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 September 30, 2010

[   ] 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 [   ] 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 [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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 November 12, 2010, the issuer had outstanding 21,240,527 shares of common stock, $0.001 par value.

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

Quarterly Period Ended September 30, 2010

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 (audited)	1
	Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three and Nine Months ended September 30, 2010 and 2009	2
	Condensed Consolidated Statements of Stockholder's Equity (Unaudited)	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009	4
	Notes to Unaudited Condensed Consolidated Financial Statements as of September 30, 2010	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	(Removed and Reserved)
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,		December 31,
		2010		2009
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	549,398	$	2,918,068
Accounts receivable, net of allowance for doubtful accounts of $993,537 and $1,006,597, respectively		6,414,647		2,283,257
Inventories		1,691,480		2,440,904
Prepaid expenses		2,586		1,265
Other receivables		21,257		3,992,562
Total Current Assets		8,679,368		11,636,056
Property, plant and equipment, net of accumulated depreciation of $2,482,141 and $2,112,093, respectively		5,528,550		5,750,876
Other Assets
Intangible assets, net of accumulated amortization of $1,409,971 and $1,054,531, respectively		8,077,294		316,300
Land use rights, net of accumulated amortization of $773,194 and $473,151, respectively		18,081,669		17,981,834
Deposits in connection with Asset Purchase Agreement		2,690,460		-
Total Assets	$	43,057,341	$	35,685,066
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	228,737	$	311,417
Note payable		904,294		885,115
Taxes payable		1,139,351		789,141
Other payable		-		5,042
Total Current Liabilities		2,272,382		1,990,715
Estimated liability for equity-based financial instruments with characteristics of liabilities:
Designated as Series A convertible Preferred Stock (50,000 shares issued and outstanding          at September 30, 2010 and December 31, 2009, respectively)		51,500		135,500
Warrants		599,360		4,922,860
Total		650,860		5,058,360
Total Liabilities		2,923,242		7,049,075
Commitments and Contingencies		-		-
Stockholders' Equity
Preferred stock, par value $.001 per share; authorized 200,000,000 shares; issued and outstanding: 50,000 and 50,000 shares, respectively		-		-
Common stock, par value $.001 per share; authorized 200,000,000 shares,          issued or issuable and outstanding: 21,227,527 and 20,024,024 shares, at September 30, 2010 and December 31, 2009, respectively		21,228		20,024
Additional paid-in capital		13,476,146		11,003,276
Retained earnings
Appropriated		4,719,992		3,881,804
Unappropriated		18,226,723		10,903,711
Accumulated other comprehensive income (Foreign currency translation adjustments)		3,690,010		2,827,176
Total stockholders' equity		40,134,099		28,635,991
Total Liabilities and Stockholders' Equity	$	43,057,341	$	35,685,066

See notes to consolidated financial statements.

1

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
Net Sales	$	9,522,875		$	8,187,397		$	23,775,318		$	18,030,093
Cost of Sales		(5,902,532	)		(4,941,881	)		(15,367,229	)		(10,810,714	)
Gross Profit		3,620,343			3,245,516			8,408,089			7,219,379
Operating Expenses
Selling expenses		30,287			71,625			88,702			129,569
Provision for (reduction in) reserve for allowances, returns and doubtful accounts		-			(492,206	)		(31,146	)		457,307
Research and development		36,940			-			140,955			-
General and administrative expenses		207,170			112,896			1,194,560			236,521
Depreciation		19,262			19,210			57,369			58,267
Amortization of land use rights		6,052			9,543			25,120			28,620
Amortization of intangible assets		198,037			34,311			332,671			102,906
Total operating expenses		497,748			(244,621	)		1,808,231			1,013,190
Income from Operations		3,122,595			3,490,137			6,599,858			6,206,189
Other Income (Expense)
Interest income		-			43			243			69
Imputed interest expense		(13,409	)		(13,307	)		(39,999	)		(39,909	)
Income (expense) from revaluation of Series A Preferred Stock and A,          B, C, and D warrants with characteristics of liabilities at fair values		505,305			(2,738,135	)		3,456,500			(4,236,850	)
Loss on disposal of property and equipment		(1,666	)		-			(2,085	)		(132	)
Total Other Income (Expenses)		490,230			(2,751,399	)		3,414,659			(4,276,822	)
Income before Income Tax		3,612,825			738,738			10,014,517			1,929,367
Income tax expense		(805,608	)		(455,035	)		(1,853,317	)		(1,026,477	)
Net Income Attributable to Common Stockholders	$	2,807,217		$	283,703		$	8,161,200		$	902,890
Net Income Per Common Share
Basic	$	0.13		$	0.02		$	0.39		$	0.05
Diluted	$	0.13		$	0.01		$	0.38		$	0.05
Weighted Average Number of Common Shares Used to Compute Earnings per Common Share:
Basic		21,227,527			18,030,492			20,850,175			17,933,914
Diluted		21,563,684			19,702,898			21,336,042			19,258,049
Comprehensive Income:
Net income	$	2,807,217		$	283,703		$	8,161,200		$	902,890
Foreign currency translation adjustment		533,534			29,424			862,834			877
Comprehensive Income	$	3,340,751		$	313,127		$	9,024,034		$	903,767

See notes to consolidated financial statements.

2

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)

	Preferred Stock $0.001 par value					Common Stock $0.001 par value				Additional			Unappropriated			Appropriated		Accumulated other
										paid-in			retained			retained		comprehensive
	Shares			Amount		Shares		Amount		capital			earnings			earnings		income			Total
Balance at December 31, 2007	-		$	-		17,739,625	$	17,740		6,607,848		$	7,082,943		$	1,844,937	$	1,738,626		$	17,292,094
Sale of Series A preferred stock	1,250,000			1,250		-		-		719,672			-			-					720,922
Deemed dividends	-			-		-		-		322,750			(322,750	)		-					-
Issuance of shares in consideration for the waiver of liquidated damages	-			-		46,000		46		26,634			-			-		-			26,680
Conversion of Series A preferred stock	(100,000	)		(100	)	100,000		100		0			-			-		-			-
Stock option expense	-			-		-		-		90,635						-					90,635
Imputed interest on note payable	-			-		-		-		52,326			-			-		-			52,326
Transfer to statutory and staff welfare reserves	-			-		-		-		0			(837,408	)		837,408		-			-
Net income for the year ended December 31, 2008													5,681,500								5,681,500
Currency translation adjustment	-			-		-		-		0			-			-		1,309,246			1,309,246
Balance at December 31, 2008 (as restated)	1,150,000			1,150		17,885,625		17,886		7,819,865			11,604,285			2,682,345		3,047,872			25,173,403
January 1, 2009 cumulative effect of change in accounting principle:
Reclassification of Series A Preferred Stock and A, B, C, and D
Warrants from stockholder's equity to liabilities, including revaluation at fair value of$18,760	(1,150,000	)		(1,150	)					(688,850	)		18,760								(671,240	)
Balance at January1, 2009 after cumulative effect adjustment	-			-		17,885,625		17,886		7,131,015			11,623,045			2,682,345		3,047,872			24,502,163
Conversion of Series A preferred stock	-			-		1,100,000		1,100		1,948,067			-			-		-			1,949,167
Cashless exercise of A warrants	-			-		598,006		598		1,290,630			-			-		-			1,291,228
Cash exercise of A warrants	-			-		333,334		333		548,334			-			-		-			548,667
Exercise of stock option	-			-		107,059		107		32,011			-			-		-			32,118
Imputed interest on note payable	-			-		-		-		53,219			-			-		-			53,219
Transfer to statutory and staff welfare reserves	-			-		-		-		-			(1,199,459	)		1,199,459		-			-
Net income for the year ended December 31, 2009	-			-		-		-		-			480,125			-		-			480,125
Currency translation adjustment	-			-		-		-		-			-			-		(220,696	)		(220,696	)
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
Cashless exercise of stock options	-			-		238,503		239		(239	)		-			-		-			-
Stock issued for consulting services	-			-		90,000		90		217,710			-			-		-			217,800
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	-			-		-		-		39,999			-			-		-			39,999
Transfer to statutory and staff welfare reserves	-			-		-		-		-			(838,188	)		838,188		-			-
Net income for the nine months ended September 30, 2010 (Unaudited	-			-		-		-		-			8,161,200			-		-			8,161,200
Currency translation adjustment	-			-		-		-		-			-			-		862,834			862,834
Balance at September 30, 2010 (Unaudited)	-		$	-		21,227,527	$	21,228	$	13,476,146		$	18,226,723		$	4,719,992	$	3,690,010		$	40,134,099

See notes to consolidated financial statements.

3

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		For the Nine Months Ended
		September 30,
		2010			2009
Cash Flows from Operating Activities
Net income	$	8,161,200		$	902,890
Adjustments to reconcile net income          to net cash provided by operating activities:
(Gain) expense from revaluation of Series A Preferred Stock and               A, B, C, and D warrants with characteristics of liabilities at fair values		(3,456,500	)		4,236,850
Issuance of shares in consideration for consulting services		217,800			-
Issuance of options in consideration for legal services		390,275			-
Cashless exercise of stock options charged to operations		-			32,118
Provision for (reduction in) allowances, returns and doubtful accounts		(31,146	)		457,307
Depreciation - cost of sales		256,703			294,709
Depreciation - operating expenses		57,369			58,267
Amortization of land use rights -cost of sales		237,735			109,635
Amortization of land use rights- operating expenses		25,120			28,620
Amortization of intangible assets		332,671			102,906
Imputed interest		39,999			39,909
Loss on disposal of property and equipment		2,085			132
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(4,118,330	)		211,148
Decrease in inventories		749,424			947,095
Increase in prepaid expenses and other receivables		(1,321	)		(1,751	)
Collections of other receivables		3,747,926			-
Decrease in accounts payable and accrued liabilities		(82,680	)		(99,423	)
Increase in taxes payable		350,210			25,366
Net cash provided by operating activities		6,878,540			7,345,778
Cash Flows from Investing Activities
Purchase of patent		(8,088,226	)		-
Purchase of land use rights		-			(4,224,870	)
Purchase of property and equipment		(17,083	)		(4,113,831	)
Collection of amount previously advanced to related party		223,379			-
Deposits in connection with Asset Purchase Agreement		(2,690,460	)		-
Net cash (used for) investing activities		(10,572,390	)		(8,338,701	)
Cash Flows from Financing Activities
Repayment to related party		(5,042	)		-
Cash exercise of options		125,000			-
Exercise of B warrants		750,000			-
Net cash provided by financing activities		869,958			-
Effect of exchange rate changes on cash and cash equivalents		455,222			(7,411	)
Decrease in cash and cash equivalents		(2,368,670	)		(1,000,334	)
Cash and cash equivalents, beginning of period		2,918,068			4,398,897
Cash and cash equivalents, end of period	$	549,398		$	3,398,563
Supplemental disclosures of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	1,565,650		$	962,714
Schedule of non-cash investing and financing activities:
Acquisition of Taichang Baisa land use rights				$	9,736,149
Less amount paid to September 30, 2009					(2,920,845	)
Due seller at September 30, 2009				$	6,815,304

See notes to consolidated financial statements.

4

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 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.

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

The accompanying unaudited condensed 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 – INTERIM FINANCIAL STATEMENTS

The unaudited condensed financial statements as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 have been 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 have been 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 September 30, 2010 and the results of operations and cash flows for the periods ended September 30, 2010 and 2009. 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 months ended September 30, 2010 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2010. The balance sheet at December 31, 2009 has been 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, 2009 as included in our report on Form 10-K, as filed with the SEC on April 15, 2010.

5

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

NOTE 3 - 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.

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 are translated into United States dollars at period-end exchange rates ($0.14947 and $0.14630 at September 30, 2010 and December 31, 2009, respectively). Harbin Hainan Kangda and Taishan Kangda revenues and expenses are translated into United States dollars at weighted average exchange rates for the periods ended September 30, 2010 and 2009. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) 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 are no material foreign currency transaction gains or losses for the three and nine months ended September 30, 2010 and 2009.

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2010 and December 31, 2009 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.

6

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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).

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 and licenses. Patents and licenses are amortized over their expected useful economic lives, which range from 10 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 collectibility is deemed probable.

7

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses totaled $242,607 and $73,295 for the nine months ended September 30, 2010 and 2009.

Research and Development

Research and development costs related to both present and future products are expensed as incurred. Research and development costs totaled $140,955 and $58,636 for the nine months ended September 30, 2010 and 2009, 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, FASB 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 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.

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.

8

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 nine months ended September 30, 2010 and 2009.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2010	2009	2010	2009
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Weighted average shares outstanding - basic	21,227,527	18,030,492	20,850,175	17,933,914
Series A convertible preferred stock	50,000	1,150,000	50,000	1,150,000
Incremental common shares from stock options and warrants	286,157	522,406	435,867	174,135
Weighted average shares outstanding - diluted	21,563,684	19,702,898	21,336,042	19,258,049

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. Antidilutive common shares related to stock options and warrants excluded from the computation of diluted net income per common share were 600,000 and 0, respectively, for the three and nine months ended September 30, 2009.

Segment Information

The Company operates in only one segment, the sale of products made from cactus plants. The Company sells to two customer groups; health foods comprising cactus liquor and juice and sale of cactus powder to pharmaceutical companies for use in medical products.

Statement 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.

Recently Adopted Accounting Standards

In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent event disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.

We adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on our financial statements.

9

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on its financial condition or results of operations.

In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.

Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

10

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

NOTE 4 - INVENTORIES

Inventories consist of:

		September 30,			December 31,
		2010			2009
		(Unaudited)
Cactus stock	$	1,507,640		$	2,149,643
Other raw materials and work-in-process		6,352			28,158
Finished goods		283,078			311,761
Total		1,797,070			2,489,562
Less: allowance for market adjustments to inventories		(105,590	)		(48,658	)
Net	$	1,691,480		$	2,440,904

NOTE 5 – OTHER RECEIVABLES

Other receivables at September 30, 2010 and December 31, 2009 consist of:

		September 30,		December 31,
		2010		2009
		(Unudited)
Land Center of Qitaihe	$	-	$	3,116,843
QitaiheTianhe Pharmaceutical Co. Ltd		-		631,083
Due from related party		21,257		244,636
Total	$	21,257	$	3,992,562

Disposal of property, plant and equipment

On March 25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the “Agreement”) with Qitaihe Kangwei Biotechnology Co., Ltd. (“Seller”). Under the terms of the Agreement, the Company was to acquire (i) land use rights of state-owned land located in Shuguang Village of Xinxing District in Qitaihe City, covering an area of 49 thousand square meters, with a use life of 43 years, (ii) housing ownership of 5,606.20 square meters in Shuguang Village of Xinxing District in Qitaihe City, HeiLongJiang Province and (iii) fixed assets consisting of machinery, equipment and facilities (including equipment, information, file data, spare parts and office supplies) located on the acquired premises. The land use rights, housing ownership and fixed assets were collectively referred to as the “Assets”. Total purchase price under the Agreement was RMB 37,000,000 ($5,413,100).

On December 19, 2009, the Company entered into a draft agreement with the Government of Qitaihe City and agreed to give up all the rights acquired from the above purchase to the Qitaihe local government for rebuilding the city of Qitaihe. In return for forfeiting the properties purchased, the Company received a total of RMB 36,304,461 (approximately US$5.3 million) as compensation from the City of Qitaihe. The agreement of forfeiting was signed on January 27, 2010.

On December 20, 2009, the Company sold certain equipment it had previously acquired to an unrelated third party in the amount of RMB 4,313,620 (approximately $631,000).

As a result of transactions described in the preceding three paragraphs, the Company recognized a net gain of RMB 3,378,675 ($495,348) on the “Disposal of property, plant and equipment,” which was included within “Other Income (Expense)” in the Statement of Operations for the year ended December 31, 2009.

The balance due from Land Center of Qitaihe and proceeds receivable from sale of equipment were collected in the first quarter 2010.

11

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Due from related party

At September 30, 2010 and at December 31, 2009, due from related party, Mr. Chengzhi Wang, the General Manager and Director of the Company, of $21,257 and $244,636, respectively, was interest free and due on demand.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consist of:

		September 30,			December 31,
		2010			2009
		(Unaudited)
Buildings	$	2,984,052		$	2,920,766
Plant equipment and machinery		4,742,837			4,642,249
Motor vehicles		273,632			288,816
Furniture and office equipment		10,170			11,138
Total		8,010,691			7,862,969
Less accumulated depreciation		(2,482,141	)		(2,112,093	)
Net	$	5,528,550		$	5,750,876

Depreciation expense was $314,072 and $352,976 for the nine months ended September 30, 2010 and 2009, respectively, of which $256,703 and $294,709, were included in cost of sales, respectively.

NOTE 7 - LAND USE RIGHTS

Land use rights, net consist of:

		September 30,			December 31,
		2010			2009
		(Unaudited)
Harbin Hainan Kangda	$	17,965,255		$	17,584,244
Taishan Kangda		889,608			870,741
Total		18,854,863			18,454,985
Less accumulated amortization		(773,194	)		(473,151	)
Net	$	18,081,669		$	17,981,834

On August 25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the “Agreement”) with the Local Government of Baisha Town, Taishan City, Guangdong Province (“Seller”). Under the terms of the Agreement, the Company was to acquire land use rights of state-owned land located in Langbei Village, Baisha Town covering an area of 181,854 square meters, with a useful life of 50 years starting from the issue date of the land use right certificate.

12

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

The purchase price for the Taishan Basha land use rights of 66,376,800 RMB ($9,921,340) was paid in full as of December 31, 2009. Commencing January 2010, amortization of the cost is being charged to operations.

Amortization of land use rights was $262,855 and $138,266 for the nine months ended September 30, 2010 and 2009, respectively, of which $237,735 and $109,635, respectively, were included in cost of goods sold.

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

Year Ending		Amount
September 30,		(Unaudited)
2011	$	388,971
2012		388,971
2013		388,971
2014		388,971
2015		388,971
Thereafter		16,136,844
Total	$	18,081,699

NOTE 8 - INTANGIBLE ASSETS

Intangible assets, net consist of:

		September 30,			December 31,
		2010			2009
		(Unaudited)
Patents and licenses	$	9,487,265		$	1,370,831
Less accumulated amortization		(1,409,971	)		(1,054,531	)
Net	$	8,077,294		$	316,300

In January 2010, the Company purchased a group of cactus patents for cattle, hog and fish feed for $8,088,226 (RMB 54,112,700) 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.

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 imposes liquidated damages fees to the Company if it fails to make payment to the Transferor whom has the right to rescind the contract and return of all materials related to the patent, or if the Company is late in paying an amount, in particular if it is 2 months tardy. There were liquidated damages fees imposed on the Transferor if they were tardy as well.

13

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

The Company paid $6,299,500 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 under PRC governmental authority commenced on April 10, 2010 and expires on April 10, 2025. The Company paid the remainder $1,628,011 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 3 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) and 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.

Patents and licenses amortization expense was $332,671 and $102,906 for the nine months ended September 30, 2010 and 2009, respectively.

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

Year Ending		Amount
September 30,		(Unaudited)
2011	$	786,891
2012		725,309
2013		646,987
2014		646,987
2015		646,987
Thereafter		4,624,133
Total	$	8,077,294

NOTE 9 - NOTE PAYABLE

Note payable consists of:

		September 30,		December 31,
		2010		2009
		(Unaudited)
Note payable to a financial institution, interest free, unsecured and due on demand	$	904,294	$	885,115

14

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

The note payable (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 $39,999 and $39,909 for the nine months ended September 30, 2010 and 2009, respectively.

NOTE 10 – TAXES PAYABLE

Taxes payable consist of:

		September 30		December 31,
		2010		2009
		(Unaudited)
PRC corporation income tax	$	814,931	$	527,264
Value added tax payable		106,513		74,419
Consumption tax		215,812		151,751
Other taxes		2,095		35,707
Total	$	1,139,351	$	789,141

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:

	Shares / Warrants		Fair Value
Series A Convertible Preferred Stock	1,150,000	$	333,500
A warrants	1,250,000		122,000
B warrants	1,500,000		120,150
C warrants	500,000		47,950
D warrants	600,000		47,640
Total warrants	3,850,000		337,740
Total Financial Instruments	5,000,000	$	671,240

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.

15

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 September 30, 2010 and December 31, 2009, the fair values of the financial instruments consisted of:

	September 30, 2010			December 31, 2009
	Shares / Warrants		Fair Value	Shares / Warrants		Fair Value
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
Series A Convertible Preferred Stock	50,000	$	51,500	50,000	$	135,500
A warrants	-		-	-		-
B warrants	750,000		219,600	1,500,000		2,839,500
C warrants	500,000		197,600	500,000		992,500
D warrants	600,000		182,160	600,000		1,090,860
Total warrants	1,850,000		599,360	2,600,000		4,922,860
Total Financial Instruments	1,900,000	$	650,860	2,650,000	$	5,058,360

Below is a reconciliation of the change in the fair values of the financial instruments from January 1, 2009 through September 30, 2010.

	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 (Unaudited)	(475,000	)		(612,750	)
Revaluation credited to operations (Unaudited)	-			(1,515,915	)
Balance, March 31, 2010 (Unaudited)	2,175,000			2,929,695
Exercise of B warrants (Unaudited)	(275,000	)		(338,250	)
Revaluation credited to operations (Unaudited)	-			(1,435,280	)
Balance, June 30, 2010 (Unaudited)	1,900,000			1,156,165
Revaluation credited to operations (Unaudited)	-			(505,305	)
Balance, September 30, 2010 (Unaudited)	1,900,000		$	650,860

16

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

The Series A Convertible Preferred Stock is valued based on the trading price of the Company’s common stock. The warrants are valued using the Black-Scholes option pricing model with a 100% 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.

The Series A Preferred Stock, has no voting or dividend rights, is entitled to a liquidation preference of $0.60 per share, and each share is 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 is 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%.

17

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

On July 16, 2008, the Company sold 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 summary of the deemed dividends for the year ended December 31, 2008:

March 21, 2008	$	196,500
July 16, 2008		126,250
Total	$	322,750

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. There were 50,000 shares of Series A Preferred Stock outstanding at September 30, 2010 and December 31, 2009.

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, 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 years ended December 31, 2008 and 2009 and for the nine months ended September 30, 2010 follows:

18

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

	Stock Options		Warrants
Outstanding at January 1, 2008	-		-
Granted and issued	400,000		3,850,000
Exercised	-		-
Forfeited/expired/cancelled	-		-
Outstanding at December 31, 2008	400,000		3,850,000
Granted and issued	-		-
Exercised	(107,059	)	(1,250,000	)
Forfeited/expired/cancelled	(42,941	)	-
Outstanding at December 31, 2009	250,000		2,600,000
Granted and issued	-		-
Exercised	(201,738	)	(475,000	)
Forfeited/expired/cancelled	(48,262	)	-
Outstanding at March 31, 2010 (Unaudited)	-		2,125,000
Granted and issued	250,000		-
Exercised	(161,765	)	(275,000	)
Forfeited/expired/cancelled	(88,235	)	-
Outstanding at June 30, 2010 and September 30, 2010 (Unaudited)	-		1,850,000

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 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.

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.

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 included with 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%).

19

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

On June 21, 2010, pursuant to a cashless exercise, 161,765 options were converted 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 September 30, 2010.

Warrants outstanding at September 30, 2010 consist of:

Date	Number	Number		Exercise	Expiration
Granted	Outstanding	Exercisable		Price	Date
March 21, 2008	750,000	750,000	$	1.0000	March 21, 2011
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	1,850,000	1,850,000

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.

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 $11,184,347 and $10,306,160 at September 30, 2010 and December 31, 2009, respectively.

20

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 2010 and 2009 since US China Kangtai had taxable losses in those periods.

At September 30, 2010, US China Kangtai has 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 managements’ present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of approximately $350,000 ($297,500 at December 31, 2009) attributable to the future utilization of the approximately $1,000,000 net operating loss carry forward of US China Kangtai as of September 30, 2010 will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at September 30, 2010. 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 2030.

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.

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 allows 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 (loss) before income taxes. The sources of the difference follow:

21

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

		Nine Months Ended September 30,
		2010			2009
		(Unaudited)			(Unaudited)
Expected tax at 35%	$	3,505,081		$	675,278
Tax effect of unutilized losses of US China Kangtai		253,817			12,171
and BVI China Kangtai
Tax effect of PRC income taxed at lower rate		(695,806	)		(1,143,870	)
(Non-taxable income) nondeductible expense from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair value		(1,209,775	)		1,482,898
Actual provision for income taxes	$	1,853,317		$	1,026,477

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 $4,185) 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 $2,223) per annum from April 1, 2008 to March 31, 2018 and RMB 23,794 (approximately $3,556) from April 1, 2018 to March 31, 2038.

Rental expenses for all operating leases for the nine months ended September 30, 2010 and 2009 were approximately $4,800 and $4,800 respectively.

At September 30, 2010, future minimum rental commitments under all non-cancellable operating leases are due as follows:

For the Year Ending
September 30,
2011	$	6,408
2012		6,408
2013		4,316
2014		2,223
2015		2,223
Thereafter		76,677
Total	$	98,255

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 gives 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. Consequently, in addition to cash compensation, the Company accrued $14,300 consulting fees (included in general and administrative expenses) in the nine months ended September 30, 2010.

22

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 provides for monthly compensation to the consultant of $5,000. The term of the agreement is 5 months, but either party may terminate the agreement on 30 days written notice to the other party.

Consulting fees totaling $270,030 were included in general and administrative expenses for the nine months ended September 30, 2010. The fees consist of total cash payments of $37,930, a stock issuance of 40,000 shares valued at $92,800 based on the market price of $2.32 per share, a stock issuance of 50,000 shares valued at $125,000 based on the market price of $2.50 per share, and a stock issuance of 13,000 shares valued at $14,300 based on the market price of $1.10 per share.

Asset Purchase Agreement

On June 28, 2010, the Company through its wholly-owned subsidiary Harbin Hainan Kangda entered into an Asset Purchase Agreement (the “Agreement”) with Dadi Tobacco Trade Center (the “Seller”) of Raoping County in Guangdong Province of China. The Company has agreed to purchase from Seller certain real property and all improvements thereon, and all equipment and fixtures used in connection with the Seller’s operations for RMB 35,000,000 (approximately US$5,231,450) in cash. The real property includes a land use right to 4,784 square meters of land located in Raoping County of Guangdong Province of China for a period of 50 years.

Pursuant to the Agreement, the Company is to make payments to the Seller in three installments. The first installment of 30% of the total purchase price was to be paid within 10 days from the date of the execution of the Agreement. The second installment of 30% of the total purchase price is to be paid at the commencement of the title transfer for the assets to be purchased under the Agreement with the applicable regulatory agencies. The third installment of 40% of the total purchase price is to be paid within 5 days following the completion of the title transfer of all assets purchased. If the Seller does not complete all transfer of title of the assets required by law within 4 months from the date of the Agreement, the Seller will be subject to a penalty equal to 10% of the aggregate purchase price. If the Company does not make payment of the purchase price as set forth in the Agreement, the Company will be subject to a penalty payment equal to 10% of the amount of the installment payment not made at the time set out in the Agreement. Approval of the title transfer has not yet occurred.

23

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

The Company paid RMB 10,500,000 (approximately $1,569,435), the first 30% installment due under the agreement, in July 2010. The Company paid an additional RMB 7,500,000 (approximately $1,121,025) during the quarter ended September 30, 2010. The Company is expecting to pay the remainder RMB 3,000,000 ($448,410) of the second 30% installment of RMB 10,500,000 by the end of November 2010. The Company currently out sources manufacturing of its cactus cigarettes. Title transfer of the assets to the Company is now expected to take place by end of December, 2010 or in early 2011. Neither the Seller or the Company are expected to be required to incurred a 10% penalty based on delayed Company payments or asset title passage.

The Company currently outsources manufacturing of its cactus cigarettes. This acquisition will provide the Company with cigarette manufacturing capabilities to produce its own cactus cigarettes.

Investment agreement

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 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 has also 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.

24

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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. 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 December 7, 2010 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 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.

25

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

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 September 30, 2010 and December 31, 2009 were located in the PRC. Net sales for the periods presented were all derived from PRC customers. During the nine months ended September 30, 2010, two customers accounted for 15% and 10%, respectively, of net sales. During the nine months ended September 30, 2009, two customers accounted for 17% and 15%, respectively, of net sales.

Net sales consisted of:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2010		2009		2010		2009
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Finished goods	$	9,499,689	$	7,364,451	$	22,074,152	$	15,965,875
Cactus stock		23,186		822,946		1,701,166		2,064,218
Total	$	9,522,875	$	8,187,397	$	23,775,318	$	18,030,093

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 14 th 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.

26

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

NOTE 19 - SUBSEQUENT EVENTS

On October 1, 2010, the Company issued 13,000 shares of Company restricted common stock to an investor relations consulting firm pursuant to the terminated investor relations contract discussed in Note 16 in the first paragraph of “Consulting Agreements”.

27

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 Brewry (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.

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 CommitteeThe 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.

28

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.

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.

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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 elsewhere in this Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on April 15, 2010.

Results of Operations

Three Months Ended September 30, 2010 as compared to Three Months Ended September 30, 2009

Comparison of Sales for the Three Months Ended September 30, 2010 and 2009

		Three Months Ended September 30,
		2010		2009	% of changes
Sales by categories
Nutraceuticals	$	3,581,023	$	3,668,195	-2.38%
Beverages		3,907,332		2,844,967	37.34%
Raw & intermediate materials		23,186		822,441	-97.18%
Packaged foods		-		1,113	-100.00%
Cactus cigarettes		659,609		42,162	1464.46%
Cactus feed		1,351,725		808,519	67.19%
Total Sales	$	9,522,875	$	8,187,397	16.31%

Sales for the three months ended September 30, 2010 totaled $9,522,875, an increase of $1,335,478, or 16% compared to the sales of $8,187,397 for the three months ended September 30, 2009. The increase in sales is attributable to the fact that the Company’s products are efficiently marketed and well accepted by consumers. The sale of our cactus feed products was $1,351,725, an increase of $543,206, or 67% as compared to the sales of $808,519 in the same period of 2009. The sale of beverages products was $3,907,332 in the three months ended September 30, 2010, an increase of $1,062,365, or 37%, as compared to the sales of $2,844,967 in the same period of 2009. The sale of cactus cigarettes products was $659,609 in the three months ended September 30, 2010, an increase of $617,447, compared to the sales of $42,162 in the same period of 2009. The sales from our raw and intermediate materials and packaged foods products was $23,186 in the three months ended September 30, 2010, a decrease of $799,255 compared to the sales of $822,441 in the same period in 2009. The cigarette sales increase and the raw and intermediate materials and packaged foods decrease resulted from the changing of our products mix.

Cost of Sales

Cost of sales totaled $5,902,532 for the three months ended September 30, 2010, an increase of $960,651, or 19% as compared to $4,941,881 in the same quarter of 2009. The gross profit rate was 38.01% for the three months ended September 30, 2010, a decrease 1.63 percentage points as compared to 39.64% in the same quarter of 2009. The increase in cost of sales and decrease in gross profit rates was primarily attributable to the increased sales of our cactus feed products. The gross profit rate is about 16% for cactus feed products.

Operating Expenses

Operating expenses for the three months ended September 30, 2010 totaled $497,748, compared to negative $244,621 (which resulted from a $492,206 reduction in reserve for allowances, returns and doubtful accounts) for the three months ended September 30, 2009. Excluding this item, the Company’s operating expenses were $247,585 in 2009.

Other Income and Expenses

Other income (net) for the three months ended September 30, 2010 totaled $490,230, compared to other expenses (net) of $2,751,399 for the same period of 2009. The increased net other income mainly resulted from the 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 $505,305 in the three months ended September 30, 2010. We incurred an expense of $2,738,135 from the revaluation in the same period of 2009.

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Income from Operations

Income from operations totaled $3,122,595 in the three months ended September 30, 2010, a decrease of $367,542, compared to $3,490,137 in the same period of 2009. The decrease resulted mainly from a $492,206 reduction in reserve for allowances, returns and doubtful accounts in 2009.

Net Income

Net income totaled $2,807,217 for the three months ended September 30, 2010, an increase of $2,523,514, as compared to $283,703 in the same period of 2009. The increase in net income was caused partially by the income and loss from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values. Absent this income, the Company would have had a net income of $2,301,912 and basic and diluted earnings per common share would have been $0.11 and $0.11 for the three months ended September 30, 2010. Absent the revaluation loss of $2,738,135 and the reduction in reserve for allowance, returns and doubtful account, the Company would have had a net income of $2,529,632 and basic and diluted earnings per common share would have been $0.14 and $0.13 for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 as compared to Nine Months Ended September 30, 2009

Comparison of Sales for the Nine Months Ended September 30, 2010 and 2009

		Nine Months Ended September 30,
		2010		2009	% of changes
Sales by categories
Nutraceuticals	$	8,724,405	$	8,356,795	4.40%
Beverages		8,479,103		5,927,250	43.05%
Raw & intermediate materials		1,701,166		2,064,218	-17.59%
Packaged foods		-		255,872	-100.00%
Cactus cigarettes		1,710,000		42,162	3955.78%
Cactus feed		3,160,644		1,383,796	128.40%
Total Sales	$	23,775,318	$	18,030,093	31.86%

Sales for the nine months ended September 30, 2010 totaled $23,775,318, an increase of $5,745,225, or 32% compared to the sales of $18,030,093 for the nine months ended September 30, 2009. The increase in sales is attributable to the fact that the Company’s products are efficiently marketed and well accepted by consumers. The sale of our cactus feed products was $3,160,644, an increase of $1,776,848, or 128% as compared to the sales of $1,383,796 in the same period of 2009. The sale of beverages products was $8,479,103 in the nine months ended September 30, 2010, an increase of $2,551,853, or 43%, as compared to the sales of $5,927,250 in the same period of 2009. The sale of cactus cigarettes products was $1,710,000 in the nine months ended September 30, 2010, compared to the sales of $42,162 in the same period of 2009. The sale of nutraceuticals products was $8,724,405 in the nine months ended September 30, 2010, an increase of $367,610, or 4%, as compared to the sales of $8,356,795 in the same period of 2009.

Cost of Sales

Cost of sales totaled $15,367,229 for the nine months ended September 30, 2010, an increase of $4,556,515, or 42% as compared to $10,810,714 in the same quarter of 2009. The gross profit rate was 35.36% for the nine months ended September 30, 2010, a decrease of 4.68 percentage points as compared to 40.04% in the same quarter of 2009. The increase in cost of sales and decrease in gross profit rates was primarily attributable to the increased sales of our cactus feed products. The gross profit rate is about 16% for cactus feed products.

Operating Expenses

Operating expenses for the nine months ended September 30, 2010 totaled $1,808,231, an increase of $795,041, or 78%, compared to $1,013,190 for the nine months ended September 30, 2009. The increase in operating expenses was mainly attributable to the following: $140,955 increase in research and development expense for appraisal of newly acquired patents prior to their acquisition; $229,765 increase in amortization expense due to newly acquired land use rights and patents; and $390,275 increase in legal fees by recording fair value of 250,000 options granted for legal service.

Other Income and Expenses

Other income (net) for the nine months ended September 30, 2010 totaled $3,414,659, compared to other expense (net) of $4,276,822 for the same period of 2009. The increased net other income mainly resulted from the 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 $3,456,500 in the nine months ended September 30, 2010. We incurred an expense of $4,236,850 from the revaluation in the same period of 2009.

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Income from Operations

Income from operations totaled $6,599,858 in the nine months ended September 30, 2010, an increase of $393,669, or 6%, as compared to $6,206,189 in the same period of 2009. The increase resulted mainly from increased sales.

Net Income

Net income totaled $8,161,200 for the nine months ended September 30, 2010 as compared $902,890 in the same period of 2009. The increase in net income was caused partially by the income of $3,456,500 from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values. Absent this income, the Company would have had a net income of $4,704,700 and basic and diluted earnings per common share would have been $0.23 and $0.22 for the nine months ended September 30, 2010. Absent the revaluation loss of $4,236,850, the Company would have had a net income of $5,139,740 and basic and diluted earnings per common share would have been $0.29 and $0.27 for the nine months ended September 30, 2009.

Liquidity and Capital Resources

We had cash and cash equivalents of $549,398 and $2,918,068, as of September 30, 2010 and December 31, 2009. 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 $6,878,540 and $7,345,778 for the nine months ended September 30, 2010 and 2009, respectively. The decrease in net cash provided by operating activities in 2010 was due to the increase of our accounts receivables. Net cash used in investing activities was $10,572,390 and $8,338,701 for the nine months ended September 30, 2010 and 2009, respectively. In January 2010, the Company purchased a livestock feed patent in the amount of $8,088,226 (RMB 54,112,700). The Company deposited $2,690,460 pursuant to the Assets Purchase Agreement entered on March 25, 2009 for land use rights.

Net cash provided by financing activities was $869,958 and $0 for the nine months ended September 30, 2010 and 2009. During the nine months ended September 30, 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. The Company repaid $5,042 to a related party.

Note Payable to a Financial Institution

The note payable (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 $39,999 and $39,909 for the nine months ended September 30, 2010 and 2009, respectively.

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:

	Shares / Warrants		Fair Value
Series A Convertible Preferred Stock	1,150,000	$	333,500
A warrants	1,250,000		122,000
B warrants	1,500,000		120,150
C warrants	500,000		47,950
D warrants	600,000		47,640
Total warrants	3,850,000		337,740
Total Financial Instruments	5,000,000	$	671,240

Since on 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 September 30, 2010 and December 31, 2009, the fair values of the financial instruments consisted of:

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	September 30, 2010			December 31, 2009
	Shares / Warrants		Fair Value	Shares / Warrants		Fair Value
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
Series A Convertible Preferred Stock	50,000	$	51,500	50,000	$	135,500
A warrants	-		-	-		-
B warrants	750,000		219,600	1,500,000		2,839,500
C warrants	500,000		197,600	500,000		992,500
D warrants	600,000		182,160	600,000		1,090,860
Total warrants	1,850,000		599,360	2,600,000		4,922,860
Total Financial Instruments	1,900,000	$	650,860	2,650,000	$	5,058,360

Below is a reconciliation of the change in the fair values of the financial instruments from January 1, 2009 through September 30, 2010.

	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 (Unaudited)	(475,000	)		(612,750	)
Revaluation credited to operations (Unaudited)	-			(1,515,915	)
Balance, March 31, 2010 (Unaudited)	2,175,000			2,929,695
Exercise of B warrants (Unaudited)	(275,000	)		(338,250	)
Revaluation credited to operations (Unaudited)	-			(1,435,280	)
Balance, June 30, 2010 (Unaudited)	1,900,000			1,156,165
Revaluation credited to operations (Unaudited)	-			(505,305	)
Balance, September 30, 2010 (Unaudited)	1,900,000		$	650,860

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

Critical Accounting Policies and Estimates

In Note 2 to the audited consolidated financial statements for the years ended December 31, 2009 and 2008 included in our annual report filed on April 15, 201, 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 related to revenue recognition 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.

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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 collectibility 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 (see Note 10 to consolidated financial statements), 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 operated in China. The Chinese Yuan is the functional currency. The financial statements of China Kangtai 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.

Recently Adopted Accounting Standards

In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent event disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.

We adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on our financial statements.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on its financial condition or results of operations.

In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.

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Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

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.

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 third quarter of fiscal year 2010 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

On October 1, 2010, the Company issued 13,000 shares of Company restricted common stock to an investor relations consulting firm pursuant to the terminated investor relations contract discussed in Note 16 in the first paragraph of “Consulting Agreements”.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

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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.

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: November 15, 2010	By:	/s/ Jinjiang Wang
		Jinjiang Wang
		President, Chief Executive Officer, Director and
		Principal Executive Officer
Date: November 15, 2010	By:	/s/ Hong Bu
		Hong Bu
		Chief Financial Officer, Director and
		Principal Financial and Accounting Officer

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