company has a three (3) month period, beginning on the trading day immediately following the effectiveness of the registration statement, during which it may deliver the Put Notice to the Investor (the “Open Period”).

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As part of the consideration for the Financing, the Company agreed to pay Kodiak a document preparation fee of $15,000 and to issue Kodiak an additional 15,000 shares of newly-issued Company common stock at the closing of the Financing.

Under the Investment Agreement, Kodiak will only purchase shares when the Company meets the following conditions:

	-	a registration statement has been declared effective and remains effective for the resale of the Shares until the closing of the Financing;
	-	at all times during the period beginning on the date of the Put Notice and ending on the date of the closing of the Financing, the Company’s common stock has been listed on the OTC Bulletin Board and has not been suspended from trading thereon for a period of two (2) consecutive trading days during the Open Period;
	-	the Company has not been notified of any pending or threatened proceeding or other action to delist or suspend the Company’s common stock;
	-	the Company has complied with its obligations and is otherwise not in breach of or in default under the Investment Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith;
	-	no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Shares; and
	-	the issuance of the Shares will not violate any shareholder approval requirements of the market or exchange on which the Company’s common stock are principally listed.

The Investment Agreement will terminate when any of the following events occur:

	-	Kodiak has purchased an aggregate of $1 million of the Company’s common stock;
	-	upon written notice from the Company to Kodiak.

Similarly, this Investment Agreement, may, at the option of the non-breaching party, terminate if Kodiak or the Company commits a material breach, or becomes insolvent or enters bankruptcy proceedings.

The Company also entered into a Registration Rights Agreement with Kodiak on July 9, 2010. Pursuant to the Registration Rights Agreement, the Company was obligated to file a registration statement registering the resale of the Shares. The Company filed a registration statement on Form S-1 on July 30, 2010. The registration statement was declared effective on September 7, 2010.

On December 17, 2010, the Company issued 15,000 shares of its common stock to Kodiak for consulting services rendered pursuant to the Investment Agreement (see Note 13). The Company recorded the $13,050 estimated fair value of the shares (based on the market closing price of $0.87 on December 31, 2010) as a general and administrative expense in the three months ended December 31, 2010.

On December 17, 2010, the Company issued 1,000,000 shares of its common stock to Kodiak pursuant to the Investment Agreement (see Note 13). The Company received net proceeds from Kodiak of $743,678 ($785,678 gross based on a price of $0.785678 per share, less $42,000 fees and costs charged by Kodiak.

On April 18, 2011, the Company entered into another Investment Agreement (the “Investment Agreement”) with Kodiak Capital Group, LLC (the “Investor”) pursuant to which the Company has agreed to issue and sell to the Investor, and the Investor has agreed to purchase from the Company, up to that number shares of the Company's common stock, at $0.001 par value per share, having an aggregate purchase price of $1,500,000 (the “Shares”) (the “Financing”). Pursuant to the Investment Agreement, the price per share will be determined once the Company submits a written notice (the “Put Notice”) to the Investor stating the dollar amount in U.S. dollars the Company intends to sell to the Investor and will be based on the following formula: eighty five percent (85%) of the volume-weighted average price of the Company’s common stock five (5) days immediately preceding the date of the Put Notice and five (5) days immediately following the date of the Put Notice. Under the Investment Agreement, the Company may not deliver the Put Notice until after the resale of the Shares has been registered with the Securities and Exchange Commission. Additionally, provided that the Investment Agreement does not terminate earlier, the Company has a six (6) month period, beginning on the trading day immediately following the effectiveness of the registration statement, during which it may deliver the Put Notice to the Investor (the “Open Period”).

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Under the Investment Agreement, the Investor will only purchase shares when the Company meets the following conditions: a registration statement has been declared effective and remains effective for the resale of the Shares until the closing of the Financing; at all times during the period beginning on the date of the Put Notice and ending on the date of the closing of the Financing, the Company’s common stock has been listed on the Over-the-Counter Bulletin Board and has not been suspended from trading thereon for a period of two (2) consecutive trading days during the Open Period; the Company has not been notified of any pending or threatened proceeding or other action to delist or suspend the Company’s common stock; the Company has complied with its obligations and is otherwise not in breach of or in default under the Investment Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith; no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Shares; and the issuance of the Shares will not violate any shareholder approval requirements of the market or exchange on which the Company’s common stock are principally listed.

The Investment Agreement will terminate when any of the following events occur: the Investor has purchased an aggregate of $1.5 million of the Company’s common stock; upon written notice from the Company to the Investor; and upon the expiration of the Open Period.

Similarly, this Investment Agreement, may, at the option of the non-breaching party, terminate if the Investor or the Company commits a material breach, or becomes insolvent or enters bankruptcy proceedings.

The Company also entered into a Registration Rights Agreement with the Investor on April 18, 2011. Pursuant to the Registration Rights Agreement, the Company is obligated to file a registration statement registering the resale of the Shares. On April 28, 2011, the Company filed a registration statement on Form S-1 with the SEC to register the resale of the shares. This registration statement was declared effective on May 9, 2011. To the date of the issuance of these financial statements, the Company has not as yet submitted a written “Put Notice” to Kodiak under the Investment Agreement, which has not otherwise been terminated by either party, stating the dollar value of Company common stock it intends to sell under the Investment Agreement with Kodiak. The Company has until November 9, 2011 to submit the notice to Kodiak. Whether the Company will submit the notice is dependent upon its management’s evaluation of the put price relative to its current stock trading price, and the Company’s needs for working capital.

Concentrations and risks

Substantially all of the Company’s assets are located in China and 100% of the Company’s revenues have been derived from customers located in China.

Substantially all of Harbin Hainan Kangda and Taishan Kangda’s business operations are conducted in the PRC and governed by PRC laws and regulations. Because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Under existing PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from the transaction, 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 25 appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC 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.

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company maintains cash balances that are held in two banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear a risk if any of these banks become insolvent. As of June 30, 2011 and December 31, 2010, the Company’s uninsured cash balances were approximately $3,982,463 and $2,366,954, respectively.

NOTE 17 - SEGMENT AND OTHER INFORMATION

The Company operates in one industry segment – the production and sale of cactus, cactus health food, and other cactus products. Substantially all of the Company’s identifiable assets at June 30, 2011 and December 31, 2010 were located in the PRC. Net sales for the periods presented were all derived from PRC customers. During the three months ended June 30, 2011, three customers accounted for 25%, 14% and 11%, respectively, of net sales. During the comparable period of 2010, two customers accounted for 13% and 11%, respectively, of net sales. During the six months ended June 30, 2011, three customers accounted for 17%, 16% and 10%, respectively, of net sales. During the comparable period of 2010, three customers accounted for 18%, 11% and 10%, respectively, of net sales.

Net sales by product categories consisted of:

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Nutraceuticals	$	3,925,596		$	3,233,594		$	6,446,324		$	5,022,721
Beverages		1,190,112			3,173,069			2,867,054			4,571,771
Cactus feed		1,772,206			1,340,547			2,691,291			1,808,919
Raw and intermediate materials		483,868			148,447			701,910			1,798,641
Cigarettes products		2,134,702			837,752			3,250,257			1,050,391
Total Sales	$	9,506,484		$	8,733,409		$	15,956,836		$	14,252,443

Cooperation Processing Agreement

On February 14, 2011, Harbin Hainan Kangda entered into a Cooperation Processing Agreement with Shandong Qingdao Cigarette Factory (“Shandong Qingdao”). Under the agreement, Harbin has granted Shandong Qingdao the right to use Harbin’s cigarette trademarks and patents and provides Shandong Qingdao with dry cactus, fine cut tobacco, and certain other raw materials to assist Shandong Qingdao’s production of cigarette products for sale. Shandong Qingdao is responsible for the production of the cigarettes at its facilities and the sale of the cigarette products under its operating license to do so.

The agreement provides for monthly payments from Shandong Qingdao to Harbin equal to 30% of the prior month’s production amount (currently calculated at 2,700 RMB, or approximately $418, per box of 50 cartons) less processing fees (currently allocated at 660 RMB or approximately $102, per box of 50 cartons). Shangdong Qingdao retains the remaining 70% of the production amount (the aggregate production amount of 9,000 RMB, or $1,392 per box of 50 cartons) pursuant to the agreement since it is responsible for selling the cigarettes products. The net amounts receivable from Shandong Qingdao are reported by the Company in the consolidated statements of income and comprehensive income net of the Company’s raw material costs and the processing fee it incurs to Shandong Qingdao as “Production Revenue From Shandong Qingdao Processing, Net”.

A summary of the “Production Revenue From Shandong Qingdao Processing Agreement, Net” for the three and six months ended June 30, 2011 follows:

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CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Three Months			Six Months
		Ended			Ended
		June 30, 2011			June 30, 2011
Company 30% shares of gross production revenue ( at 2,700 RMB per box)	$	2,683,615		$	2,895,785
Less Company costs under the agreement:
Cost of raw material provided by Harbin to Shandao Qingdao		770,164			831,987
Processing fee incurred under agreement by Harbin to Shandong Qingdao (at 660RMB/$102 per box) for producation and sales		655,961			691,323
Total Company costs under the agreement		1,426,125			1,523,310
Production revenue, net	$	1,257,490		$	1,372,475

NOTE 18 - TERMINATION OF COMMON STOCK PURCHASE AGREEMENT (LIMITED PRIVATE PLACEMENT OFFERING WITH SEASIDE 88, LP) ENTERED INTO IN NOVEMBER 2009

On November 15, 2009, the Company entered into a Common Stock Purchase Agreement (the “Agreement”) with Seaside 88, LP (“Seaside”) relating to the offering and sale of up to 2,100,000 shares of Company common stock. Subject to the limitations and qualifications set forth therein, the Agreement required the Company to issue and sell, and Seaside to purchase, up to 150,000 shares of common stock once every two weeks, subject to the satisfaction of customary closing conditions. At the initial closing and at each subsequent closing, on each 14th day thereafter for twenty-six (26) weeks, the offering price of the Common stock was to equal 87% of the volume weighted average trading price of the Common Stock for the ten consecutive trading days immediately preceding each subsequent closing date. If, with respect to any subsequent closing, the volume weighted average trading price of the Common Stock for the three trading days immediately prior to such closing was below $1.25 per share, then the particular subsequent closing was not to occur and the aggregate number of Shares to be purchased was to be reduced by 150,000 shares of Common Stock, The Agreement provided that the Company may, at its sole discretion, upon thirty (30) days’ prior written notice to Seaside, terminate the Agreement after the fifth subsequent closing. The Agreement contained representations and warranties and covenants for each party, which must be true and have been performed at each closing. The Agreement may have been terminated by Seaside, by written notice to the Company, if the initial closing was not consummated on or before March 31, 2010, provided, however, if the Company receives comments from the Securities and Exchange Commission on the registration statement covering the sale to Seaside, or the resale by Seaside, of the Shares, this date was to be extended until April 30, 2010.

On April 30, 2010, the Company entered into a termination agreement (the “Termination Agreement”) with Seaside pursuant to which the parties agreed to mutually terminate the Common Stock Purchase Agreement relieving the Company of any obligations arising out of the agreement, including liquidated damages penalties concerning shares that were to be purchased from the Company by Seaside and registered by the Company with the Securities and Exchange Commission.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results. These forward-looking statements are made as of the date of the filing of the Form 10-Q and the Company undertakes no responsibility to update these forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report. The Company’s fiscal year end is December 31.

Company Overview

The Company is principally engaged in the development, production, marketing and sales of products derived from Cactus plant and Cactus fruits. The Company’s product lines include cactus nutraceuticals, cactus nutritional food and drinks, cactus feed, and raw and intermediate materials.

The Company occupies 387 acres of cactus-farms in the Guangdong and Heilongjiang Provinces of China, of which approximately 245 acres are leased from third partied through operating leases on April 1, 2008 for a term of 30 years and of which the right of use of the 142 acres land are vested in the Company.

The Company predominantly grows three species of cacti -- Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen. Mexican Pyramid and Mexican Queen cacti are used in cactus fruit drinks and nutraceutical products. Mexican Milpa-Alta is predominantly used in nutritional food products. Most of the fruit produced from the cactus plants is processed into cactus fruit juice, which is the raw material for our cactus nutritional drinks. Most of the harvested edible cacti are processed into dry powders, which are used in our cactus nutraceutical products. The Company’s annual production capability of edible cacti in 2009 was 19,184 tons.

The Company engages with, by co-operative production agreements, local pharmaceutical, food and beverage manufacturers to produce its consumer products. This strategy allows the Company to fill the orders quickly with short production runs and to reduce the requirements in fixed assets investment. The Company currently has entered into co-production agreements with five processors in China. They are Harbin Bin County Hualan Dairy Factory, Harbin Ice Lantern Noodle Factory, Tsingtao Brewery (Harbin) Inc., Harbin Diwang Pharmacy Co., Ltd. (a GMP or Good Manufacturing Practice certified processor), and Mudanjiang Kangwei Health Food Company, Ltd. GMP or Good Manufacturing Practice certifications are awarded by the State Food and Drug Administration of China to processors that meet the safety and quality assurance standards set by the State Food and Drug Administration of China.

Pursuant to these contracts, the Company provides raw materials, quality control guidelines and technical support while the processors provide other materials, processing facilities and labor to manufacture products for the Company. These processors are required to adhere strictly to the Company’s production guidelines and instructions. The Company inspects all final products. The Company's agreements with all of its five processors expire in 2012. The Company currently has long term agreements with all five processors which automatically renew at expiration in 2012 for one year terms unless terminated by either party 30 days prior to the expiration of the agreements.

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The Company has also established its own cactus beverage and fruit wine production facilities. The Company’s cactus beverage product category includes cactus beer, cactus fruit wine (including the brand name of Overlord Scourge Flower Imperial Wine), cactus palm juices and cactus fruit drinks.

In addition, the Company has its own research and development facility, the Heilongjiang Sino-Mexico Cactus Development and Utilization Institute, which is licensed by Heilongjiang Science & Technology Committee. The Institute has utilized patented technology to independently develop cactus-based nutraceuticals and nutritional food and drink product formulas and production processes. The Institute has 18 patents approved and 12 patent applications currently pending.

Company History

Our Company was initially incorporated as InvestNet, Inc. (“InvestNet”) on March 16, 2000 under the laws of the State of Nevada. Prior to June 3, 2005, the Company’s operations consisted of real time software and IT solutions which the Company held through its subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited. Due to the fact that the Company was unable to generate sufficient cash flows from operations, obtain funding to sustain operations nor reduce or stabilize expenses to the point where it could have realized a net positive cash flow, management and the board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that the Company could continue to operate. On May 13, 2005, InvestNet entered into a series of agreements to effect a “reverse merger transaction” via a share exchange and through the conversion of a convertible promissory note, as described below, with China Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”), a British Virgin Islands (“BVI”) incorporated on November 26, 2004.

These documents included a Stock Purchase Agreement, pursuant to which InvestNet issued 30,000,000 shares to a stockholder of BVI China Kangtai for $300,000. Additionally, InvestNet entered into an Agreement and Plan of Reorganization, pursuant to which the stockholders of BVI China Kangtai exchanged 12% of BVI China Kangtai’s outstanding shares for 110,130,615 shares of InvestNet. Additionally, InvestNet issued a Convertible Promissory Note to BVI China Kangtai or its designees in the amount of $8,070,000 plus accrued interest at a rate of 5% per annum or convertible at the option of the holder(s) in the event that InvestNet effected a one for seventy reverse split of InvestNet’s common stock into the remaining 88% of the outstanding shares of BVI China Kangtai (the “Convertible Note”). The Company did effect a one for seventy reverse split of all of its outstanding shares of Common Stock and changed its name (to “China Kangtai Cactus Bio-Tech Inc.”) and trading symbol on the OTC Bulletin Board (to “CKGT”) on August 25, 2005. The holders of the Convertible Note converted the Convertible Note a day later on August 26, 2005 into 14,248,395 shares of Common Stock of the Company. As the result of the share exchange and conversion of the Convertible Note, the Company completed a “reverse merger transaction” whereby InvestNet acquired 100% of BVI China Kangtai, which wholly owns Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”).

Harbin Hainan Kangda is presently our main operating subsidiary. Harbin Hainan Kangda is in the business of selling and producing cactus and cactus related products in the PRC as more fully described below. In connection with the “reverse merger transaction”, we completely sold all the Company’s real time software and IT solutions operations by selling all of the stock held by the Company in its prior wholly owned subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited to V-Capital Limited, a Republic of Mauritius corporation which is controlled by a former director of InvestNet.

On June 3, 2005, in connection with the reorganization of the Company and the acquisition of BVI China Kangtai and its wholly owned subsidiary, Harbin Hainan Kangda, the Company’s executive officers and directors significantly changed. Specifically, Norman Koo resigned as a director, Chief Executive Officer and President of the Company; Terence Ho resigned as a director, Chief Financial Officer, and Treasurer of the Company; Vivian Szeto resigned as a director (However, Ms. Szeto’s resignation from the Board of Directors was contingent on the Company completing its filing and mailing requirements of its Schedule 14f-1 which occurred on July 22, 2005 and so, from June 3, 2005 to July 22, 2005 she served as the Company’s sole director) and Secretary of the Company; Johnny Lu resigned as a director of the Company; and Mantin Lu resigned as a director of the Company.

In contemplation of the aforementioned resignations, also on June 3, 2005, the Board of Directors appointed in accordance with Section 3.04 of the Company’s Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song Yang as members of the Company’s Board of Directors, subject to the fulfillment of the filing and mailing requirements, including the 10 day waiting period of its Schedule 14f-1 that was sent to all stockholders of the Company pursuant to section 14(f) of the Securities Exchange Act of 1934 which occurred on July 22, 2005 and appointed the following officers to serve immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu, Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang, Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou, Assistant General Manager of the Company.

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On July 20, 2005, InvestNet’s sole director, Vivian Szeto, and a majority of the Company’s stockholders unanimously approved and ratified a one for seventy reverse split (the “Reverse Split”) of the Company’s common stock and the amendment and restatement of the Company’s Articles of Incorporation to effect a name change of the Company from “Investnet, Inc.” to “China Kangtai Cactus Bio-Tech Inc.”. The Reverse Split became effective on August 25, 2005; 20 days after the Company sent an Information Statement to all of its stockholders and after the filing of the Amended and Restated Articles of Incorporation with the Secretary of State of Nevada. As a result of the Reverse Split, the number of issued and outstanding shares of common stock of the Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after the Reverse Split on August 26, 2005, the Convertible Note was converted by its holders(s) into 14,248,395 shares of the Company, which increased the total outstanding shares of the Company to 17,105,625 shares. The Company’s trading symbol was changed by the OTC Bulletin Board Stock Market (“OTCBB”) to “CKGT” to better reflect the Company’s new name. The Company has also changed its Web site to www.xrz.cn.

On June 26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a company with limited liability formed under the laws of the People’s Republic of China for $1,574,000 in cash. Taishan Kangda’s assets include large areas of cactus plantation and production facilities in Guangdong Province in southeast China. The acquisition allows the Company to establish production facilities closer to its existing cactus plantations in Guangdong Province in order to reduce transportation cost and to distribute its products more effectively in southeast China.

The Company has three wholly-owned owned subsidiaries: China Kangtai Cactus Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI”) ; Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company (“Harbin Hainan Kangda”); and Taishan Kangda, a PRC company.

Kangtai BVI is a holding company and does not have any operations. Taishan Kangda is engaged in the cultivation and harvest of cactus plants and the production of our cactus raw materials. Harbin Hainan Kangda is engaged in the development, production, sales and marketing of our products derived from the raw materials produced by Taishan Kangda.

The following discussion should be read in conjunction with our financial statements and notes thereto included in this Form 10-Q filed with SEC.

Results of Operations

Comparison of Sales for the Three Months Ended June 30, 2011 and 2010

Net sales by product categories consisted of:

Sales for the three months ended June 30, 2011 totaled $9,506,484, an increase of $773,075, or 9% compared to the sales of $8,733,409 in 2010. The increase in sales is attributable to the fact that the Company’s products are efficiently marketed and well accepted by consumers, such in the case with our nutraceuticals, cactus cigarettes and cactus feed products. The increase in sales also resulted from our new acquired patents and new products. The sale of nutraceuticals products was $3,925,596 in 2011, an increase of $692,002, or 21%, compared to $3,233,594 in 2010. The sale of our cactus feed products was $1,772,206 in 2011, an increase of $431,659, or 32%, compared to $1,340,547 in 2010. The sale of cactus cigarettes products was $2,134,702 in 2011, an increase of $1,296,950 or 155%, compared to $837,752 in 2010. The sales from our raw and intermediate materials products was $483,868 in 2011, an increase of $335,421, or 226%, compared to $148,447 in 2010. The sale of beverages products was $1,190,112 in 2011, a decrease of $1,982,957, or (62%), compared to $3,173,069 in 2010. It resulted from the change of the Company’s products mix.

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On February 14, 2011, Harbin Hainan Kangda entered into a Cooperation Processing Agreement with Shandong Qingdao Cigarette Factory (“Shandong Qingdao”). Under the agreement, Harbin has granted Shandong Qingdao the right to use Harbin’s cigarette trademarks and patents and provides Shandong Qingdao with dry cactus, fine cut tobacco, and certain other raw materials to assist Shandong Qingdao’s production of cigarette products for sale. Shandong Qingdao is responsible for the production and sale of the cigarette products. The net income from Shandong Qingdao was $1,257,490 for the three months ended June 30, 2011.

Cost of Sales

Cost of sales totaled $6,257,536 in the three months ended June 30, 2011, an increase of $832,701, or 15%, compared to $5,424,835 in 2010. The increase in cost of sales resulted from the increase in sales. The gross profit rate was 34% for the three months ended June 30, 2011, a decrease of 4 percentage points as compared to 38% in the comparable period of 2010. The decrease of gross margin resulted from the change of the Company’s products mix. Cactus feed and raw and intermediate materials have a lower gross margin rate than the Company’s other products.

Operating Expenses

Operating expenses for the three months ended June 30, 2011 totaled $654,321, a decrease of $357,647, or (35%), compared to $1,011,968 in the comparable period of 2010. The decrease in operating expenses was mainly due to the decrease in consulting and legal fees. In April 2010, the Company granted 250,000 options to its attorney and expensed an estimated fair market value of $390,275. In April 2010, the Company issued 50,000 shares of its common stock to an individual for consulting services rendered and expensed $125,000 estimated fair value of the shares. The decrease in legal and consulting expenses was offset by the increase of $193,668 in amortization of intangible assets, which resulted from our acquisition of patents and trademarks in 2010.

Other Income and Expenses

Other expenses (net) for the three months ended June 30, 2011 totaled $63,218, compared to other income (net) of $1,421,662 in 2010. The decrease in other income mainly resulted from the reduction in income from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values. Such income totaled $99,780 in 2011, compared to income of $1,435,280 from the revaluation in the comparable period of 2010. In addition, there was a loss on the disposal of property and equipment of $150,542 during the three months ended June 30, 2011.

Income from Operations

Income from operations totaled $3,852,117 in the three months ended June 30, 2011, an increase of $1,555,511, or 68%, compared to $2,296,606 in the comparable period of 2010. The increase in our income from operations resulted mainly from net income earned during the three months ended June 30, 2011 from the Shandong Qingdao Cooperative Processing Agreement of $1,257,490 and of $357,647 lower operating expenses in the current three months period compared to 2010.

Net Income

Net income totaled $2,829,424 for the three months ended June 30, 2011, a decrease of $171,921, or 6%, compared to $3,001,345 in 2010. The decrease in net income was caused mainly by the reduced income from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values of $1,335,500 offset by net income earned during the three months ended June 30, 2011 from the Shandong Qingdao Cooperative Processing Agreement of $1,257,490 and of $357,647 lower operating expenses in the current three month period compared to 2010. In addition, the three months ended June 30, 2011 included a loss on disposal of property and equipment of $150,542.

Absent the revaluation income of $99,780 in 2011, the Company would have had a net income of $2,729,644 and basic and diluted earnings per common share would have been $0.12 for the three months ended June 30, 2011. Absent the revaluation income of $1,435,280 in 2010, the Company would have had a net income of $1,566,065, and basic and diluted earnings per common share would have been $0.07 for the three months ended June 30, 2010.

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Comparison of Sales for the Six Months Ended June 30, 2011 and 2010

Net sales by product categories consisted of:

Sales for the six months ended June 30, 2011 totaled $15,956,836, an increase of $1,704,393, or 12% compared to the sales of $14,252,443 in 2010. The increase in sales is attributable to the fact that the Company’s products are efficiently marketed and well accepted by consumers, such in the case with our nutraceuticals, cactus cigarettes and cactus feed products. The increase in sales also resulted from our new acquired patents and new products. The sale of nutraceuticals products was $6,446,324 in 2011, an increase of $1,423,603, or 28%, compared to $5,022,721 in 2010. The sale of our cactus feed products was $2,691,291 in 2011, an increase of $882,372, or 49%, compared to $1,808,919 in 2010. The sale of cactus cigarettes products was $3,250,257 in 2011, an increase of $2,199,866 or 209%, compared to $1,050,391 in 2010. The sales from our raw and intermediate materials products was $701,910 in 2011, a decrease of $1,096,731, or (61%), compared to $1,798,641 in 2010. The sale of beverages products was $2,867,054 in 2011, a decrease of $1,704,717, or (37%), compared to $4,571,771 in 2010. It resulted from the change of the Company’s products mix.

On February 14, 2011, Harbin Hainan Kangda entered into a Cooperation Processing Agreement with Shandong Qingdao Cigarette Factory (“Shandong Qingdao”). Under the agreement, Harbin has granted Shandong Qingdao the right to use Harbin’s cigarette trademarks and patents and provides Shandong Qingdao with dry cactus, fine cut tobacco, and certain other raw materials to assist Shandong Qingdao’s production of cigarette products for sale. Shandong Qingdao is responsible for the production and sale of the cigarette products. The net income from Shandong Qingdao was $1,372,475 for the six months ended June 30, 2011.

Cost of Sales

Cost of sales totaled $10,310,318 in the six months ended June 30, 2011, an increase of $845,621, or 9%, compared to $9,464,697 in 2010. The increase in cost of sales resulted from the increase in sales. The gross profit rate was 35% for the six months ended June 30, 2011, an improvement of one percentage point as compared to 34% in the comparable period of 2010.

Operating Expenses

Operating expenses for the six months ended June 30, 2011 totaled $1,135,421, a decrease of $175,062, or 13%, compared to $1,310,483 in the comparable period of 2010. The decrease in operating expenses was mainly due to the decrease in consulting and legal fees. In April 2010, the Company granted 250,000 options to its attorney and expensed an estimated fair market value of $390,275. In April 2010, the Company issued 50,000 shares of its common stock to an individual for consulting services rendered and expensed $125,000 estimated fair value of the shares. The decrease in legal and consulting expenses was offset by the increase of $450,005 in amortization of intangible assets, which resulted from our acquisition of patents and trademarks in 2010.

Other Income and Expenses

Other income (net) for the six months ended June 30, 2011 totaled $298,956, compared to other income (net) of $2,924,429 in 2010. The decrease in other income mainly resulted from the reduction in income from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values. Such income totaled $475,205 in 2011, compared to income of $2,951,195 from the revaluation in the comparable period of 2010. In addition, there was a loss on the disposal of property and equipment of $150,542 during the six months ended June 30, 2011.

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Income from Operations

Income from operations totaled $5,883,572 in the six months ended June 30, 2011, an increase of $2,406,309, or 69%, compared to $3,477,263 in the comparable period of 2010. The increase in our income from operations resulted mainly from net income earned during the six months ended June 30, 2011 from the Shandong Qingdao Cooperative Processing Agreement of $1,372,475 and of $175,062 lower operating expenses in the current six months period compared to 2010.

Net Income

Net income totaled $4,694,646 for the six months ended June 30, 2011, a decrease of $659,337, or 12%, compared to $5,353,983 in 2010. The decrease in net income was caused mainly by the reduced income from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values of $2,475,990 offset by the net income earned during the six months ended June 30, 2011 from the Shandong Qingdao Cooperative Processing Agreement of $1,372,475 and of $175,062 lower operating expenses in the current six month period compared to 2010. In addition, the six months ended June 30, 2011 included a loss on disposal of property and equipment of $150,542.

Absent the revaluation income of $475,205 in 2011, the Company would have had a net income of $4,219,441 and basic and diluted earnings per common share would have been $0.19 for the six months ended June 30, 2011. Absent the revaluation income of $2,951,195 in 2010, the Company would have had a net income of $2,402,788, and basic and diluted earnings per common share would have been $0.12 and $0.11, respectively, for the six months ended June 30, 2010.

Liquidity and Capital Resources

We had cash and cash equivalents of $4,025,502 and $2,630,035 as of June 30, 2011 and December 31, 2010, respectively. Our funds are kept in financial institutions located in China, which do not provide insurance for amounts on deposit. Moreover, we are subject to the regulations of the PRC which restrict the transfer of cash from China, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC.

Net cash provided by operating activities was $979,913 and $6,078,370 in the six months ended June 30, 2011and 2010, respectively. The change in net cash provided by operating activities in 2011 was due to the $2,649,078 negative change in levels of inventories ($1,531,663 increase in 2011; $1,117,415 decrease in 2010). It was also attributable to the $581,339 negative change in taxes payable in 2011 due to payments of PRC corporation income taxes in excess of amounts currently provided for in each period’s operations in 2011 ($371,228 decrease in 2011; $210,111 increase in 2010); and collection of other receivables of $3,747,926 in 2010, but none collected in 2011; offset by an increase in 2011 net income adjusted for noncash items over that for 2010 of $2,004,569.

Net cash provided by or (used in) investing activities was $111,169 and $(7,738,315) for the six months ended June 30, 2011 and 2010, respectively. During 2010, the Company purchased a livestock feed patent in the amount of $7,981,624 (RMB 54,112,700). In the second quarter 2011, the Company sold certain beverage production equipment for $110,669 cash.

Net cash provided by financing activities was $36,633 in the six months ended June 30, 2011, which was an advance from a related party. Net cash provided by financing activities was $869,958 in the comparable period of 2010. The Company received net proceeds of $125,000 from cash exercise of stock options and net proceeds of $750,000 from exercise of B warrants and repaid $5,042 to a related party in the six months ended June 30, 2010.

Note Payable to a Financial Institution

The note payable of $936,056 (6,050,000 RMB) is due to a PRC provincial government financial institution which made the loan to the Company to promote the commercial cultivation of cactus. The loan was made to the Company on an interest-free and unsecured basis and is repayable on demand. Imputed interest is calculated at 6% per annum on the amount due. Total imputed interest recorded as additional paid-in capital amounted to $27,750 and $26,590 for the six months ended June 30, 2011 and 2010, respectively.

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Estimated Liability for Equity-Based Financial Instruments with Characteristics of Liabilities

Effective January 1, 2009, in accordance with EITF Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”, the Company reclassified the fair values at January 1, 2009 of the outstanding Series A Convertible Preferred Stock and the warrants comprising the March 21, 2008 and the July 16, 2008 sales of units (see Note 12) from stockholders’ equity to liabilities, as follows:

Since at January 1, 2009 the carrying value of the outstanding financial instruments was $690,000, the Company recognized a cumulative effect adjustment resulting from a change in accounting principle of $18,760, or a net of $671,240. Accordingly, the unappropriated retained earnings balance at December 31, 2008 was increased from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.

The characteristics which require classification of the Series A Preferred Stock and warrants as liabilities are the Company’s obligations to reduce the conversion price of the Series A Preferred Stock and the exercise price of the warrants in the event that the Company sells, grants, or issues any shares, options, warrants, or any convertible instrument at a price below the $0.60 current conversion price of the Series A Preferred Stock or the current exercise prices of the warrants. As a result, the Company remeasures the fair values of these financial instruments each quarter, adjusts the liability balances, and reflects changes in operations as “income (expense) from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values”.

At June 30, 2011 and December 31, 2010, the fair values of the financial instruments consisted of:

		2011						2010
		Shares / Warrants			Fair Value			Shares / Warrants			Fair Value
		(Unaudited)
Series A Convertible Preferred Stock		-		$	-			50,000		$	51,500
B warrants		-			-			750,000			153,975
C warrants		500,000			-			500,000			171,550
D warrants		600,000			-			600,000			144,180
Total warrants		1,100,000			-			1,850,000			469,705
Total Financial Instruments		1,100,000		$	-			1,900,000		$	521,205

Below is a reconciliation of the change in the fair values of the financial instruments from January 1, 2009 through June 30, 2011.

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		Shares /
		Warrants			Fair Value
Balance, January 1, 2009		5,000,000		$	671,240
Revaluation credited to operations		-			(262,725	)
Balance, March 31, 2009		5,000,000			408,515
Revaluation charged to operations		-			1,761,440
Balance, June 30, 2009		5,000,000			2,169,955
Conversion of Series A Preferred Stock to Common Stock		(416,667	)		(666,667	)
Revaluation charged to operations		-			2,738,135
Balance, September 30, 2009		4,583,333			4,241,423
Conversion of Series A Preferred Stock to Common Stock		(683,333	)		(1,282,500	)
Exercise of A warants		(1,250,000	)		(1,589,895	)
Revaluation charged to operations		-			3,689,332
Balance, December 31, 2009		2,650,000			5,058,360
Exercise of B warrants		(475,000	)		(612,750	)
Revaluation credited to operations		-			(1,515,915	)
Balance, March 31, 2010		2,175,000			2,929,695
Exercise of B warrants		(275,000	)		(338,250	)
Revaluation credited to operations		-			(1,435,280	)
Balance, June 30, 2010		1,900,000			1,156,165
Revaluation credited to operations		-			(505,305	)
Balance, September 30, 2010		1,900,000			650,860
Revaluation credited to operations		-			(129,655	)
Balance, December 31, 2010		1,900,000			521,205
Expiration of B warrants		(750,000	)		-
Conversion of Series A Preferred Stock to Common Stock		(50,000	)		(46,000	)
Revaluation credited to operations		-			(375,425	)
Balance, March 31, 2011		1,100,000			99,780
Revaluation credited to operations		-			(99,780	)
Balance, June 30, 2011 - (Unaudited)		1,100,000		$	-

The Series A Convertible Preferred Stock was valued based on the trading price of the Company’s common stock. The warrants were valued using the Black-Scholes option pricing model with a 100% expected volatility assumption regarding the trading price of the Company’s common stock.

Investment agreements

On July 9, 2010, the Company entered into an Investment Agreement (the “Investment Agreement”) with Kodiak Capital Group, LLC (“Kodiak”) pursuant to which the Company has agreed to issue and sell to the Investor, and Kodiak has agreed to purchase from the Company, up to that number shares of the Company’s common stock having an aggregate purchase price of $1,000,000 (the “Financing”). Pursuant to the Investment Agreement, the price per share will be determined once the Company submits a written notice (the “Put Notice”) to Kodiak stating the dollar amount in U.S. dollars the Company intends to sell to Kodiak and will be at a price equal to 83% of the volume-weighted average price of the Company’s common stock five (5) days immediately preceding the date of the Put Notice and five (5) days immediately following the date of the Put Notice. Under the Investment Agreement, the Company may not deliver the Put Notice until after the resale of the Shares has been registered with the Securities and Exchange Commission. Additionally, provided that the Investment Agreement does not terminate earlier, the Company has a three (3) month period, beginning on the trading day immediately following the effectiveness of the registration statement, during which it may deliver the Put Notice to the Investor (the “Open Period”).

As part of the consideration for the Financing, the Company agreed to pay Kodiak a document preparation fee of $15,000 and to issue Kodiak an additional 15,000 shares of newly-issued Company common stock at the closing of the Financing.

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The Company also entered into a Registration Rights Agreement with Kodiak on July 9, 2010. Pursuant to the Registration Rights Agreement, the Company was obligated to file a registration statement registering the resale of the Shares. The Company filed a registration statement on Form S-1 on July 30, 2010. The registration statement was declared effective on September 7, 2010.

On December 17, 2010, the Company issued 15,000 shares of its common stock to Kodiak for consulting services rendered pursuant to the Investment Agreement (see Note 13). The Company recorded the $13,050 estimated fair value of the shares (based on the market closing price of $0.87 on December 31, 2010) as a general and administrative expense in the three months ended December 31, 2010.

On December 17, 2010, the Company issued 1,000,000 shares of its common stock to Kodiak pursuant to the Investment Agreement (see Note 13). The Company received net proceeds from Kodiak of $743,678 ($785,678 gross based on a price of $0.785678 per share, less $42,000 fees and costs charged by Kodiak.

On April 18, 2011, the Company entered into another Investment Agreement (the “Investment Agreement”) with Kodiak Capital Group, LLC (the “Investor”) pursuant to which the Company has agreed to issue and sell to the Investor, and the Investor has agreed to purchase from the Company, up to that number shares of the Company's common stock, at $0.001 par value per share, having an aggregate purchase price of $1,500,000 (the “Shares”) (the “Financing”). Pursuant to the Investment Agreement, the price per share will be determined once the Company submits a written notice (the “Put Notice”) to the Investor stating the dollar amount in U.S. dollars the Company intends to sell to the Investor and will be based on the following formula: eighty five percent (85%) of the volume-weighted average price of the Company’s common stock five (5) days immediately preceding the date of the Put Notice and five (5) days immediately following the date of the Put Notice. Under the Investment Agreement, the Company may not deliver the Put Notice until after the resale of the Shares has been registered with the Securities and Exchange Commission. Additionally, provided that the Investment Agreement does not terminate earlier, the Company has a six (6) month period, beginning on the trading day immediately following the effectiveness of the registration statement, during which it may deliver the Put Notice to the Investor (the “Open Period”).

Under the Investment Agreement, the Investor will only purchase shares when the Company meets the following conditions: a registration statement has been declared effective and remains effective for the resale of the Shares until the closing of the Financing; at all times during the period beginning on the date of the Put Notice and ending on the date of the closing of the Financing, the Company’s common stock has been listed on the Over-the-Counter Bulletin Board and has not been suspended from trading thereon for a period of two (2) consecutive trading days during the Open Period; the Company has not been notified of any pending or threatened proceeding or other action to delist or suspend the Company’s common stock; the Company has complied with its obligations and is otherwise not in breach of or in default under the Investment Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith; no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Shares; and the issuance of the Shares will not violate any shareholder approval requirements of the market or exchange on which the Company’s common stock are principally listed.

The Investment Agreement will terminate when any of the following events occur: the Investor has purchased an aggregate of $1.5 million of the Company’s common stock; upon written notice from the Company to the Investor; and upon the expiration of the Open Period.

Similarly, this Investment Agreement, may, at the option of the non-breaching party, terminate if the Investor or the Company commits a material breach, or becomes insolvent or enters bankruptcy proceedings.

The Company also entered into a Registration Rights Agreement with the Investor on April 18, 2011. Pursuant to the Registration Rights Agreement, the Company is obligated to file a registration statement registering the resale of the Shares. On April 28, 2011, the Company filed a registration statement on Form S-1 with the SEC to register the resale of the shares. This registration statement was declared effective on May 9, 2011. To the date of the issuance of these financial statements, the Company has not as yet submitted a written “Put Notice” to Kodiak under the Investment Agreement, which has not otherwise been terminated by either party, stating the dollar value of Company common stock it intends to sell under the Investment Agreement with Kodiak. The Company has until November 9, 2011 to submit the notice to Kodiak. Whether the Company will submit the notice is dependent upon its management’s evaluation of the put price relative to its current stock trading price, and the Company’s needs for working capital.

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Critical Accounting Policies and Estimates

In Note 2 to the audited consolidated financial statements for the years ended December 31, 2010 and 2009 included in our annual report filed with SEC, the Company discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. The Company believes that the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America. The Company applies the following critical accounting policies in the preparation of its financial statements.

General

The Company’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Sales of products are recognized when title to the product and risk of loss transfer to the customer (which depends on the customer) provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable. Sales terms provide for passage of title either at the time shipment is made or at the time of the delivery of product and generally do not include any customer right of return. Shipping and handling costs are included as a component of cost of sales.

Fair Value of Financial Instruments

In connection with the determination of estimated liability for equity-based financial instruments with characteristics of liabilities, the Company used the Black-Scholes option pricing model and the following assumptions: expected volatility of 100%, and risk-free interest rate of 2%.

Foreign Currency Translation

The consolidated financial statements of the Company are translated pursuant to Accounting Standard Codification (“ASC”) 830, “Foreign Currency Matters.” The Company’s subsidiaries, Harbin Hainan Kangda and Guangdong Taishan Kangda, are located and operate in China. The Chinese Yuan is their functional currency. The financial statements of these subsidiaries are translated to U.S. dollars using period-end exchange rates for assets and liabilities, and average exchange rates for revenues, costs and expenses. Translation adjustments are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Transaction gains or losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted 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 Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal controls over financial reporting that occurred during the second quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

To the best knowledge of the Officers and Directors of the Company, the Company is not a party to any material legal proceeding or litigation and such persons know of no other material legal proceeding or litigation contemplated or threatened.

Item 1A. Risk Factors

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA KANGTAI CACTUS BIO-TECH INC.
Date: August 15, 2011	By:	/s/ Jinjiang Wang
		Jinjiang Wang
		President, Chief Executive Officer, Director and
		Principal Executive Officer
Date: August 15, 2011	By:	/s/ Hong Bu
		Hong Bu
		Chief Financial Officer, Director and
		Principal Financial and Accounting Officer

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