Winner Medical 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 000 -16547

WINNER MEDICAL GROUP INC.

(Exact name of Registrant as Specified in its Charter)

Nevada		33-0215298
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification. No.)

Winner Industrial Park, Bulong Road

Longhua, Shenzhen City, 518109

People’s Republic of China

(Address of principal executive offices)

86-(755) 28138888

(Registrant’s Telephone Number)

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

Yes x No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (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 o No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of May10, 2009 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		44,727,171

TABLE OF CONTENTS

		Page
	PART I	3

Item 1.	Condensed Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30

	PART II	30

Item 1.	Legal Proceedings	30
Item 1A	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Securities Holders	31
Item 5.	Other Information	31
Item 6.	Index to Exhibits	32

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS.

WINNER MEDICAL GROUP INC.

Condensed Consolidated Financial Statements (Unaudited)

For the three and six months ended March 31, 2009 and 2008

WINNER MEDICAL GROUP INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Condensed Consolidated Balance Sheets	F1
Condensed Consolidated Statements of Income and Comprehensive Income	F2
Condensed Consolidated Statements of Stockholders’ Equity	F3
Condensed Consolidated Statements of Cash Flows	F4
Notes to Condensed Consolidated Financial Statements	F5-F15

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31		September 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents		8,115,362		6,462,505
Restricted bank deposits		88,616		126,749
Accounts receivable, less allowances for doubtful accounts of US$75,641 and US$100,964 at March 31, 2009 and September 30, 2008, respectively		10,398,347		13,516,688
Amounts due from affiliated companies		165,684		349,359
Inventories		14,880,550		15,839,587
Prepaid expenses and other current assets		4,193,485		4,734,503
Income taxes recoverable		38,915		99,126
Deferred tax assets		237,040		207,798
Total current assets		38,117,999		41,336,315
Property, plant and equipment, net		56,506,544		57,937,881
Held-for-sale asset		-		607,423
Investment in equity investees		1,600,233		1,518,848
Intangible assets, net		117,025		126,141
Non-current restricted bank deposits		158,189		-
Prepaid expenses and other receivable		65,829		233,203
Deferred tax assets		227,340		158,280
Total assets		96,793,159		101,918,091
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank loans		10,537,018		15,033,073
Accounts payable		4,232,792		8,271,926
Accrued payroll and employee benefits		1,786,622		1,891,410
Customer deposits		694,781		458,303
Other accrued liabilities		2,158,541		2,518,326
Amounts due to affiliated companies		6,047		136,481
Income taxes payable		1,303,710		656,550
Total current liabilities		20,719,511		28,966,069
Deferred tax liabilities		41,857		41,965
Total liabilities		20,761,368		29,008,034

Commitments and contingencies

Minority interests		72,927		148,306

Stockholders’ equity:
Common stock, par value $0.001 per share; authorized 495,000,000, issued and outstanding March 31, 2009 – 44,727,171 shares; September 30, 2008 – 44,727,171 shares		44,727		44,727
Additional paid-in capital		31,046,409		30,843,327
Retained earnings		30,803,057		28,791,259
Statutory reserves		3,412,809		2,305,434
Accumulated other comprehensive income		10,651,862		10,777,004
Total stockholders’ equity		75,958,864		72,761,751
Total liabilities and stockholders’ equity		96,793,159		101,918,091

See accompanying notes to condensed consolidated financial statements.

F-1

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Three months ended March 31						Six months ended March 31
	2009			2008			2009			2008
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	US$			US$			US$			US$

Net sales		20,627,146			17,888,303			46,357,420			37,213,902

Cost of sales		(14,825,262	)		(13,936,502	)		(33,952,140	)		(28,462,520	)
Gross profit		5,801,884			3,951,801			12,405,280			8,751,382

Other operating income, net		406,285			72,472			891,249			437,555
Exchange difference, net		(244,685	)		(223,352	)		(1,129,697	)		(536,884	)
Selling, general and administrative expenses		(3,864,748	)		(3,341,351	)		(8,323,274	)		(6,925,171	)

Income from operations		2,098,736			459,570			3,843,558			1,726,882
Interest income		11,303			8,259			23,819			18,737
Interest expense		(118,647	)		(138,206	)		(327,056	)		(238,865	)
Equity in earnings of 50 percent or less owned persons		133,262			(564	)		223,138			23,965
Income before income taxes and minority interests		2,124,654			329,059			3,763,459			1,530,719

Income taxes		(459,537	)		223,441			(719,665	)		158,584
Income before minority interests		1,665,117			552,500			3,043,794			1,689,303

Minority interests		(20,828	)		17,728			75,379			43,001
Net income		1,644,289			570,228			3,119,173			1,732,304

Other comprehensive income
Foreign currency translation difference		42,540			2,667,997			(125,142	)		4,339,872

Comprehensive income		1,686,829			3,238,225			2,994,031			6,072,176


Net income per share
- basic		0.04			0.01			0.07			0.04
- diluted		0.04			0.01			0.07			0.04

Weighted average common stock outstanding
- basic		44,727,171			44,727,171			44,727,171			44,727,171
- diluted		44,962,369			44,864,313			44,989,693			44,864,313

See accompanying notes to condensed consolidated financial statements.

F-2

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

	Common stock				Additional							Accumulated other			Total stock-
	Stock				paid-in		Retained			Statutory		Comprehensive			holders’
	outstanding		Amount		capital		earnings			reserves		income			equity
			US$		US$		US$			US$		US$			US$

Balance at September 30, 2007		44,677,171		44,677		30,260,547		24,116,054			1,914,344		4,486,035			60,821,657
Issuance of common stock		50,000		50		199,950		-			-		-			200,000
Restricted stock granted		-		-		382,830		-			-		-			382,830
Net income		-		-		-		5,066,295			-		-			5,066,295
Foreign currency translation difference		-		-		-		-			-		6,290,969			6,290,969
Transfer to statutory reserves		-		-		-		(391,090	)		391,090		-			-
Balance at September 30, 2008		44,727,171		44,727		30,843,327		28,791,259			2,305,434		10,777,004			72,761,751
Restricted stock granted		-		-		203,082		-			-		-			203,082
Net income		-		-		-		3,119,173			-		-			3,119,173
Foreign currency translation difference		-		-		-		-			-		(125,142	)		(125,142	)
Transfer to statutory reserve		-		-		-		(1,107,375	)		1,107,375		-			-
Balance at March 31, 2009		44,727,171		44,727		31,046,409		30,803,057			3,412,809		10,651,862			75,958,864

See accompanying notes to condensed consolidated financial statements.

F-3

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended March 31
	2009			2008
	(Unaudited)			(Unaudited)
	US$			US$
Cash flows from operating activities
Net income		3,119,173			1,732,304
Adjustment to reconcile net income to net cash from operating activities:
Depreciation and amortization of property, plant and equipment		2,223,513			1,971,170
Amortization of intangible assets		8,802			8,272
(Gain) Loss on disposal of property, plant and equipment		(193,503	)		46,107
Impairment of property, plant and equipment		273,572			-
Minority interests		(75,379	)		(43,001	)
Share of undistributed earnings in equity investees		(223,138	)		(23,965	)
Stock based compensation expenses		203,082			262,500
Deferred tax		(99,244	)		(95,226	)
Increase (decrease) in cash resulting from changes in:
Restricted bank deposits		(119,333	)		-
Accounts receivable		3,083,540			1,537,122
Amounts due from affiliated companies		86,607			(143,514	)
Inventories		918,256			(4,126,733	)
Prepaid expenses and other current assets		528,827			3,158,146
Income taxes recoverable		59,956			(44,438	)
Non-current prepaid expenses and other receivable		166,774			(5,717	)
Accounts payable		(4,017,837	)		(2,548,975	)
Accrued payroll and employee benefits		(99,918	)		(49,209	)
Customer deposits		237,657			122,314
Other accrued liabilities		(353,301	)		(98,907	)
Amounts due to affiliated companies		(130,083	)		301,060
Income taxes payable		644,865			(140,242	)
Net cash provided by operating activities		6,242,888			1,819,068

Cash flows from investing activities
Purchase of property, plant and equipment		(1,277,001	)		(7,509,676	)
Proceeds from disposal of property, plant and equipment		863,991			-
Proceeds from disposal of an equity investee		141,755			-
Repayments received from affiliated companies		96,169			-
Net cash used in investing activities		(175,086	)		(7,509,676	)

Cash flows from financing activities
Proceeds from bank borrowings		(16,551,684	)		11,815,564
Repayment of bank borrowings		12,088,588			(10,572,035	)
Net cash (used in) provided by financing activities		(4,463,096	)		1,243,529

Effect of exchange rate changes on cash balance		48,151			578,898

Net increase (decrease) in cash and cash equivalents		1,652,857			(3,868,181	)
Cash and cash equivalents, beginning of period		6,462,505			6,377,488
Cash and cash equivalents, end of period		8,115,362			2,509,307
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		327,056			319,621
Income taxes		108,629			122,685

See accompanying notes to condensed consolidated financial statements.

F-4

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation of Financial Statements

The accompanying condensed consolidated financial statements of Winner Medical Group Inc (“Winner Medical” or “the Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information. Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the operating results for the six months ended March 31, 2009 have been made. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual audited financial statements for the year ended September 30, 2008. The Company follows the same accounting policies in preparation of interim reports.

Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

2. Description of Business

The principal activities of the Company and its subsidiaries consist of research and development, manufacturing and trading of medical dressings and medical disposable products. All activities of the Company are principally conducted by subsidiaries operating in the People’s Republic of China (the “PRC”).

3. Recently Issued Accounting Pronouncements

In December 2007, FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141R”). The objective of SFAS No. 141R is to improve the relevance, presentational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS No. 141R is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and is required to be adopted by the Company in the first quarter of fiscal year 2010. The Company is evaluating the impact, if any, of the adoption of SFAS No. 141R. The impact will depend on future acquisitions. It is not expected to have material impact on the Company’s consolidated financial position, results of operations and cash flows.

In December 2007, FASB issued SFAS No. 160 “Non-controlling Interest in Consolidated Financial Statements”. SFAS No. 160 amends Accounting Research Bulletin No.51, Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 defines “a non-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent”. The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and is required to be adopted by the Company in the first quarter of fiscal year 2010. The Company is evaluating the impact, if any, of the adoption of SFAS No. 160. It is not expected to have material impact on the Company’s consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities amendment of FASB Statement No. 133” (“SFAS 161”). This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures stating how and why an entity uses derivative instruments; how derivatives and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and its related interpretations; and how derivative instruments and related hedge items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective in fiscal years beginning after November 15. 2008 and is required to be adopted by the Company in the first quarter of fiscal year 2010. The Company does not expect the adoption of SFAS 161 will have a material impact on the Company’s disclosures.

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FSP 142-3 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

F-5

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Recently Issued Accounting Pronouncements-Continued

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not anticipate that the provisions of SFAS No. 162 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF 08-3 on its consolidated financial position and results of operations and is currently not yet in a position to determine such effects.

In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). ESP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No.128 Earning per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is currently evaluating the effect of EITF 03-6-1 on the earnings per share calculation.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” This FSP amends and clarifies FASB Statement No. 141 (revised 2007), “Business Combinations”, to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141(R)-1 shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the effect of FAS 141(R)-1 on its consolidated financial statements and results of operation and is currently not yet in a position to determine such effects.

4. Net Income Per Share

Net income per share- Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share gives effect to all dilutive potential ordinary shares outstanding during the period. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. At March 31, 2009 and 2008, the basic and diluted net income per share calculated in accordance with SFAS No. 128, "Earnings Per Share", are reconciled as follows:

F-6

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Net Income Per Share-Continued

	Three months ended March 31
	2009		2008
	US$		US$
	(Unaudited)		(Unaudited)
Basic income per share
Net Income for the period		1,644,289		570,228
Weighted average common stock outstanding		44,727,171		44,727,171
Net income per share		0.04		0.01
Diluted income per share
Net Income for the period		1,644,289		570,228
Weighted average common stock outstanding		44,727,171		44,727,171
Effect of dilution
Restricted stock		235,198		137,142
Options		-		-
Weighted average common stock outstanding		44,962,369		44,864,313
Net income per share		0.04		0.01

	Six months ended March 31
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Basic income per share
Net Income for the period		3,119,173		1,732,304
Weighted average common stock outstanding		44,727,171		44,727,171
Net income per share		0.07		0.04
Diluted income per share
Net Income for the period		3,119,173		1,732,304
Weighted average common stock outstanding		44,727,171		44,727,171
Effect of dilution
Restricted stock		262,522		137,142
Options		-		-
Weighted average common stock outstanding		44,989,693		44,864,313
Net income per share		0.07		0.04

As of March 31, 2009, 8,333 and 20,000 potential common shares relating to options were at the exercise price of US$9.25 and US$4.75 per share, respectively, and representing the total options granted to independent directors, and were excluded from the computations of diluted income per share as both exercise prices were higher than the average market price for the six months ended March 31, 2009.

F-7

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Inventories

Inventories by major categories are summarized as follows:

	March 31		September 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Raw materials		5,762,904		5,400,887
Work in progress		4,618,183		5,839,042
Finished goods		4,499,463		4,599,658
		14,880,550		15,839,587

6. Income Taxes

United States

The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes has been made as the Company has no taxable income for the first two quarters and does not expect to have taxable income for the full year. The applicable income tax rate for the Company for the six months ended March 31, 2009 and 2008 is 34%.

Cayman Islands

Winner Group Limited, a wholly owned subsidiary of the Company, is incorporated in the Cayman Islands and, under the current laws of the Cayman Islands, is not subject to income taxes.

Hong Kong

Winner Medical (Hong Kong) Limited, a 60% owned subsidiary of the Company, is incorporated in Hong Kong. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. The Company was incorporated in January 2008 and the applicable statutory tax rate for the subsidiary is 16.5%.

PRC

Effective on January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exceptions. As such, starting from January 1, 2008, three of the Company’s subsidiaries in China, including Winner Medical & Textile Ltd., Jingmen, Winner Medical & Textile Ltd. Jiayu, and Winner Medical & Textile Ltd. Yichang, are subject to an enterprise income tax rate of 25%.

The EIT Law gives existing foreign investment enterprises a five-year grandfather period, during which they can continue to enjoy their existing preferential tax treatments. For foreign investment enterprises that currently enjoy full exemption from PRC enterprise income tax for two years starting from the first profit-making year, followed by a 50% tax exemption for the next three years, the tax holidays are still valid. Four of the Company’s PRC subsidiaries, Winner Medical (Huanggang) Co., Ltd., Winner Medical & Textile Ltd. Chongyang, Hubei Winner Textiles Co., Ltd., and Shanghai Winner Medical Apparatus Co., Ltd. are each entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate for the three years following its second profitable year.

F-8

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Income Taxes-Continued

The following table sets forth the tax rates applicable for the Company’s PRC subsidiaries that enjoy their existing preferential tax treatments.

	Calendar year end December 31,
	2008			2009			2010			2011			2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Winner Medical (Huanggang) Co., Ltd.		0	%		0	%		12.5	%		12.5	%		12.5	%
Winner Medical & Textile Ltd. Chongyang		12.5	%		12.5	%		12.5	%		25	%		25	%
Hubei Winner Textiles Co., Ltd.		12.5	%		12.5	%		25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0	%		12.5	%		12.5	%		12.5	%		25	%

In addition, during the grandfather period, the income tax rate for enterprises located in Shenzhen currently enjoying an 20% income tax rate will increase from 18%, 20%, 22%, and 24% in 2008, 2009, 2010, and 2011 respectively, and reach 25% in 2012.

On October 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109 (FIN48). The Company’s policy on classification of all interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provisions. The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. Until March 31, 2009, the management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flow, and will continue to evaluate for the uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s financial statements for the six months ended March 31, 2009 and 2008, respectively. The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities and the major one is the China Tax Authority. The open tax year for examination in China is 5 years.

7. Credit Facilities

	March 31,2009
	Bank credit facilities		Unused bank credit facilities		Bank loans
	(Unaudited) US$		(Unaudited) US$		(Unaudited) US$
Bank A		8,777,191		5,847,072		2,930,119
Bank B		8,777,191		4,681,169		4,096,022
Bank C		5,037,133		2,696,548		2,340,585
Bank D		1,579,894		409,602		1,170,292
Total		24,171,409		13,634,391		10,537,018

As of March 31, 2009, the Company had approximately $24.17 million bank credit facilities from four commercial banks; and after drawdowns of $10.54 million banks loans as of March 31, 2009, there are $13.63 million unused bank credit facilities. The Company’s real estate and other assets have been pledged as collateral for the credit facilities. These revolving lines of credit allow the Company to make short-term loans on a recurring basis, and the banks re-evaluate the Company’s credit line annually. These bank credits enable the Company to utilize the short-term loans and enjoy a lower interest expense compared with long-term loans. There has been no substantial change in the credit facilities during the six months ended March 31, 2009.

F-9

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Related Party Transactions

During the six months ended March 31, 2009 and 2008, the Company purchased goods from L+L Healthcare Hubei Co., Ltd., an equity investee, for US$5,175 and US$621,762. As of March 31, 2009, amount due from the equity investee was US$159,637.

During the six months ended March 31, 2009 and 2008, the Company sold goods to Winner Medical & Textile (H.K.) Limited for US$Nil and US$552,391 respectively. Mr. Jianquan Li, director of the Company, has a controlling interest in Winner Medical & Textile (H.K.) Limited. As of March 31, 2009, amount due from Winner Medical & Textile (H.K.) Limited was US$ Nil.

The amounts due from/to the above affiliated companies with the exception of L+L Healthcare Hubei are unsecured, interest free and payable according to the trading credit terms. Starting from 2006, the amount due from L+L Healthcare Hubei Co., Ltd. are unsecured, 5% interest bearing and payable according to the trading credit terms.

9. Stock-Based Compensation

Stock-Based Compensation - The Company has adopted Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004) ("SFAS No. 123(R)"), ''Share-based Payment'', which requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.

The Company uses the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that have no restrictions, are fully transferable and negotiable in a free trading market, to value its options under the independent director’s contract. Use of an option valuation model, as required by SFAS No. 123(R), “Accounting for Stock-Based Compensation”, includes highly subjective assumptions based on long-term prediction, including the expected stock price volatility and average life of each option grant.

	Six months ended March 31
	2009			2008
	(Unaudited)			(Unaudited)

Risk free interest rate		0.55	%		1.79	%
Volatility		237.16	%		69.81	%
Expected life (years)		3			3
Dividends		-			-
Weighted average fair value of options granted during the period	US$	0.38		US$	0.28

In a contract signed on May 8, 2006, the Company agreed to grant to two of its independent directors each year non-qualified options for purchasing up to 20,000 shares of the common stock of the Company, which options shall be exercisable within three years from the grant date and have an exercise price equal to the fair market value on the grant date. On October 1, 2007, the Company and two of its independent directors agreed to increase the cash compensation to them of US$5,000 each, and in order to substitute the option compensation terms agreed in the previous contracts. The options granted according to the previous contracts are still valid. There was no stock-based compensation cost recorded for the six months ended March 31, 2009 and 2008, respectively. Instead, the total cash compensation costs for the six months ended March 31, 2009 and 2008 are US$37,500 and US$37,500, respectively.

F-10

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Stock-Based Compensation-Continued

A summary of option activity under the 2008-2009 Plan (as defined below) as of March 31, 2009, and changes during the period then ended is presented below:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
			US$		Years
	(Unaudited)		(Unaudited)		(Unaudited)

Outstanding at September 30, 2007		28,334		6.07		2.12
Granted (from October 1, 2007 to September 30, 2008)		-		-		-
Exercised (from October 1, 2007 to September 30, 2008)		-		-		-
Forfeited or expired		-		-		-
Outstanding at September 30, 2008		28,334		6.07		1.13
Granted (from October 1, 2008 to March 31, 2009)		-		-		-
Exercised (from October 1, 2008 to March 31, 2009)		-		-		-
Forfeited or expired		-		-		-
Outstanding at March 31, 2009		28,334		6.07		0.63

On October 7, 2007, the Board of Directors approved a 2008-2009 Restricted Stock Unit Incentive Plan, the “2008-2009 Plan”, an equity incentive compensation program for fiscal years 2008 and 2009.The 2008-2009 Plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees, where a participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Following this incentive plan, the Company granted 1,000,000 units out of the total 1,200,000 authorized restricted stock on October 7, 2007. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on October 7, 2010 and the second 50% on October 7, 2011; if the target of corporate net income, annual sales objectives, and the participant’s individual performance objectives are fulfilled. As of September 30, 2008, 88,500 units were cancelled due to the resignation of employees or failure to meet the agreed performance. On October 16, 2008, the Company, without changing the terms of the incentive plan, granted the remaining 200,000 units of restricted stock to selected staff.

A summary of the restricted stock units activity under the 2008-2009 Plan is as follows:

	Number of units
	(Unaudited)

Units outstanding at October 1, 2007		-
Granted		1,000,000
Exercised		-
Cancelled		(88,500	)
Units outstanding at September 30, 2008		911,500
Granted		200,000
Exercised		-
Cancelled		-
Units outstanding at March 31, 2009		1,111,500

Estimated value of award as of grant date is based on the market price of the common stock as quoted on the www.NASDAQ.com as of October 5, 2007 and October 15, 2008, which was US$1.80 and US$0.25 per share, respectively and assumes that the individual achieves 100% of the applicable corporate and individual objectives as set forth in the award. The Company recorded share-based compensation expense of US$203,082 and US$191,415 for the six months ended March 31, 2009 and 2008, respectively.

F-11

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Commitments and Contingencies

Operating leases - The Company was obligated under operating leases requiring minimum rentals as follows:

	US$
	(Unaudited)
Six months ending September 30, 2009 Year ending September 30		145,359
2010		186,477
2011		84,283
2012		-
2013		-
Total minimum lease payments		416,119

Rental expenses under operating leases included in the statement of income were US$180,808 and US$134,456 for the six months ended March 31, 2009 and 2008 respectively.

Purchase obligations- The Company has signed agreements with suppliers and other parties to purchase plant and machinery, and computer equipment with estimated non-cancelable obligations of US$309,577 and US$255,155 as of March 31, 2009 and 2008 respectively.

11. Fair Value Measurement

On October 1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements”, (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of the provisions of SFAS 157 related to financial assets and liabilities, and other assets and liabilities that are carried at fair value on a recurring basis do not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows. The FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. Accordingly, the Company is still evaluating the impact of the provisions of SFAS 157 for non-financial assets and liabilities and is not yet in a position to determine such effects.

In October 10, 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market for that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective for the Company upon issuance, including prior periods for which financial statements have not been issued; and, therefore was effective for the Company’s financial statements as of and for the six-month periods ended March 31, 2009. The adoption of FSP No. FAS 157-3 did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which clarifies the application of SFAS 157 when there is no active market or where the price inputs being used represent distressed sales. Additional guidance is provided regarding estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. FSP FAS 157-4 will be effective for interim and annual periods ending after June 15, 2009. The Company is currently evaluating the effect of SFAS 157-4 on its consolidated financial statements and results of operation and is currently not yet in a position to determine such effects.

F-12

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. Operating Risk

Concentrations of credit risk, major customers and suppliers - A substantial percentage of the Company’s sales are made to one customer, Sakai Shoten Co. Ltd., and are typically sold on an open account basis. The sales to this customer accounted for 16% and 18%, of the total net sales for the six months ended March 31, 2009 and 2008, respectively.

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers. Bad debt expense was US$60,163 and US$14,453 during the six months ended March 31, 2009 and 2008 respectively.

Interest rate risk - The interest rates and terms of repayment of bank and other borrowings ranged from 4.37% to 7.84%. Other financial assets and liabilities do not have material interest rate risk.

Credit risk -In order to reduce the risk of inability to collect the accounts receivables, the Company entered into a one-year insurance contract with China Export & Credit Insurance Corporation to cover the non-collected accounts receivables, which became effective on April 25, 2008 and automatically renewed subject to a one month written notice is given by either party. A total of US$17.8 million of accounts receivables from the new customers and the customers with high credit risk were covered under this insurance contract, and the maximum insurance indemnity from China Export & Credit Insurance Corporation is US$8 million.

Foreign currency risk -The value of the Renminbi, the main currency used in the PRC, fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the Renminbi is not readily convertible into US dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of Renminbi into foreign currencies such as the US dollar, Euro, Pound Sterling, and Australian dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. On March 31, 2009 and 2008, the exchange rates of RMB against Euro were 9.6590 and 10.6669 respectively; the appreciation of RMB against Euro was 10.43%. The exchange rates of RMB against Pound Sterling were 9.8798 and 14.5807 respectively; the appreciation of RMB against Pound Sterling was 47.58%. The exchange rates of RMB against Australian dollar were 4.7135 and 6.4061 respectively; the appreciation of RMB against Australian dollar was 35.91%. The exchange rates of RMB against US dollar were 6.8346 and 7.3046 respectively; the appreciation of RMB against US dollar was 6.88%. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could have various adverse effects on the Company’s business.

The Company’s currency exchange rate risks come primarily from the sales of products to international customers. If the RMB continues its appreciation against foreign currencies, it will make the Company’s sale prices more expensive, thus its sales may decline. The Company believes that the exchange rate of RMB against US dollar will remain relatively stable in the short run, thus the Company currently required its European and Australian customers to settle their payments by US dollars instead of Euro, Pound Sterling, and Australian dollars. In the long run, the Company believes that the RMB will continue to appreciate against the US dollar, Euro, Pound Sterling, and Australian dollar; and the following strategies were implemented to reduce or limit the currency exchange risks: (1) As a percentage of total revenue, the sales revenue in China continues to increase. (2)The Company shall increase import of raw materials from the US, such as cotton and packaging materials.

F-13

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13. Geographical Information

The business of the Company is manufacturing and trading of medical dressings and medical disposable products. The Company's sales by geographic destination are analyzed as follows:

	Three months ended March 31
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Europe		8,450,865		8,084,061
Japan		3,707,079		4,188,024
North and South America		4,028,393		1,559,089
China		3,875,648		2,718,491
Others		565,161		1,338,638
Total net sales		20,627,146		17,888,303

	Six months ended March 31
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Europe		19,553,803		16,996,770
Japan		8,516,478		8,576,915
North and South America		8,989,801		3,968,424
China		6,477,306		5,343,186
Others		2,820,032		2,328,607
Total net sales		46,357,420		37,213,902

F-14

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Segment Information

The Company has two reportable segments: traditional products (Medical Care, Wound Care, and Home Care) and new style PurCotton Products. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

Contributions of the major activities and profitability information of the Company’s reportable segments for the six months ended March 31, 2009 and 2008 are as follows:

	Six months ended March 31
	2009			2008
	(Unaudited)			(Unaudited)
Net Sales:	US$			US$
Segment:
Traditional products		44,406,798			37,041,083
PurCotton products		1,950,622			172,819
Consolidated total		46,357,420			37,213,902

Gross Profits:
Segment:
Traditional products		11,985,148			8,683,741
PurCotton products		420,132			67,641
Consolidated total		12,405,280			8,751,382

Income from operations before taxes
Segment:
Traditional products		4,079,535			1,906,761
PurCotton products		(316,076	)		(376,042	)
Consolidated total		3,763,459			1,530,719

Net Income:
Segment:
Traditional products		3,433,850			2,108,347
PurCotton products		(314,677	)		(376,043	)
Consolidated total		3,119,173			1,732,304

F-15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of the Company’s management and involve risks and uncertainties, as well as assumptions that, if they ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. The words “believe”, “expect”, “anticipate”, “project”, “targets”, “optimistic”, “intend”, “aim”, “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk Factors” section of the Company’s annual report on Form 10-K; and any statements of assumptions underlying any of the foregoing. Except as otherwise indicated by the context, references in this report to “the Company”, “Winner”, “Winner Medical”, “we”, “us”, or “our”, are references to the combined business of Winner Medical Group Inc. and its subsidiaries.

Overview

Winner Medical’s business operations consist of the manufacturing and marketing, research and development of medical dressings and medical disposable products. The Company has eight wholly-owned operating subsidiaries and four joint venture companies. The Company has established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical care, wound care, home care products and PurCotton products, a nonwoven fabric made from 100% natural cotton. The Company manufactures its products in China and sells them both in China and abroad in other countries and areas such as Japan, Germany, Italy, the Netherlands, the United Kingdom, Australia, France, South America, Africa, the Middle East and the United States.

The following analysis discusses changes in the financial condition and results of operations at and for the three and six months ended March 31, 2009 and 2008, and should be read in conjunction with the Company’s unaudited consolidated financial statements and the notes thereto included elsewhere in this Report.

The Company’s History

Winner Medical Group Inc., formerly known as Birch Enterprises, Inc., HDH Industries, Inc. and Las Vegas Resorts Corporation, was originally incorporated in the State of Nevada in August 1986. From July 1993 until late 2005, the Company’s immediate predecessor, Las Vegas Resorts Corporation, and its predecessors had no meaningful business operations.

Winner Medical Group Inc. presently conducts its business operations through its operating subsidiaries located in China and elsewhere.

The Company’s Business Operations

Winner Medical’s present business operations commenced February 1991 and involve the manufacture and marketing of its products primarily out of its facilities in China. The Company generates revenue through domestic (China) and foreign sale of a variety of medical dressings and medical disposables products, such as dressing packs, wound care dressings, protective products, medical instruments, dental products, hygiene products and home care products.

The Company has integrated manufacturing lines that provide its clients with the ability to procure certain products from a single supplier. The Company sells its own brand products in the developing countries including China, the Middle East, South America, Africa, and Southeast Asia. In the developed countries where it sells its products, the Company provides its customers with its specialized design, manufacturing and packaging services. When the Company works on this basis, its clients are able to select the design, size, type and scale of the products the Company manufactures for them.

The Company’s board of directors decided it was in its best interest to transfer all the business operations of the Company’s subsidiary Winner Medical & Textile Ltd. Zhuhai, Winner Zhuhai, to Winner Industrial (Shenzhen) Co. Ltd. and Winner Medical & Textile Ltd. Jingmen. On February 1, 2008, the Company stopped all the business operations of Winner Zhuhai and filed for the deregistration of Winner Zhuhai with various government authorities in the PRC.

Industry Wide Trends that are Relevant to the Company’s Business

The medical dressings and medical disposables manufacturing market are continually evolving due to technological advances and new demands in the healthcare industry. The Company believes the trends in the industry towards improving medical care and patient conditions, changes in patient treatment approaches and technological advances will impact favorably on the demand for its products. The Company anticipates that these factors will result in growth in sales of medical dressings and medical disposables products and increased revenue for the Company.

The export of medical dressings and medical disposables products from China has grown rapidly over the last few years. The Company believes that its sales over the next five years will grow in correlation to the growth of medical dressings and medical disposables export volume from China.

One main factor that management considers when estimating the Company’s future growth is the potential for revenues from new product sales. The Company’ subsidiary Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”, has commenced production of the new spunlace cotton nonwoven products, “PurCotton Products”. The Company has already installed three manufacturing lines in Winner Huanggang. The PurCotton product combines the superior characteristics of both natural cotton and materials made using nonwoven technology. It has many advantages over woven cotton or synthetic nonwoven fabric as it is natural, safe, strong, durable, healthy, environmentally friendly, and of higher quality. Patent applications covering the invention of spunlace cotton nonwoven process have been made in more than 30 countries. Patents have been granted in China, patent number: ZL200510033147.1; in the United States, patent number: US 7049753 B2; in Russia, patent number: 2005118845/12(021367), in Singapore, patent number: 200503941-7, and in South Africa, patent number: 07/7583. The Company’s patented manufacturing process enables it to produce PurCotton at a relatively lower cost than woven gauze, so the Company expects its new PurCotton products to gradually supersede its gauze products.

The Company increased the sales and marketing input for PurCotton products, and its focus is the Japanese, Chinese, United States and European markets. After equipment installation and adjustment, as well as factory audits by customers, the Company commenced production of PurCotton, and started selling PurCotton raw materials to Japan, US, Europe, and Chinese customers. During the six months ended March 31, 2009 and 2008, revenue from these products reached approximately $1,951,000 and $173,000, respectively. At the same time, the Company is in the stage of processing trial orders of PurCotton finished medical products with customers in North America and Europe.

The medical dressings and medical disposables market is subject to consumption patterns and trends. One such trend or consumption pattern relates to the age demographics of the end users of the Company’s products. On average, the worldwide population is aging and life spans are generally increasing. As the general population begins to include a larger percentage of older people, the Company anticipates that more medical care will be required, and that will result in increased sales of the Company’s products.

Another trend or consumption pattern in the Company’s industry is that hospitals are increasingly seeking to reduce their costs. One method hospitals employ to reduce costs is to seek alternative products that increase efficiency or reduce labor costs. For example, disposable catheters may reduce the need for frequent changes of diapers and bed sheets. Other popular disposable products used by hospitals to reduce operating costs include Eustachian tubes and needles, disposable clothing and accessories. The Company believes the demand for cost-effective products and healthcare solutions and an increasing emphasis on health in the U.S. and European Union will bring an increase in the demand for medical instruments, medical dressings and medical disposables products.

Also affecting the Company’s industry is the growing trend towards protecting the environment. Consumers are becoming increasingly concerned about the environmental impact of the products they buy. Nonwoven medical dressings, medical instruments and medical disposables products usually contain materials like rubber and polyester, which may result in restrictions on these products under environmental protection regulations which may negatively affect sales of these products. Moreover, such materials are non-biodegradable and exploit petroleum, a non-renewable energy resource. The Company believes this trend will benefit the Company in competing with its competitors because its new PurCotton products are primarily made of natural cotton, which is an environmentally friendly raw material, and the Company’s new nonwoven fabric manufacturing capabilities enables it to make new products with natural cotton at lower costs.

The Company believes that there is a trend in its industry that is resulting in the geographical shift in product manufacturing from countries with high labor and manufacturing costs to countries, such as China, where labor and manufacturing costs are generally lower. As a result of the lower cost structure and rapid development of the Chinese economy, more foreign multinational companies are entering the Chinese market to produce their goods as China emerges as part of the global production and supply chain. The Company anticipates that this trend of large multinational companies seeking to produce their products in China will benefit the Company. In addition, the Company is negotiating with several large companies in the industry in developed countries which intend to outsource some of their production lines.

Finally, the Company estimates that China’s current annual exports of medical dressings and medical disposables products still account for a small percentage of the total world market demand. Therefore, the Company believes there is a significant opportunity to expand China’s export volume in this industry. This presents a significant opportunity for the Company.

Competition

The Company competes based upon manufacturing capacity, product quality, product cost, ability to produce a diverse range of products and logistical capabilities.

The Company encounters significant competition within China and throughout the world. Some of the Company’s competitors have greater financial resources, additional human resources, and more established market recognition in both domestic and international markets than the Company does. However, the Company believes that its China-based competitors have lower labor costs, but their products often lack diversity. With respect to the Company’s competitors located outside China, it believes competitors in India generally utilize older equipment to manufacture their products, resulting in lower product quality. The Company’s competition in Europe and North and South America may have a geographic advantage in the European Union and U.S. markets, but the Company believes they are generally manufacturing on a smaller scale, have less product diversity and higher production costs.

This level of competition puts pressure on the sales prices of the Company’s products, which results in lower margins for the Company.

The Company’s competitive advantages

Customers in the medical field employ high quality standards, since product quality and safety are their primary consideration. They will undergo strict factory and production system verification and product quality testing on their target suppliers. Once a supplier passed their test, it is costly for the customers to switch to others. Compared with the Company’s competitors, its competitive advantages include the following:

- Sound quality management system and certificates obtained. The Company has already established three quality management systems, ISO9001:2000 quality management system, ISO13485:2003 medical devices quality control system, and 21CFR Part 820 U.S. FDA (United States Food and Drug Administration) Medical Device Quality System Regulation. Also, the Company is proud to be one of the few to receive FDA approval to export sterilized products to the US directly. Currently, over 90% of the Company’s products have obtained European Union CE certificates. There are also 30 types of products registered and listed with the FDA in the US, among those are the sterilization pouches and face masks that have got 510K (US FDA) certificates. The Japanese certificates, which are awarded to individual factories, have been granted to the Company’s Shenzhen factory, Jiayu factory, and Chongyang factory, which are factories qualified and entitled to export products to Japan.

-Quality control on vertically integrated production capacities. The Company has shaped its integrated manufacturing lines to meet client preferences of procuring a range of products from a single trusted supplier. The Company’ services range from raw material processing, bleaching, folding, packaging and sterilization to finished product delivery. They are adamant about maintaining stringent quality control throughout each stage. The Company has factories in Hubei, Shenzhen and Shanghai, production plants in Hubei province are primarily focused on upstream manufacturing, and the facilities in Shenzhen are focused on higher value-added processing to finished products.

The Company’ strategy against current economic crisis

Due to the current economic crisis, the prices of all raw materials such as petroleum and cotton are decreasing; as a result, some of the Company’s customers requested the Company to decrease the prices for most of its product lines. Following is the Company’ strategy to address this challenge:

- Focus on higher margin products. As its long term plan, the Company is executing a systematic plan for the marketing and sales of PurCotton products, which have a higher margin than its traditional products. Even though it experienced low margins during the initial stage of the PurCotton product launch, the Company believes it will generate a higher margin than its traditional products once PurCotton products commence mass production. At the same time, the Company is working on equipment technical improvements in Winner Huanggang to increase production efficiency.

- Implement lean production and equipment technical improvements. The Company implements lean production management and equipment technical improvements among all subsidiaries to eliminate waste during production and increase efficiency.

- Purchase price decreases across the raw materials from the Company’ suppliers. The Company tries its best efforts to maintain good relationships with its major suppliers and obtain as lowest prices as possible.

- Control administrative expense. The Company will continue to optimize the Enterprise Resources Planning, “ERP”, software provided by Systems Applications and Products Company, “SAP”, which enables the Company to reduce its administrative staff, and thus lower its administrative expenses.

- Optimize resource allocation. The Company aims to reduce production costs and administrative and transportation expenses and optimize resource allocation. For instance, due to the limited production and operational area, the Company’s wholly-owned subsidiary, Winner Medical & Textile Ltd. Zhuhai, “Winner Zhuhai”, is not cost effective to further expand its production of certain types of gauze products. To solve this inefficiency of resource utilization, the Company transferred production to Winner Industrial (Shenzhen) Co. Ltd., “Winner Shenzhen,” and Winner Medical & Textile Ltd. Jingmen, “Winner Jingmen”.

- Reduce labor input. Through improving production techniques, the Company can reduce labor costs and increase efficiency by automation.

Chinese government actions in favor of the Company

- Chinese Medical Reform. Announced RMB 850 billion healthcare spending in the following three years by the Chinese government to reform the healthcare system will greatly improve the accessibility to and desire for medical care. The Chinese government’s increased spending in the medical devices sector is a driving force of the Company’s future development.

- Increased Government Subsidies. During the economic crisis, the Chinese government increased the subsidies to private enterprises to stimulate innovation. The Company has already received and expects to receive some of these government subsidies.

- VAT Tax Reform. The Chinese government reformed its policy on Value Added Taxes, VAT, for purchased machinery. Starting January 1, 2009, the 17% input VAT for machinery is eligible for a reimbursement. This new policy will reduce the Company’s cost on equipment technical improvements and purchase of machineries.

Results of Operations

The following sets forth certain of the Company’s income statement information for the three and six months ended March 31, 2009 and 2008.

Comparison of the Three Months Ended March 31, 2009 and 2008

(All amounts, other than percentages, in thousand of U.S. dollars)

	THREE MONTHS ENDED 03/31/09					THREE MONTHS ENDED 03/31/08
Item	In Thousand		As a Percentage			In Thousand		As a Percentage			Amount Change		% Change
Net Sales	$	20,627		100.00	%	$	17,888		100.00	%	$	2,739		15.31	%
Costs of Sales	$	14,825		71.87	%	$	13,937		77.91	%	$	888		6.37	%
Other Operating Income, Net	$	406		1.97	%	$	72		0.40	%	$	334		463.89	%
Exchange Difference, Net	$	-245		-1.19	%	$	-223		-1.25	%	$	-22		9.87	%
Selling, general and administrative expenses	$	3,865		18.74	%	$	3,341		18.68	%	$	524		15.68	%
Interest Expense	$	119		0.58	%	$	138		0.77	%	$	-19		-13.77	%
Interest Income	$	11		0.05	%	$	8		0.04	%	$	3		37.50	%
Investment yields	$	133		0.64	%	$	-1		-0.01	%	$	134		-
Income tax	$	460		2.23	%	$	-223		-1.25	%	$	683		-
Minority interest	$	-21		-0.10	%	$	18		0.10	%	$	-39		-
Net income	$	1,644		7.97	%	$	570		3.19	%	$	1,074		188.42	%

Net Sales

Net Sales increased $2,739,000, or 15.31%, to $20,627,000 for the three months ended March 31, 2009 from $17,888,000 for the three months ended March 31, 2008. This increase was mainly attributable to increased volumes of large sales orders, especially from North and South American customers, and the negative effect of the South China snowstorms in the same period last year. The net sales to North and South American customers was $4,028,000 for the three months ended March 31, 2009, an increase of 158.37% compared to the same period last year. The Company has been gradually shifting its resources and services to larger clients. As a result, the Company expects revenue from these significant customers to increase in the future.

After equipment installation and adjustment, as well as factory audits by customers, the Company commenced production of PurCotton. During the three months ended March 31, 2009, revenue from PurCotton products reached approximately $1,108,000, as compared to approximately $128,000 in the same period last year. Such sales were mainly from the selling of PurCotton raw materials to Japan, US, Europe, and Chinese customers who produce consumer products, including sanitary and incontinence products. At the same time, the Company is processing trial orders of PurCotton finished medical products, such as operation room towel and sponges, with customers in North America and Europe.

Looking forward, the Company is marketing its own branded PurCotton wipes/tissue in Hong Kong and Mainland China, as well as the PurCotton materials for the international clean room product market. Thus, the Company believes that demand for PurCotton will steadily grow. While it will be necessary to build education levels and cultivate interest among potential customers in the short term, the Company is confident in its mid- to long-term growth potential and steady progress has been made to expand the net sales.

Sales by Region

The following table illustrates net sales from the major geographic areas in which the Company sells its products for the three months ended March 31, 2009 and 2008. The table also provides the percentage of total revenues represented by each listed region.

(All amounts, other than percentages, in thousand of U.S. dollars)

	Three Months Ended on 03/31/09 in Thousand		As a Percentage of Total Revenues			Three Months Ended on 03/31/08 in Thousand		As a Percentage of Total Revenues			Amount Change in Thousand		As a Percentage Change
Europe	$	8,451		40.97	%	$	8,084		45.19	%	$	367		4.54	%
Japan	$	3,707		17.97	%	$	4,188		23.05	%	$	-481		-11.49	%
North and South America	$	4,028		19.53	%	$	1,559		8.72	%	$	2,496		158.37	%
China	$	3,876		18.79	%	$	2,718		14.36	%	$	1,158		42.60	%
Others	$	565		2.74	%	$	1,339		7.48	%	$	-774		-57.80	%
Total	$	20,627		100.00	%	$	17,888		100.00	%	$	2,739		15.31	%

Other Operating Income, Net

The Company’s other operating income, net, for the three months ended March 31, 2009, increased $334,000 to $406,000, from $72,000 for the three months ended March 31, 2008. Other operating income, net mainly consists of income from sales of cotton and packing materials, sales of leftover materials, and government subsidies, which are incentives awarded by the PRC local government to the Company for continuing its research and development projects. The increase was mainly attributable to the increased government subsidies.

Exchange Difference, Net

The Company’s exchange difference, net, for the three months ended March 31, 2009, further increased by $22,000 to a loss of $245,000, from a loss of $223,000 for the three months ended March 31, 2008. The increase is mainly due to the foreign currency exchange losses recognized on three month ended March 31, 2009 compared with the same period last year. After its customers placed orders with the Company at an agreed selling price in Euro, Pound Sterling or Australian Dollar, the Renminbi (RMB) appreciated against the Euro, Pound Sterling or Australian Dollar; as a result, the Company suffered a foreign currency exchange loss on the actual payment date. On March 31, 2009 and 2008, the exchange rates of RMB against Euro were 9.0323 and 11.0809 respectively; the appreciation of RMB against Euro was 22.68%. The exchange rates of RMB against Pound Sterling were 9.7729 and 14.0219 respectively; the appreciation of RMB against Pound Sterling was 43.48%. The exchange rates of RMB against Australian dollar were 4.6707 and 6.4116 respectively; the appreciation of RMB against Australian dollar was 37.27%. The Company believes that the exchange rate of RMB against US dollar will remain relatively stable in the short run, thus the Company’s customers from European and Australian customers settled their payments by US dollars instead of Euro, Pound Sterling, and Australian dollars.

Cost of Sales

The Company’s cost of sales increased $888,000 to $14,825,000 for the three months ended March 31, 2009 from $13,937,000 for the three months ended March 31, 2008. As a percentage of net revenues, the cost of sales decreased 6.04% to 71.87% for the three months ended March 31, 2009 from 77.91% for the three months ended March 31, 2008. The decrease as percentage of revenue was mainly attributable to: (1) the unit product cost decrease as a result of better economies of scale, (2) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (3) the decrease of material purchasing price because the Company combined individual purchases by each subsidiary into larger scale orders to create more bargaining power.

Gross Profits

The Company’s gross profit increased $1,850,000 to $5,802,000 for the three months ended March 31, 2009 from $3,952,000 for the three months ended March 31, 2008. Gross profit as a percentage of net revenues was 28.13% for the three months ended March 31, 2009, compared to 22.09% for the three months ended March 31, 2008. The increase in gross profit as a percentage of net revenue was mainly due to (1) the unit product cost decrease as a result of better economies of scale, (2) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (3) the decrease of material purchasing price because the Company combined individual purchases by each subsidiary into larger scale orders to create more bargaining power.

Selling Expenses

The Company’s selling expenses decreased $134,000 to $1,347,000 for the three months ended March 31, 2009 from $1,481,000 for the three months ended March 31, 2008. As a percentage of net revenues, the Company’s selling expenses decreased to 6.53% for the three months ended March 31, 2009 from 8.28% for the three months ended March 31, 2008. The decrease as percentage of revenue was primarily attributable to the decrease of approximately $495,000 in transportation expense for export sales compared with the same period last year.

The Company’s transportation expenses for domestic sales, i.e., transportation costs within China, were $233,000, 1.13% of total sales, and $165,000, 0.92% of total sales, in the three months ended March 31, 2009 and 2008, respectively. The Company’s transportation expenses for export sales were $394,000, 1.91% of total sales, and $881,000, 4.92% of total sales, in the three months ended March 31, 2009 and 2008, respectively. The Company’s transportation fees for export sales decreased by $487,000 from the three months ended March 31, 2008 to the three months ended March 31, 2009 or approximately 55.28%. This decrease in the export transportation expenses was mainly due to (1) the decrease of unit transportation fee, and (2) the Company has changed some sales contracts from Cost, Insurance and Freight, or CIF, into Free On Board, or FOB, according to which the customers shall pay for the transportation fee.

Administrative Expenses

The Company’s administrative expenses increased $658,000, or 35.38%, to $2,581,000 for the three months ended March 31, 2009 from $1,860,000 for the three months ended March 31, 2008. As a percentage of net revenues, administrative expenses increased to 12.51% for the three months ended March 31, 2009 from 10.40% for the three months ended March 31, 2008. This increase was primarily attributable to the following: (1) as a result of the decrease of market value of general material price, there is an increase of $131,000 provision for decline in value of inventory, (2) a $222,000 reserve for fixed assets impairment during the second quarter of fiscal 2009, (3) a $72,000 increase in reserve for bad debts compared with the same period last year, (4) a $46,000 increase in salary and welfare for management and administrative staff compared with the same period last year, (5) a $141,000 increase in research and development expenses compared with the same period last year, and (6) the increase in related administrative expenses such as depreciation and amortization for the Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”, for the three months ended March 31, 2009 in the amount of approximately $380,000 with an increase of $171,000 compared to the same period last year.

Interest Expenses

Interest expenses decreased to approximately $119,000, 0.58% of the total revenue, for the three months ended March 31, 2009 as compared to approximately $138,000, 0.77% of total revenue, for the same period of 2008, a decrease of approximately $19,000, or 13.77%. The Company’s interest expense relates to bank loans which are primarily used to maintain daily operation. The percentage decrease of interest expense was mainly due to (1) a decrease in the Company’s comparatively low average outstanding balance of bank loans of approximately $10,537,000 as of March 31, 2009, compared with approximately $15,033,000 as of March 31, 2008, and (2) decreased interest rates of bank loans.

Income taxes

	Calendar year ended December 31, 2008			Calendar year ended December 31, 2009			Calendar year ended December 31, 2010			Calendar year ended December 31, 2011			Calendar year ended December 31, 2012
Winner Medical (Huanggang) Co., Ltd.		0	%		0	%		12.5	%		12.5	%		12.5	%
Winner Medical & Textile Ltd. Chongyang		12.5	%		12.5	%		12.5	%		25	%		25	%
Hubei Winner Textiles Co., Ltd.		12.5	%		12.5	%		25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0	%		12.5	%		12.5	%		12.5	%		25	%

In addition, during the grandfather period, the income tax rate for enterprises located in Shenzhen currently enjoying an 18% income tax rate will increase from 18%, 20%, 22%, and 24% in 2008, 2009, 2010, and 2011 respectively, and reach 25% in 2012.

Winner Medical (Hong Kong) Limited was incorporated in January 2008 and the applicable statutory tax rate is 16.5%.

No provision for US tax is made as the Company has no assessable income in the US for the three months ended March 31, 2009 and 2008. The enterprise income tax of US is 34%.

The Company’s income tax provision for the three months ended March 31, 2009 was $460,000 as compared to -$223,000 for the three months ended March 31, 2008, an increase of $683,000. The increase of income tax is mainly due to (1) a change in the tax rate on the Company’s subsidiaries in China. The applicable tax rate of the Company’s subsidiary Winner Industrial (Shenzhen) Co. Ltd, Winner Shenzhen, was 20% and 7.5% for the three months ended March 31, 2009 and 2008 respectively, and Winner Shenzhen’s profits constitutes a major part of the Company’s total profits, and (2) after the Company reassessed its tax status, the over-provision of income taxes was written off in the second fiscal quarter of 2008.

Minority Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income of -$21,000 and $18,000 in the three months ended March 31, 2009 and 2008, respectively, reflecting third party minority interests in two of the Company’s subsidiaries, 40% in Shanghai Winner Medical Apparatus Co., Ltd., and 40% in Winner Medical (Hong Kong) Limited.

Net income (profit after taxes)

Net profit increased to approximately $1,644,000 for the three months ended March 31, 2009, as compared to approximately $570,000 for the same period of 2008, an increase of approximately $1,074,000, or approximately 188.42%. Such increase is mainly attributable to (1) higher gross margin during the three months ended March 31, 2009 as compared with the same period last year, (2) the decrease in transportation expenses for export sales, and (3) improved production management to reduce manufacture cost.

Comparison of the Six months Ended March 31, 2009 and 2008

(All amounts, other than percentages, in thousand of U.S. dollars)

	SIX MONTHS ENDED 03/31/09					SIX MONTHS ENDED 03/31/08
Item	In Thousand		As a Percentage			In Thousand		As a Percentage			Amount Change		% Change
Net Sales	$	46,357		100.00	%	$	37,214		100.00	%	$	9,143		24.57	%
Costs of Sales	$	33,952		73.24	%	$	28,463		76.48	%	$	5,489		19.28	%
Other Operating Income, Net	$	891		1.92	%	$	438		1.18	%	$	453		103.42	%
Exchange Difference, Net	$	-1,130		-2.44	%	$	-537		-1.44	%	$	-593		110.43	%
Selling, general and administrative expenses	$	8,323		17.95	%	$	6,925		18.61	%	$	1,398		20.19	%
Interest Expense	$	327		0.71	%	$	239		0.64	%	$	88		36.82	%
Interest Income	$	24		0.05	%	$	19		0.05	%	$	5		26.32	%
Investment yields	$	223		0.48	%	$	24		0.06	%	$	199		829.17	%
Income tax	$	720		1.55	%	$	-159		-0.43	%	$	879		-
Minority interest	$	75		0.16	%	$	43		0.12	%	$	32		74.42	%
Net income	$	3,119		6.73	%	$	1,732		4.65	%	$	1,387		80.08	%

Net Sales

Net sales increased $9,143,000, or 24.57%, to $46,357,000 for the six months ended March 31, 2009 from $37,214,000 for the six months ended March 31, 2008. This increase was mainly attributable to increased volumes of large sales orders, especially from North and South American customers, and the negative effect of the South China snow storm during the second quarter of fiscal 2008. The net sales to North and South American customers was $8,990,000 for the six months ended March 31, 2009, an increase of 126.56% compared to the same period last year. The Company has been gradually shifting its resources and services to larger clients. As a result, the Company expects revenue from these significant customers to increase in the future.

After equipment installation and adjustment, as well as factory audits by customers, the Company commenced production of PurCotton. During the six months ended March 31, 2009, revenue from PurCotton products reached approximately $1,951,000, as compared to approximately $173,000 in the same period last year. Such sales were mainly from the selling of PurCotton raw materials to Japan, US, Europe, and Chinese customers who produce consumer products, including sanitary and incontinence products. At the same time, the Company is processing trial orders of PurCotton finished medical products, such as operation room towel and sponges, with customers in North America and Europe.

Sales by Region

The following table illustrates net sales from the major geographic areas in which the Company sells its products for the six months ended March 31, 2009 and 2008. The table also provides the percentage of total revenues represented by each listed region.

(All amounts, other than percentages, in thousand of U.S. dollars)

	Six months Ended on 03/31/09 in Thousand		As a Percentage of Total Revenues			Six months Ended on 03/31/08 in Thousand		As a Percentage of Total Revenues			Amount Change in Thousand		As a Percentage Change
Europe	$	19,554		42.18	%	$	16,997		45.67	%	$	2,557		15.04	%
Japan	$	8,517		18.37	%	$	8,577		23.05	%	$	-60		-0.70	%
North and South America	$	8,990		19.39	%	$	3,968		10.66	%	$	5,022		126.56	%
China	$	6,477		13.97	%	$	5,343		14.36	%	$	1,134		21.22	%
Others	$	2,820		6.08	%	$	2,329		6.26	%	$	491		21.08	%
Total	$	46,357		100.00	%	$	37,214		100.00	%	$	9,143		24.57	%

Other Operating Income, Net

The Company’s other operating income, net, for the six months ended March 31, 2009, increased $453,000 to $891,000, from $438,000 for the six months ended March 31, 2008. Other operating income, net mainly consists of income from sales of cotton and packing materials, sales of leftover materials, and government subsidies, which are incentives awarded by the PRC local government to the Company for continuing its research and development projects. The increase was mainly attributable to the increased government subsidies.

Exchange Difference, Net

The Company’s exchange difference, net, for the six months ended March 31, 2009, further increased by $593,000 to a loss of $1,130,000, from a loss of $537,000 for the six months ended March 31, 2008. The increase is mainly due to the foreign currency exchange losses recognized on three month ended March 31, 2009 compared with the same period last year. After its customers placed orders with the Company at an agreed selling price in Euro, Pound Sterling or Australian Dollar, the Renminbi (RMB) appreciated against the Euro, Pound Sterling or Australian Dollar; as a result, the Company suffered a foreign currency exchange loss on the actual payment date. On March 31, 2009 and 2008, the exchange rates of RMB against Euro were 9.0323 and 11.0809 respectively; the appreciation of RMB against Euro was 22.68%. The exchange rates of RMB against Pound Sterling were 9.7729 and 14.0219 respectively; the appreciation of RMB against Pound Sterling was 43.48%. The exchange rates of RMB against Australian dollar were 4.6707 and 6.4116 respectively; the appreciation of RMB against Australian dollar was 37.27%. The Company believes that the exchange rate of RMB against US dollar will remain relatively stable in the short run, thus the Company’s customers from European and Australian customers settled their payments by US dollars instead of Euro, Pound Sterling, and Australian dollars.

Cost of Sales

The Company’s cost of sales increased $5,489,000 to $33,952,000 for the six months ended March 31, 2009 from $28,463,000 for the six months ended March 31, 2008. As a percentage of net revenues, the cost of sales decreased 3.24% to 73.24% for the six months ended March 31, 2009 from 76.48% for the six months ended March 31, 2008. The decrease as percentage of revenue was mainly attributable to: (1) the unit product cost decrease as a result of better economies of scale, (2) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (3) the decrease of material purchasing price because the Company combined individual purchases by each subsidiary into larger scale orders to create more bargaining power.

Gross Profits

The Company’s gross profit increased $3,654,000 to $12,405,000 for the six months ended March 31, 2009 from $8,751,000 for the six months ended March 31, 2008. Gross profit as a percentage of net revenues was 26.76% for the six months ended March 31, 2009, compared to 23.52% for the six months ended March 31, 2008. The increase in gross profit as a percentage of net revenue was mainly due to: (1) the unit product cost decrease as a result of better economies of scale, (2) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (3) the decrease of material purchasing price because the Company combined individual purchases in each subsidiary into larger scale orders to create more bargaining power.

Selling Expenses

The Company’s selling expenses decreased $10,000 to $3,242,000 for the six months ended March 31, 2009 from $3,252,000 for the six months ended March 31, 2008. As a percentage of net revenues, the Company’s selling expenses decreased to 6.99% for the six months ended March 31, 2009 from 8.74% for the six months ended March 31, 2008. The decrease as percentage of revenue was primarily attributable to the decrease of approximately $859,000 in transportation expense for export sales compared with the same period last year.

The Company’s transportation expenses for domestic sales, i.e., transportation costs within China, were $520,000, 1.12% of total sales, and $373,000, 1.00% of total sales, in the six months ended March 31, 2009 and 2008, respectively. The Company’s transportation expenses for export sales were $1,080,000, 2.33% of total sales, and $1,939,000, 5.21% of total sales, in the six months ended March 31, 2009 and 2008, respectively. The Company’s transportation fees for export sales decreased by $859,000 from the six months ended March 31, 2008 to the six months ended March 31, 2009 or approximately 44.30%. This decrease in the export transportation expenses was mainly due to (1) the decrease of unit transportation fee, and (2) the Company has changed some sales contracts from Cost, Insurance and Freight, or CIF, into Free On Board, or FOB, according to which the customers shall pay for the transportation fee.

Administrative Expenses

The Company’s administrative expenses increased $1,408,000, or 38.33%, to $5,081,000 for the six months ended March 31, 2009 from $3,673,000 for the six months ended March 31, 2008. As a percentage of net revenues, administrative expenses increased to 10.96% for the six months ended March 31, 2009 from 9.87% for the six months ended March 31, 2008. This increase was primarily attributable to the following: (1) as a result of the decrease of market value of general material price, there is an increase of $334,000 provision for decline in value of inventory, (2) a $274,000 reserve for fixed assets impairment during the six months ended March 31, 2009, (3) a $165,000 increase in salary and welfare for the management and administrative staff compared with the same period last year, (4) a $269,000 increase in research and development expenses compared with the same period last year, and (5) the increase in related administrative expenses such as depreciation and amortization for the Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”, for the six months ended March 31, 2009 in the amount of approximately $816,000 with an increase of $410,000 compared to the same period last year.

Interest Expenses

Interest expenses increased to approximately $88,000, 0.71% of the total revenue, for the six months ended March 31, 2009 as compared to approximately $239,000, 0.64% of total revenue, for the same period of 2008, an increase of approximately $88,000, or 36.82%. The Company’s interest expense relates to bank loans which are primarily used to maintain daily operation. The percentage increase of interest expense was mainly due to an increase in the Company’s comparatively high average outstanding balance of bank loans of approximately $14,339,000 as of December 31, 2008, compared with approximately $14,105,000 as of December 31, 2007.

Income taxes

	Calendar year ended December 31, 2008			Calendar year ended December 31, 2009			Calendar year ended December 31, 2010			Calendar year ended December 31, 2011			Calendar year ended December 31, 2012
Winner Medical (Huanggang) Co., Ltd.		0	%		0	%		12.5	%		12.5	%		12.5	%
Winner Medical & Textile Ltd. Chongyang		12.5	%		12.5	%		12.5	%		25	%		25	%
Hubei Winner Textiles Co., Ltd.		12.5	%		12.5	%		25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0	%		12.5	%		12.5	%		12.5	%		25	%

Winner Medical (Hong Kong) Limited was incorporated in January 2008 and the applicable statutory tax rate is 16.5%.

No provision for US tax is made as the Company has no assessable income in the US for the six months ended March 31, 2009 and 2008. The enterprise income tax of US is 34%.

The Company’s income tax provision for the six months ended March 31, 2009 was $720,000 as compared to -$159,000 for the six months ended March 31, 2008, an increase of $879,000. The increase of income tax is mainly due to (1) a change in the tax rate on the Company’s subsidiaries in China. The applicable tax rate of the Company’s subsidiary Winner Industrial (Shenzhen) Co. Ltd, Winner Shenzhen, was 20% and 7.5% for the three months ended March 31, 2009 and 2008 respectively, and Winner Shenzhen’s profits constitutes a major part of the Company’s total profits, and (2) after the Company reassessed its tax status, the over-provision of income taxes was written off in the second fiscal quarter of 2008.

Minority Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income of $75,000 and $43,000 in the six months ended March 31, 2009 and 2008, respectively, reflecting third party minority interests in two of the Company’s subsidiaries, 40% in Shanghai Winner Medical Apparatus Co., Ltd., and 40% in Winner Medical (Hong Kong) Limited.

Net income (profit after taxes)

Net profit increased to approximately $3,119,000 for the six months ended March 31, 2009, as compared to approximately $1,732,000 for the same period of 2008, an increase of approximately $1,387,000, or approximately 80.08%. Such increase is mainly attributable to (1) higher gross margin during the six months ended March 31, 2009 as compared with the same period last year, (2) the decrease in transportation expenses for export sales, and (3) improved production management to reduce manufacture cost.

Foreign Currency Translation Difference

The Company incurred foreign currency translation differences, equal to a loss of $125,000 and a gain of $4,340,000 in the six months ended March 31, 2009 and 2008, respectively. On July 21, 2005, China reformed its foreign currency exchange policy to adopt floating RMB exchange rates. On March 31, 2009 and 2008, the exchange rates of RMB against US dollar were 6.8359 and 7.0190 respectively; the appreciation of RMB against US dollar was 2.68%. As a result, the Company applied different exchange rates in translating RMB into U.S. dollar in its financial statements for the six months ended March 31, 2009 and 2008. In the six months ended March 31, 2009, the exchange rates of 6.8359, 8.277 and 6.8271 were applied in calculating the total assets/liabilities, shareholders’ equity and profit and loss, as compared to the exchange rates of 7.0190, 8.277 and 7.2646 in the six months ended March 31, 2008, respectively. In addition, the Company also applied different exchange rates in translating Hong Kong dollar into U.S. dollar in its financial statements for the six months ended March 31, 2009. In the six months ended March 31, 2009, the exchange rates of 7.7502, 7.7940 and 7.7645 were applied in calculating the total assets/liabilities, shareholders’ equity and profit and loss, respectively.

Accounts receivable

Accounts receivable decreased to approximately $10,398,000 as of March 31, 2009 as compared to approximately $13,517,000 as of September 30, 2008, a decrease of approximately $3,119,000, or 23.07%. In order to reduce the risk of inability to collect the accounts receivables, the Company entered into a one-year insurance contract with China Export & Credit Insurance Corporation to cover the non-collected accounts receivable, which became effective on April 25, 2008 and will be automatically renewed unless a one month written notice is given by either party. A total of US$17.8 million of accounts receivables from new customers and customers with high credit risk were covered under this insurance contract, and the maximum insurance indemnity from China Export & Credit Insurance Corporation is US$8 million. Also the Company is using SAP ERP system to evaluate and monitor accounts receivables risks of each individual customer.

Inventory

The Company’s inventory decreased to approximately $14,881,000 for the six months ended March 31, 2009 as compared to approximately $15,840,000 as of September 30, 2008, a decrease of approximately $959,000, or 6.05%. The decrease of inventory is mainly attributable to the decrease of raw materials and semi-finished products as a result of the Company’s risk control on inventory in order to improve its free cash flow.

Liquidity and Capital Resources

As of the March 31, 2009, the Company had cash and cash equivalents of approximately $8,115,000.

Cash Flow

(in Thousand US$)

	Six Months Ended March 31,					��
	2009			2008

Net cash provided by operating activities		6,243			1,819
Net cash (used in) investing activities		(175	)		(7,510	)
Net cash (used in) provided by financing activities		(4,463	)		1,244
Effect of exchange rate changes on cash balance		48			579
Net increase (decrease) in cash and cash equivalent		1,653			(3,868	)
Cash and cash equivalents at the beginning of period		6,462			6,377
Cash and cash equivalents at the end of period		8,115			2,509

Operating Activities:

Net cash provided by operating activities was $6,243,000 for the six months ended March 31, 2009, which increased by an amount of $4,424,000 from net cash used in operating activities of $1,819,000 in the same period of 2008. The increase was mainly due to the increase in net income during the six months ended March 31, 2009 compared to the same period last year, and the decrease in accounts receivables and inventory level.

Investing Activities:

The Company’s main uses of cash for investing activities are payments to the acquisition of property, plant and equipment.

Net cash used in investing activities for the six months ended March 31, 2009 was $175,000, a decrease of $7,335,000 from net cash used in investing activities of $7,510,000 in the same period of 2008. This was due to the decrease of investment in property, plant, and equipment. The Company has carefully evaluated its investment plan for fiscal year 2009, and reduced or delayed some of the investment in fixed assets to maintain a healthy cash position.

Financing Activities:

Net cash used in financing activities for the six months ended March 31, 2009 totaled $4,463,000, as compared to $1,244,000, provided by financing activities in the same period of 2008. Such decrease of cash provided by financing activities was mainly attributable to the increase in repayments of bank borrowings.

The Company’s debt to asset ratio was 21.45% as of March 31, 2009. The Company plans to maintain its debt to asset ratio below 40%. The Company believes that it currently maintains a good business relationship with each of the banks with whom it has loans, as identified in the table below.

As of March 31, 2009, the Company has loans with Chinese banks totaling $10,537,000. These annual interest rates of these loans are ranging from 4.37%-7.84%.

Bank loans as of March 31, 2009

						Balance as of March 31, 2009
Loan	Bank	Loan period	Interest rate		Secured by	US$
A	Shenzhen Industrial and Commercial Bank of China	01-09-2009 to 07-08-2009	4.86	%	Land use rights & buildings	1,462,865
B	Shenzhen Industrial and Commercial Bank of China	03-26-2009 to 06-25-2009	4.37	%	Land use rights & buildings	1,467,254
C	China Merchants Bank, Shenzhen Branch	05-27-2008 to 05-27-2009	7.47	%	Land use rights & buildings	1,170,292
D	China Merchants Bank, Shenzhen Branch	03-27-2009 to 03-27-2010	4.78	%	Land use rights & buildings	1,462,865
E	China Merchants Bank, Shenzhen Branch	03-30-2009 to 03-30-2010	4.78	%	Land use rights & buildings	1,462,865
F	Huanggang Industrial and Commercial Bank of China	06-26-2008 to 06-25-2009	7.84	%	Land use rights & buildings	877,719
G	Huanggang Industrial and Commercial Bank of China	02-27-2009 to 02-26-2010	5.31	%	Land use rights & buildings	1,462,866
H	Tianmen Branch of the Industrial and Commercial Bank of China	12-17-2008 to 08-31-2009	6.417	%	Land use rights & buildings	1,170,292
		Total				10,537,018

As of March 31, 2009, the Company had approximately $24.17 million bank credit facilities from four commercial banks; and excluding the $10.54 million banks loans as of March 31, 2009, there are $13.63 million unused bank credit facilities, consisting of approximately $4.68 million from Shenzhen Branch of China Merchants Bank, approximately $5.85 million from Shenzhen Branch of the Industrial and Commercial Bank of China, approximately $0.41 million form Tianmen Branch of the Industrial and Commercial Bank of China, and approximately $2.69 million from Huanggang Branch of the Industrial and Commercial Bank of China. These bank credit lines are all secured by the Company’s real estate and other assets. These revolving lines of credit allow the Company to make short-term loans repeatedly, and the banks re-evaluate the Company’s credit line annually. These bank credits enable the Company to utilize the short-term loans and enjoy a lower interest expense compared with long-term loans.

The Company believes that its currently available working capital, after taking into account the credit facilities referred to above, short-term loans and future cash provided by operating activities will be sufficient to meet its operations at its current level and working capital and capital expenditure needs over the next twelve months. The Company’s future capital requirements will depend on many factors, including its rate of revenue growth, the expansion of its marketing and sales activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of new products or services introductions, the timing of enhancements to existing products and services and the timing of capital expenditures.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. The Company considers its critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Principles of consolidation –The Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America and include the assets, liabilities, revenues, expenses and cash flows of the Company and all of its subsidiaries. All significant intercompany accounts, transactions and cash flows are eliminated on consolidation.

Revenue Recognition –The Company derives its revenue primarily from the sales of medical dressings and disposables. Sales of goods are recognized when goods are shipped, title of goods sold has passed to the purchaser, the price is fixed or determinable as stated on the sales contract, and its collectibility is reasonably assured. Customers do not have a general right of return on products shipped. Products returns to the Company were insignificant during past years.

Inventory –Inventories are stated at the lower of cost or market, determined by the weighted average method. Work-in-progress and finished goods inventories consist of raw material, direct labor and overhead associated with the manufacturing process.

Trade accounts receivable –Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at year-end. Based on management's assessment of the credit history with customers having outstanding balances and current relationships with them, it has concluded that realization losses on balances outstanding at year-end will be immaterial.

Property, plant and equipment –Property, plant and equipment are stated at cost including the cost of improvements. Maintenance and repairs are charged to expense as incurred. Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Depreciation and amortization are provided on the straight-line method based on the estimated useful lives of the assets as follows:

Leasehold land	Over the lease term

Buildings	10 - 30 years

Plant and machinery	10 - 12 years

Furniture, fixtures and equipment	5 - 8 years

Motor vehicles	5 - 8 years

Leasehold improvements	Over the lease term

Impairment of long-lived assets – The Company evaluates all of its long-lived assets for impairment in accordance with the provisions of FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company assesses the impairment of fixed assets on an annual basis or whenever events or changes in circumstances indicate that the fair value or future discounted cash flows of these assets is less than the carrying value. Should events indicate that any of the Company’s long-lived assets are impaired; the amount of such impairment will be measured as the difference between the carrying value and the fair value, or the difference between the carrying value and future discounted cash flows of the impaired assets, and recorded in earnings during the period of such impairment.

Income taxes –Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Any tax paid by subsidiaries during the year is recorded. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.

New Accounting Policies

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Seasonality

The Company’s operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company is exposed to interest rate risk primarily with respect to its short-term bank loans. Although the interest rates are fixed for the terms of the loans, the terms are typically three to twelve months and interest rates are subject to change upon renewal. During calendar years 2007 and 2008 the People’s Bank of China, the central bank of China, adjusted the interest rate of RMB bank loans eleven times - on March 18, 2007, May 19, 2007, July 21, 2007, August 22, 2007, September 15, 2007, December 21, 2007, September 16, 2008, October 19, 2008, October 30, 2008, November 27, 2008, and December 23, 2008. Since December, 2008, the new interest rates are 4.86% and 5.31% for RMB bank loans with a term less than 6 months and loans with a term of 6-12 months, respectively, as compared to the respective rates of 5.58% and 6.12%, before March 18, 2007. A hypothetical 1.0% change in the annual interest rates for all of the Company’s credit facilities on March 31, 2009 would affect the net income before provision for income taxes by approximately $0.11 million for the three months ended March 31, 2009. Management monitors the banks’ interest rates in conjunction with the Company’s cash requirements to determine the appropriate level of debt balances relative to other sources of funds. The Company has not entered into any hedging transactions in an effort to reduce its exposure to interest rate risk.

Foreign Exchange Risk

The Company’s reporting currency is US dollar and the majority of its revenues will be settled in RMB and US dollars. All of the Company’s assets are denominated in RMB except for cash. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US dollars and RMB.

The value of the Renminbi, the main currency used in the PRC, fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the Renminbi is not readily convertible into US dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of Renminbi into foreign currencies such as the US dollar, Euro, Pound Sterling, and Australian dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. On March 31, 2009 and 2008, the exchange rates of RMB against Euro were 9.0323 and 11.0809 respectively; the appreciation of RMB against Euro was 22.68%. The exchange rates of RMB against Pound Sterling were 9.7729 and 14.0219 respectively; the appreciation of RMB against Pound Sterling was 43.48%. The exchange rates of RMB against Australian dollar were 4.6707 and 6.4116 respectively; the appreciation of RMB against Australian dollar was 37.27%. The exchange rates of RMB against US dollar were 6.8359 and 7.0190 respectively; the appreciation of RMB against US dollar was 2.68%. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could have various adverse effects on the Company’s business.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of its chief executive officer and chief financial officer, Messrs. Jianquan Li and Xiuyuan Fang, respectively evaluated the effectiveness of the Company’s disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Messrs. Li and Fang concluded that as of March 31, 2009, the Company’s disclosure controls and procedures were effective at that reasonable assurance level.

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation performed that occurred during the quarter covered by this report that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

The Company is currently not aware of any such legal proceedings or claims that the Company believes will have a material adverse affect on its business, financial condition or operating results.

To the Company’s knowledge, no director, officer or affiliate of its, and no owner of record or beneficial owner of more than five percent, 5%, of its securities, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously discussed in Part II, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2008.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

On April 2, 2009, the Company held its Annual Meeting of Shareholders for which the Board of Directors solicited proxies. At the Annual Meeting, the shareholders voted on the following proposals stated in the Proxy Statement dated February 20, 2009.

The proposals voted on and approved by the shareholders at the Annual Meeting were as follows:

1. Election of five directors to hold office until the 2010 Annual Meeting of Stockholders and until their successors are elected and qualified.

Election of Directors:	Number of Shares
	For		Withhold
Jianquan Li		36,810,657		14
Xiuyuan Fang		36,613,823		196,848
Larry Goldman		36,810,657		14
Richard B. Goodner, Esq.		36,810,657		14
Dr. Horngjon Shieh		36,810,657		14

2. Approval of the proposal to ratify the appointment of BDO Limited , (On May 1, 2009, BDO McCabe Lo Limited changed its name to BDO Limited), as the Company’s independent auditors for the fiscal year ending September 30, 2009, by a vote of 36,810,657 for, 14 against, zero abstain and zero broker non-votes.

ITEM 5. OTHER INFORMATION

In October 2008, shareholders of Winner Jordan Co., Ltd., or Winner Jordan, decided to close Winner Jordan and file for deregistration. The decision to close Winner Jordan is due to the unexpected huge increase of the price of land, and construction cost. The total investment from the Company to Winner Jordan is $175,000, and the Company has 35% ownership. The total loss from Winner Jordan since its commencement attributable to the Company is approximately $43,000. After the closing of Winner Jordan, the Company has hired a sales and marketing representative in Jordan in April 2009 to develop the markets in Middle East countries.

In April 2009, the board of directors of Winner Industries (Shenzhen) Co., Ltd., a wholly-owned subsidiary of the Company, decided to establish a joint venture with Chengdu Likang Industries Co., Ltd. The new joint venture company, Chengdu Winner Likang Medical Appliances Company Limited, has a registered capital of RMB 5 million, or approximately $0.73 million; the total investment from Winner Industries (Shenzhen) Co., Ltd. is RMB 2.45 million, or approximately $0.36 million. Chengdu Winner Likang Medical Appliances Company Limited is 51% owned by Chengdu Likang Industries Co., Ltd., and 49% by Winner Industries (Shenzhen) Co., Ltd. Chengdu Winner Likang Medical Appliances Company Limited will be engaged in the business of manufacturing and sales of “Winner” brand products to hospitals in Western China, and is expected to begin operation in July, 2009.

ITEM 6. INDEX TO EXHIBITS

EXHIBITS.

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certification of Principal Executive Officer furnished 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 Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* filed herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: May 13, 2009

WINNER MEDICAL GROUP INC.

By:	/s/ Xiuyuan Fang
Xiuyuan Fang Chief Financial Officer and Treasurer (On behalf of the Registrant and as Principal Financial Officer)

EXHIBIT INDEX

Number		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certification of Principal Executive Officer furnished 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 Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

* filed herewith

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Winner Medical Inactive 10-Q2009 Q2 Quarterly report

Content analysis