Winner Medical 10-Q 2009 Q3 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: June 30, 2009

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

For the transition period from ____________ to _____________

Commission File 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 x

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 August 10, 2009 is as follows:

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

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Condensed Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4T.	Controls and Procedures	18
	PART II
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Securities Holders	18
Item 5.	Other Information	18
Item 6.	Index to Exhibits	19

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

WINNER MEDICAL GROUP INC.

Condensed Consolidated Financial Statements (Unaudited)

For the three and nine months ended June 30, 2009 and 2008

1

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-F16

2

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30		September 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents		7,837,701		6,462,505
Restricted bank deposits		99,694		126,749
Accounts receivable, less allowances for doubtful accounts of US$114,596 and US$100,964 at June 30, 2009 and September 30, 2008, respectively		11,502,982		13,516,688
Amounts due from affiliated companies		365,781		349,359
Inventories		14,785,842		15,839,587
Prepaid expenses and other receivable		5,279,048		4,734,503
Income taxes recoverable		30,897		99,126
Deferred tax assets		223,726		207,798
Total current assets		40,125,671		41,336,315
Property, plant and equipment, net		55,943,053		57,937,881
Held-for-sale asset		-		607,423
Investment in equity investees		1,845,291		1,518,848
Intangible assets, net		153,404		126,141
Non-current restricted bank deposits		158,193		-
Prepaid expenses and other receivable		117,170		233,203
Deferred tax assets		281,222		158,280
Total assets		98,624,004		101,918,091
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank loans		7,757,725		15,033,073
Accounts payable		6,090,115		8,271,926
Accrued payroll and employee benefits		1,790,164		1,891,410
Customer deposits		476,064		458,303
Other accrued liabilities		2,057,541		2,518,326
Amounts due to affiliated companies		56,384		136,481
Income taxes payable		1,118,719		656,550
Total current liabilities		19,346,712		28,966,069
Deferred tax liabilities		41,881		41,965
Total liabilities		19,388,593		29,008,034
Commitments and contingencies
Minority interests		74,111		148,306
Stockholders’ equity:
Common stock, par value $0.001 per share; authorized 495,000,000, issued and outstanding June 30, 2009 – 44,727,171 shares; September 30, 2008 – 44,727,171 shares		44,727		44,727
Additional paid-in capital		31,147,950		30,843,327
Retained earnings		33,851,423		28,791,259
Statutory reserves		3,428,095		2,305,434
Accumulated other comprehensive income		10,689,105		10,777,004
Total stockholders’ equity		79,161,300		72,761,751
Total liabilities and stockholders’ equity		98,624,004		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 June 30						Nine months ended June 30
	2009			2008			2009			2008
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	US$			US$			US$			US$
Net sales		24,357,878			23,073,575			70,715,298			60,287,476
Cost of sales		(17,176,129	)		(17,094,433	)		(51,128,269	)		(45,556,952	)
Gross profit		7,181,749			5,979,142			19,587,029			14,730,524
Other operating (loss) income, net		96,183			(77,968	)		987,432			359,587
Exchange difference, net		47,432			(90,993	)		(1,082,265	)		(627,877	)
Selling, general and administrative expenses		(3,600,442	)		(3,655,928	)		(11,923,716	)		(10,581,098	)
Income from operations		3,724,922			2,154,253			7,568,480			3,881,136
Interest income		19,069			13,591			42,888			32,328
Interest expense		(70,884	)		(196,275	)		(397,940	)		(435,140	)
Equity in earnings of 50 percent or less owned persons		86,446			15,766			309,584			39,731
Income before income taxes and minority interests		3,759,553			1,987,335			7,523,012			3,518,055
Income taxes		(694,718	)		(271,384	)		(1,414,383	)		(112,801	)
Income before minority interests		3,064,835			1,715,951			6,108,629			3,405,254
Minority interests		(1,183	)		20,902			74,196			63,903
Net income		3,063,652			1,736,853			6,182,825			3,469,157
Other comprehensive income
Foreign currency translation difference		37,243			1,433,644			(87,899	)		5,773,517
Comprehensive income		3,100,895			3,170,497			6,094,926			9,242,674
Net income per share
- basic		0.07			0.04			0.14			0.08
- diluted		0.07			0.04			0.14			0.08
Weighted average common stock outstanding
- basic		44,727,171			44,727,171			44,727,171			44,727,171
- diluted		44,908,262			44,849,292			44,962,549			44,849,292

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		-		-		304,623		-			-		-			304,623
Net income		-		-		-		6,182,825			-		-			6,182,825
Foreign currency translation difference		-		-		-		-			-		(87,899	)		(87,899	)
Transfer to statutory reserves		-		-		-		(1,122,661	)		1,122,661		-			-
Balance at June 30, 2009		44,727,171		44,727		31,147,950		33,851,423			3,428,095		10,689,105			79,161,300

See accompanying notes to condensed consolidated financial statements.

F-3

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine months ended June 30
	2009			2008
	(Unaudited)			(Unaudited)
	US$			US$
Cash flows from operating activities
Net income		6,182,825			3,469,157
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization of property, plant and equipment		3,351,350			3,156,166
Amortization of intangible assets		13,891			13,142
(Gain) Loss on disposal of property, plant and equipment		(116,991	)		64,090
Impairment of property, plant and equipment		490,572			72,149
Minority interests		(74,196	)		(63,904	)
Equity in earnings of 50 percent or less owned persons		(309,584	)		(39,731	)
Stock based compensation expenses		304,623			393,750
Deferred tax		(139,599	)		(131,563	)
Increase (decrease) in cash resulting from changes in:
Restricted bank deposits		(130,411	)		-
Accounts receivable		1,986,799			650,104
Amounts due from affiliated companies		86,657			(75,692	)
Inventories		1,022,214			(3,457,519	)
Prepaid expenses and other receivable		(438,401	)		1,399,216
Income taxes recoverable		68,032			(34,969	)
Accounts payable		(2,165,345	)		(2,063,587	)
Accrued payroll and employee benefits		(97,481	)		88,562
Customer deposits		18,673			(35,045	)
Other accrued liabilities		(455,772	)		258,895
Amounts due to affiliated companies		(116,419	)		173,117
Income taxes payable		460,580			38,390
Net cash provided by operating activities		9,942,017			3,874,728
Cash flows from investing activities
Purchase of property, plant and equipment		(2,150,846	)		(8,477,496	)
Purchase of intangible assets		(41,432	)		-
Proceeds from disposal of property, plant and equipment		950,793			-
Proceeds from disposal an equity investee		141,753			-
Investment in an equity investee		(358,612	)		-
Repayments received from affiliated companies		96,225			-
Net cash used in investing activities		(1,362,119	)		(8,477,496	)
Cash flows from financing activities
Proceeds from bank borrowings		16,487,671			14,362,160
Repayments of bank borrowings		(23,740,311	)		(12,440,015	)
Proceeds from minority interests		-			51,277
Amounts due from affiliated companies		-			1,793
Net cash (used in) provided by financing activities		(7,252,640	)		1,975,215
Effect of exchange rate changes on cash balance		47,938			797,527
Net increase (decrease) in cash and cash equivalents		1,375,196			(1,830,026	)
Cash and cash equivalents, beginning of period		6,462,505			6,377,488
Cash and cash equivalents, end of period		7,837,701			4,547,462
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest		397,316			569,670
Income taxes		1,022,119			266,145

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 nine months ended June 30, 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 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.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. SFAS 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date should be disclosed if the financial statements would otherwise be misleading. The Company adopted SFAS No. 165 in the third quarter of fiscal 2009. See Note 15 for required disclosures related to subsequent events.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under SFAS 167, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS 167 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. SFAS 167 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. SFAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. SFAS No. 167 is effective for the Company in the first quarter of fiscal 2011. The Company is currently evaluating the impact the adoption of SFAS 167 will have on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM; and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“FAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 168 will be effective for our interim and annual financial periods ending after September 15, 2009.  The Company does not anticipate that the provisions of SFAS No. 168 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

F-6

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 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:

	Three months ended June 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Basic income per share
Net Income for the period		3,063,652		1,736,853
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		3,063,652		1,736,853
Weighted average common stock outstanding		44,727,171		44,727,171
Effect of dilution
Restricted stock awards		181,091		122,121
Options		-		-
Weighted average common stock outstanding		44,908,262		44,849,292
Net income per share		0.07		0.04

	Nine months ended  June 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Basic income per share
Net Income for the period		6,182,825		3,469,157
Weighted average common stock outstanding		44,727,171		44,727,171
Net income per share		0.14		0.08
Diluted income per share
Net Income for the period		6,182,825		3,469,157
Weighted average common stock outstanding		44,727,171		44,727,171
Effect of dilution
Restricted stock awards		235,378		122,121
Options		-		-
Weighted average common stock outstanding		44,962,549		44,849,292
Net income per share		0.14		0.08

F-7

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.  Net Income Per Share-Continued

On May 7, 2009, 8,334 potential common shares expired. As of June 30, 2009, 20,000 potential common shares relating to options at the exercise price of US$4.75 per share, and representing the total options granted, were excluded from the computations of diluted income per share as the exercise price was higher than the average market price for the nine months ended June 30, 2009.

5.  Inventories

Inventories by major categories are summarized as follows:

	June 30		September 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Raw materials		5,844,256		5,400,887
Work in progress		4,515,632		5,839,042
Finished goods		4,425,954		4,599,658
		14,785,842		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 three quarters and does not expect to have taxable income for the full year. The applicable income tax rate for the Company for the nine months ended June 30, 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 an unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, starting from January 1, 2008, three of the Company’s subsidiaries in PRC, 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%.

F-8

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.  Income Taxes-Continued

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.

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% to 25%		12.5% to 25%			25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0%		12.5%		12.5	%		12.5	%		25	%

In October 2006, for the purpose of improving operation efficiency, Hubei Winner Textiles Co., Ltd., “Winner Hubei”, merged with Winner Medical & Textile Ltd., Tianmen, “Winner Tianmen”. Income from Winner Hubei and Winner Tianmen were separately reported to the local tax office to reflect the different tax incentive status enjoyed by both entities. The applicable income tax rates for Winner Hubei and Winner Tianmen was 12.5% and 25% respectively for calendar years 2008 and 2009. The preferential tax incentives will expire at the end of 2009.

In addition, during the grandfather period, the income tax rate for enterprises located in Shenzhen currently enjoying a 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 classifies 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 June 30, 2009, the management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for the uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the nine months ended June 30, 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 PRC is 5 years.

F-9

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.  Credit Facilities

	June 30 2009
	Bank credit facilities		Unused bank credit facilities		Bank loans
	(Unaudited) US$		(Unaudited) US$		(Unaudited) US$
Bank A		8,782,330		7,318,608		1,463,722
Bank B		8,782,330		4,391,165		4,391,165
Bank C		5,040,082		3,576,360		1,463,722
Bank D		1,580,819		1,141,703		439,116
Total		24,185,561		16,427,836		7,757,725

As of June 30, 2009, the Company had approximately $24.19 million bank credit facilities from four commercial banks; and after drawdown of $7.76 million banks loans as of June 30, 2009, there are $16.43 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 total credit facilities during the nine months ended June 30, 2009.

8.  Related Party Transactions

During the nine months ended June 30, 2009 and 2008, the Company purchased goods from L+L Healthcare Hubei Co., Ltd., an equity investee, for US$27,446, and US$639,629. During the nine months ended June 30, 2009, the Company purchased a set of machinery from the equity investee for US$36,593. As of June 30, 2009, amount due from the equity investee was US$309,397.

During the nine months ended June 30, 2009 and 2008, the Company sold goods to Winner Medical & Textile (H.K.) Limited for US$ Nil and US$835,127, respectively.  Mr. Jianquan Li, a director of the Company, has a controlling interest in Winner Medical & Textile (H.K.) Limited.  As of June 30, 2009, the outstanding balance due from Winner Medical & Textile (H.K.) Limited was US$ Nil.

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

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.

F-10

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Stock-Based Compensation-Continued

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.

	Nine months ended  June 30
	2009			2008
	(Unaudited)			(Unaudited)
Risk free interest rate		0.55	%		2.91	%
Volatility		237.64	%		77.72	%
Expected life (years)		3			3
Dividends		-			-
Weighted average fair value of options granted during the period	US$	0.49		US$	0.20

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 May 8, 2006, a total of of 8,334 non-qualified options was granted and expired on May 7, 2009. On February 6, 2007, a total of 20,000 non-qualified options was granted. 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 on February 6, 2007 according to the previous contracts are still valid.  There was no stock-based compensation cost recorded for the nine months ended June 30, 2009 and 2008, respectively. Instead, the total cash compensation costs for the nine months ended June 30, 2009 and 2008 are US$56,250 and US$ 56,250, respectively.

A summary of option activity under the 2008-2009 Plan (as defined below) as of June 30, 2009, and changes during the period then ended is presented below:

	Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
	(Unaudited)			(Unaudited) US$			(Unaudited) Years
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 June 30, 2009)		-			-			-
Exercised (from October 1, 2008 to June 30, 2009)		-			-			-
Forfeited or expired		(8,334	)		(1.32	)		-
Outstanding at June 30, 2009		20,000			4.75			0.60

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 Restricted Stock Unit represents a promise that employees will receive stock in the future and the units do not pay dividends until the stock is vested. The 2008-2009 Plan allows the Company to offer a variety of restricted stock unit awards to 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.

F-11

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.  Stock-Based Compensation-Continued

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 June 30, 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$304,623 and US$393,750 for the nine months ended June 30, 2009 and 2008, respectively.

10.  Commitments and Contingencies

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

	(Unaudited)
	US$
Three months ending September 30, 2009		75,504
Years ending September 30
2010		191,102
2011		84,332
2012		-
2013		-
Total minimum lease payments		350,938

Rental expenses under operating leases included in the statement of income were US$279,715 and US$204,318 for the nine months ended June 30, 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-cancellable obligations of US$576,651 and US$500,221 as of June 30, 2009 and 2008, respectively.

F-12

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 anticipate that the provisions of FSP No. FAS 157-4 does not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require interim disclosures of fair value measurements for all financial instruments within the scope of FAS 107. FSP FAS 107-1 and APB 28-1 require disclosure of the methods and assumptions used to estimate fair value. “FSP FAS 107-1 and APB 28-1” are effective for interim and annual periods ending after June 15, 2009. The financial instruments of the Company are cash and cash equivalents, restricted bank deposits, accounts receivable, deposits and other receivable and other current assets, bank loans, accounts payable and other current liabilities for which their carrying amounts approximate to the fair values. The adoptions of these FSPs do not have a material impact on the Company’s 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 two customers, Sakai Shoten Co., Ltd. and Tyco Healthcare, and are typically sold on an open account basis.  The sales to Sakai Shoten Co., Ltd. accounted for 15% and 16%, and the sales to Tyco Healthcare accounted for 11% and 4%, of the total net sales for the nine months ended June 30, 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$100,828 and US$86,942 during the nine months ended June 30, 2009 and 2008, respectively.

Interest rate risk - The interest rates and terms of repayment of bank and other borrowings ranged from 4.78% to 6.417%.  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 receivable, the Company entered into a one-year insurance policy with China Export & Credit Insurance Corporation effective on April 25, 2009 and automatically renewable subject to a one month written notice given by either party. The maximum insurance coverage from China Export & Credit Insurance Corporation is US$4 million.

Foreign currency 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 and accounts receivable. 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.

F-13

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. Operating Risk-Continued

The value of the Renminbi, the main currency used in the PRC, fluctuates and is affected by, among other things, changes in PRC'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 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.

The Company’s currency exchange rate risks come primarily from the sales of products to international customers. If the RMB appreciates 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.

On June 30, 2009 and 2008, the exchange rates of RMB against US dollar were 6.8319 and 6.8591, respectively; the appreciation of RMB against US dollar was 0.40%. 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.

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  June 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Europe		9,752,937		10,341,642
Japan		3,821,324		3,998,528
North and South America		4,557,277		4,442,568
PRC		5,022,645		3,336,503
Others		1,203,695		954,334
Total net sales		24,357,878		23,073,575

	Nine months ended  June 30
	2009		2008
	(Unaudited)		(Unaudited)
	US$		US$
Europe		29,306,740		27,338,412
Japan		12,337,802		12,575,443
North and South America		13,547,078		8,410,992
PRC		11,499,951		8,679,689
Others		4,023,727		3,282,940
Total net sales		70,715,298		60,287,476

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 three and nine months ended June 30, 2009 and 2008 are as follows:

	Three months ended  June 30
	2009			2008
	(Unaudited)			(Unaudited)
	US$			US$
Net Sales:
Segment:
Traditional products		23,150,458			22,696,853
PurCottonproducts		1,207,420			376,722
Consolidated total		24,357,878			23,073,575
Gross Profits:
Segment:
Traditional products		6,837,570			5,994,736
PurCotton products		344,179			(15,594	)
Consolidated total		7,181,749			5,979,142
Income from operations before taxes:
Segment:
Traditional products		3,762,701			2,474,211
PurCotton products		(3,148	)		(486,876	)
Consolidated total		3,759,553			1,987,335
Net Income:
Segment:
Traditional products		3,068,199			2,223,727
PurCotton products		(4,547	)		(486,874	)
Consolidated total		3,063,652			1,736,853
Depreciation and Amortization:
Segment:
Traditional products		847,088			982,269
PurCotton products		285,838			207,597
Consolidated total		1,132,926			1,189,866

F-15

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14.  Segment Information-Continued

	Nine months ended  June 30
	2009			2008
	(Unaudited)			(Unaudited)
	US$			US$
Net Sales:
Segment:
Traditional products		67,557,256			59,737,935
PurCottonproducts		3,158,042			549,541
Consolidated total		70,715,298			60,287,476
Gross Profits:
Segment:
Traditional products		18,822,718			14,678,477
PurCotton products		764,311			52,047
Consolidated total		19,587,029			14,730,524
Income from operations before taxes:
Segment:
Traditional products		7,842,236			4,380,972
PurCotton products		(319,224	)		(862,917	)
Consolidated total		7,523,012			3,518,055
Net Income:
Segment:
Traditional products		6,502,049			4,332,074
PurCotton products		(319,224	)		(862,917	)
Consolidated total		6,182,825			3,469,157
Depreciation and Amortization:
Segment:
Traditional products		2,518,241			2,593,832
PurCotton products		847,000			575,476
Consolidated total		3,365,241			3,169,308

	June 30 2009			September 30 2008
	(Unaudited)			(Unaudited)
	US$			US$
Total Assets:
Segment:
Traditional products		76,053,919			75,552,814
PurCotton products		31,488,891			29,587,955
Segment total		107,542,810			105,140,769
Reconciliation to consolidated totals:
Elimination of other receivable from intersegments		(8,918,806	)		(3,222,678	)
Consolidated total		98,624,004			101,918,091

15.  Subsequent events

The Company has evaluated transactions, events and circumstances for consideration of recognition or disclosure through August 11, 2009, the date these interim financial statements were issued, and has reflected or disclosed those items within the condensed consolidated financial statements as deemed appropriate.

F-16

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 seven 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 nine months ended June 30, 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.

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 sales of a variety of medical dressings and medical disposables products, such as medical care, wound care, home care products and PurCotton products, a nonwoven fabric made from 100% natural cotton.

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. As of June 30, 2009, Winner Zhuhai received approvals from various government authorities in the PRC regarding its application for deregistration, except the relevant tax bureau clearance is still on-going.

3

In October 2008, shareholders of Winner Jordan Co., Ltd., “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 costs. The total investment from the Company to Winner Jordan is $175,000, and the Company has 35% ownership. There are no operations in Winner Jordan since its incorporation. The total loss from Winner Jordan, mainly representing the setting-up expense, since its date of incorporation 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 the near future.

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’s subsidiary Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”, has commenced production of the new spunlace cotton nonwoven products, “PurCotton Products”. 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 first two PurCotton manufacturing lines are producing in full capacity, and the third manufacturing line is still in the testing stage, production by this manufacture line is expected to increase. The Company is planning to purchase the fourth manufacturing line to meet the growing demand. The Company commenced production of PurCotton, and started selling PurCotton jumble rolls to customers in China, the U.S., Europe and Japan. During the nine months ended June 30, 2009 and 2008, revenue from these products reached approximately $3,158,000 and $550,000, 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.

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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 local market demand for medical dressings and medical disposables products will continue to grow. This presents a significant opportunity for the Company. The Company is developing distribution network to capture opportunities in China, mainly through local distributors, over-the-counter drugstore chains, and direct sales to hospitals.

 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.

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’s 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.

- Innovation. The Company is dedicated to invest in research and development to drive innovation. The focus is on the PurCotton manufacturing process to improve product quality and enhance efficiency, and also continuing to expand PurCotton line through line extensions and value-added features. The Company has already obtained invention patent in China, the U.S., Russia, Singapore, South Africa, and 34 member states of the European Patent Office for the invention of spunlace cotton nonwoven manufacture process.

The Company’s 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’s strategy to address this challenge:

5

- 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 at 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’s 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. The Chinese government’s announced RMB 850 billion healthcare spending in the following three years 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, research and development, brand promotion and management improvement. 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.

- Tax Rebate Policy. The Chinese State Ministry of Finance and State Ministry of Taxation announced that as of June 1, 2009, the tax rebate rate for exports of medical dressing and related products would be increased by two percent. Effective from June 1, 2009, the tax rebate rate for exports of all the Company’s medical dressing products, and also some types of medical equipment will increase from 13% to 15%; the tax rebate rate for exports of the Company’s plastic and glass products will increase from 11% to 13%.

Recent Development

On July 27, 2009, the Company entered into a consulting agreement, the “Consulting Agreement”, and a restricted common stock incentive plan agreement, the “Restricted Common Stock Incentive Plan Agreement”, with a consulting firm, pursuant to which, the consulting firm will provide market research and analysis, diagnostic, brand design and building, marketing and promotion services to develop the Company’s own branded consumer products in China.

Pursuant to the Consulting Agreement, the Company has agreed to pay to the consulting firm an aggregate consulting fees of RMB 6,500,000, equivalent to approximately US$952,000, over a period of five years and to grant equity incentives in the form of restricted common stock units, the “Stock Units”, in the aggregate sum of one million (1,000,000) units to the consulting firm over a period of five years pursuant to the Restricted Common Stock Incentive Plan Agreement, provided that the operational target for those new products has been reached.

The Company will work closely with the consulting firm to integrate the Company’s strategy and implementation process and to develop the Company’s own branded consumer products in China.

6

Results of Operations

The following sets forth certain of the Company’s income statement information for the three and nine months ended June 30, 2009 and 2008.

Comparison of the Three Months Ended June 30, 2009 and 2008

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

	THREE MONTHS  ENDED 06/30/09					THREE MONTHS  ENDED 06/30/08
Item	In Thousand		As a Percentage			In Thousand		As a Percentage			Amount Change		% Change
Net Sales	$	24,358		100.00	%	$	23,074		100.00	%	$	1,284		5.56	%
Cost of Sales	$	17,176		70.51	%	$	17,094		74.08	%	$	82		0.48	%
Other Operating Income, Net	$	96		0.39	%	$	-78		-0.34	%	$	174		-
Exchange Difference, Net	$	47		0.19	%	$	-91		-0.39	%	$	138		-
Selling, general and administrative expenses	$	3,600		14.78	%	$	3,656		15.84	%	$	-56		-1.53	%
Interest Expense	$	71		0.29	%	$	196		0.85	%	$	-125		-63.78	%
Interest Income	$	19		0.08	%	$	14		0.06	%	$	5		35.71	%
Investment yields	$	86		0.35	%	$	16		0.07	%	$	70		437.50	%
Income tax	$	695		2.85	%	$	271		1.17	%	$	424		156.46	%
Minority interest	$	-1		0.00	%	$	21		0.09	%	$	-22		-
Net income	$	3,064		12.58	%	$	1,737		7.53	%	$	1,327		76.40	%

Net Sales

Net Sales increased $1,284,000, or 5.56%, to $24,358,000 for the three months ended June 30, 2009 from $23,074,000 for the three months ended June 30, 2008.  This increase was mainly attributable to (1) increased volumes from China as a result of the medical reform in China and the Company’s effort to develop China market through distributors, drugstore chains, and hospitals; the net sales to Chinese customers were $5,023,000 for the three months ended June 30, 2009, an increase of 50.57%, compared to the same period last year; and (2) increased sales of PurCotton products to China, the U.S., Europe and Japan.

During the three months ended June 30, 2009, revenue from PurCotton products reached approximately $1,207,000, as compared to approximately $377,000 in the same period last year. Such sales were mainly from the selling of PurCotton jumble rolls to customers in China, the U.S., Europe and Japan 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 June 30, 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 06/30/09 in Thousand		As a Percentage of Total Revenues			Three Months Ended on 06/30/08 in Thousand		As a Percentage of Total Revenues			Amount Change in Thousand		As a Percentage Change
Europe	$	9,753		40.04	%	$	10,342		44.82	%	$	-589		-5.70	%
Japan	$	3,821		15.69	%	$	3,999		17.33	%	$	-178		-4.45	%
North and South America	$	4,557		18.71	%	$	4,443		19.26	%	$	114		2.57	%
China	$	5,023		20.62	%	$	3,336		14.46	%	$	1,687		50.57	%
Others	$	1,204		4.94	%	$	954		4.13	%	$	250		26.21	%
Total	$	24,358		100.00	%	$	23,074		100.00	%	$	1,284		5.56	%

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Other Operating Income, Net

The Company’s other operating income, net, for the three months ended June 30, 2009, increased $174,000 to a gain of $96,000, from a loss of $78,000 for the three months ended June 30, 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. The increase was mainly attributable to the increased government subsidies and awards.

Exchange Difference, Net

The Company’s exchange difference, net, for the three months ended June 30, 2009, increased by $138,000 to a gain of $47,000, from a loss of $91,000 for the three months ended June 30, 2008. The increase is mainly due to the foreign currency exchange gain recognized on three months ended June 30, 2009 compared with the same period last year. As some of the Company’s sales were settled in Euro, after its customers placed orders with the Company at an agreed selling price in Euro, the Renminbi (RMB) depreciated against the Euro; as a result, the Company earned a foreign currency exchange gain on the actual payment date. On June 30, and March 31, 2009, the exchange rates of RMB against Euro were 9.6408 and 9.0323 respectively; the depreciation of RMB against Euro was 6.31%.

Cost of Sales

The Company’s cost of sales increased $82,000 to $17,176,000 for the three months ended June 30, 2009 from $17,094,000 for the three months ended June 30, 2008.  As a percentage of net revenues, the cost of sales decreased 3.57% to 70.51% for the three months ended June 30, 2009 from 74.08% for the three months ended June 30, 2008.  The decrease as percentage of revenue was mainly attributable to: (1) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (2) the tax rebate rate for exports increased by two percent.

Gross Profits

The Company’s gross profit increased $1,203,000 to $7,182,000 for the three months ended June 30, 2009 from $5,979,000 for the three months ended June 30, 2008.  Gross profit as a percentage of net revenues was 29.49% for the three months ended June 30, 2009, compared to 25.91% for the three months ended June 30, 2008.  The increase in gross profit as a percentage of net revenue was mainly due to (1) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, (2) the tax rebate rate for exports increased by two percent, and (3) the PurCotton products starts making profit during the month of June 2009 compared to losses from these products during the same period last year.

Selling Expenses

The Company’s selling expenses decreased $346,000 to $1,275,000 for the three months ended June 30, 2009 from $1,621,000 for the three months ended June 30, 2008.  As a percentage of net revenues, the Company’s selling expenses decreased to 5.23% for the three months ended June 30, 2009 from 7.03% for the three months ended June 30, 2008.  The decrease as percentage of revenue was primarily attributable to the decrease of approximately $513,000 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 $220,000, 0.90% of total sales, and $247,000, 1.07% of total sales, in the three months ended June 30, 2009 and 2008, respectively.  The Company’s transportation expenses for export sales were $375,000, 1.54% of total sales, and $889,000, 3.85% of total sales, in the three months ended June 30, 2009 and 2008, respectively.  The Company’s transportation fees for export sales decreased by $514,000 from the three months ended June 30, 2008 to the three months ended June 30, 2009, or approximately 57.82%. This decrease in the export transportation expenses was mainly due to the decrease of unit transportation fee.

Administrative Expenses

The Company’s administrative expenses increased $291,000, or 14.30%, to $2,326,000 for the three months ended June 30, 2009 from $2,035,000 for the three months ended June 30, 2008.  As a percentage of net revenues, administrative expenses increased to 9.55% for the three months ended June 30, 2009 from 8.82% for the three months ended June 30, 2008.  This increase was primarily attributable to the following: (1) a $137,000 increase in salary and welfare for management and administrative staff compared with the same period last year, and (2) a $109,000 increase in research and development expenses compared with the same period last year.

Interest Expenses

Interest expenses decreased to approximately $71,000, 0.29% of the total revenue, for the three months ended June 30, 2009 as compared to approximately $196,000, 0.85% of total revenue, for the same period of 2008, a decrease of approximately $125,000, or 63.78%.  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 $7,758,000 as of June 30, 2009, compared with approximately $16,009,000 as of June 30, 2008, and (2) decreased interest rates of bank loans.

8

Income taxes

Effective 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. The following table sets forth the tax rates applicable to the Company’s PRC subsidiaries that enjoy 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% to 25%		12.5% to 25%			25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0%		12.5%		12.5	%		12.5	%		25	%

In October 2006, for the purpose of improving operation efficiency, Hubei Winner Textiles Co., Ltd., “Winner Hubei”, merged with Winner Medical & Textile Ltd. Tianmen, “Winner Tianmen”. Income from Winner Hubei and Winner Tianmen was separately reported to the local tax office to reflect the different tax incentive status enjoyed by each entity. The applicable income tax rate for Winner Hubei and Winner Tianmen was 12.5% and 25% respectively for calendar years 2008 and 2009. The preferential tax incentives will expire at the end of 2009.

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 United States federal taxation is made as the Company has no assessable income in the US for the three months ended June 30, 2009 and 2008. The United States enterprise income tax is 34%.

The Company’s income tax provision for the three months ended June 30, 2009 was $695,000 as compared to $271,000 for the three months ended June 30, 2008, an increase of $424,000. 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 was 20% and 18% for the three months ended June 30, 2009 and 2008 respectively, and its profits constitutes 80% of the Company’s total profits, and (2) the cancellation of tax return policy for purchasing domestic machinery.

Minority Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income of -$1,000 and $21,000 in the three months ended June 30, 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 $3,064,000 for the three months ended June 30, 2009, as compared to approximately $1,737,000 for the same period of 2008, an increase of approximately $1,327,000, or approximately 76.40%.  Such increase is mainly attributable to (1) relatively stable RMB against foreign currency exchange rate since calendar year 2009, (2) the PurCotton products starts making profit during the three months ended June 30, 2009 compared to losses from these products during the same period last year, (3) improved production management to reduce manufacture unit cost and improved production efficiency and (4) the decrease in transportation expenses for export sales.

9

Comparison of the Nine months Ended June 30, 2009 and 2008

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

	NINE MONTHS  ENDED 06/30/09					NINE MONTHS  ENDED 06/30/08
Item	In Thousand		As a Percentage			In Thousand		As a Percentage			Amount Change		% Change
Net Sales	$	70,715		100.00	%	$	60,287		100.00	%	$	10,428		17.30	%
Cost of Sales	$	51,128		72.30	%	$	45,557		75.57	%	$	5,571		12.23	%
Other Operating Income, Net	$	987		1.40	%	$	360		0.60	%	$	627		174.17	%
Exchange Difference, Net	$	-1,082		-1.53	%	$	-628		-1.04	%	$	-454		72.29	%
Selling, general and administrative expenses	$	11,924		16.86	%	$	10,581		17.55	%	$	1,343		12.69	%
Interest Expense	$	398		0.56	%	$	435		0.72	%	$	-37		-8.51	%
Interest Income	$	43		0.06	%	$	32		0.05	%	$	11		34.38	%
Investment yields	$	310		0.44	%	$	40		0.07	%	$	270		675.00	%
Income tax	$	1,414		2.00	%	$	113		0.19	%	$	1,301		1151.33	%
Minority interest	$	74		0.10	%	$	64		0.11	%	$	10		15.63	%
Net income	$	6,183		8.74	%	$	3,469		5.75	%	$	2,714		78.24	%

Net Sales

Net sales increased $10,428,000, or 17.30%, to $70,715,000 for the nine months ended June 30, 2009 from $60,287,000 for the nine months ended June 30, 2008.  This increase was mainly attributable to increased volumes of large sales orders, especially from North and South American and Chinese customers. The net sales to North and South American customers was $13,547,000 for the nine months ended June 30, 2009, an increase of 61.06% compared to the same period last year. The net sales to Chinese customers were $11,500,000 for the nine months ended June 30, 2009, an increase of 32.49%, 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.

During the nine months ended June 30, 2009, revenue from PurCotton products reached approximately $3,158,000, as compared to approximately $550,000 in the same period last year. Such sales were mainly from the selling of PurCotton jumble rolls to the customers in China, the U.S., Europe and Japan 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 nine months ended June 30, 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)

	Nine months Ended on 06/30/09 in Thousand		As a Percentage of Total Revenues			Nine months Ended on 06/30/08 in Thousand		As a Percentage of Total Revenues			Amount Change in Thousand		As a Percentage Change
Europe	$	29,307		41.44	%	$	27,338		45.35	%	$	1,969		7.20	%
Japan	$	12,338		17.45	%	$	12,575		20.86	%	$	-237		-1.88	%
North and South America	$	13,547		19.16	%	$	8,411		13.95	%	$	5,136		61.06	%
China	$	11,500		16.26	%	$	8,680		14.40	%	$	2,820		32.49	%
Others	$	4,023		5.69	%	$	3,283		5.45	%	$	740		22.54	%
Total	$	70,715		100.00	%	$	60,287		100.00	%	$	10,428		17.30	%

Other Operating Income, Net

The Company’s other operating income, net, for the nine months ended June 30, 2009, increased $627,000 to $987,000, from $360,000 for the nine months ended June 30, 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. The increase was mainly attributable to the increased government subsidies and awards.

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Exchange Difference, Net

The Company’s exchange net loss for the nine months ended June 30, 2009, further increased by $454,000 to a loss of $1,082,000, from a loss of $628,000 for the nine months ended June 30, 2008. The increase of exchange losses is mainly due to the foreign currency exchange losses recognized from October to December 2008 compared with the same period last year. After its customers placed orders with the Company at an agreed selling price in Euro and US Dollar, the Renminbi (RMB) appreciated against the Euro and US Dollar; as a result, the Company suffered a foreign currency exchange loss on the actual payment date. On December 31, 2008 and 2007, 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 US dollar were 6.8346 and 7.3046 respectively; the appreciation of RMB against US dollar was 6.88%.

Cost of Sales

The Company’s cost of sales increased $5,571,000 to $51,128,000 for the nine months ended June 30, 2009 from $45,557,000 for the nine months ended June 30, 2008.  As a percentage of net revenues, the cost of sales decreased 3.27% to 72.30% for the nine months ended June 30, 2009 from 75.57% for the nine months ended June 30, 2008.  The decrease as percentage of revenue was mainly attributable to: (1) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, and (2) the tax rebate rate for exports increased by two percent.

Gross Profits

The Company’s gross profit increased $4,856,000 to $19,587,000 for the nine months ended June 30, 2009 from $14,731,000 for the nine months ended June 30, 2008.  Gross profit as a percentage of net revenues was 27.70% for the nine months ended June 30, 2009, compared to 24.43% for the nine months ended June 30, 2008.  The increase in gross profit as a percentage of net revenue was mainly due to: (1) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, (2) the tax rebate rate for exports increased by two percent, and (3) the PurCotton products starts making profit during the month of June 2009 compared to losses from these products during the same period last year.

Selling Expenses

The Company’s selling expenses decreased $357,000 to $4,517,000 for the nine months ended June 30, 2009 from $4,874,000 for the nine months ended June 30, 2008.  As a percentage of net revenues, the Company’s selling expenses decreased to 6.39% for the nine months ended June 30, 2009 from 8.08% for the nine months ended June 30, 2008.  The decrease as percentage of revenue was primarily attributable to the decrease of approximately $1,372,000 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 $740,000, 1.05% of total sales, and $619,000, 1.03% of total sales, in the nine months ended June 30, 2009 and 2008, respectively.  The Company’s transportation expenses for export sales were $1,456,000, 2.06% of total sales, and $2,827,000, 4.69% of total sales, in the nine months ended June 30, 2009 and 2008, respectively.  The Company’s transportation fees for export sales decreased by $1,371,000 from the nine months ended June 30, 2008 to the nine months ended June 30, 2009, or approximately 48.50%. This decrease in the export transportation expenses was mainly due to the decrease of unit transportation fee.

Administrative Expenses

The Company’s administrative expenses increased $1,698,000, or 29.75%, to $7,406,000 for the nine months ended June 30, 2009 from $5,708,000 for the nine months ended June 30, 2008.  As a percentage of net revenues, administrative expenses increased to 10.47% for the nine months ended June 30, 2009 from 9.47% for the nine months ended June 30, 2008.  This increase was primarily attributable to the following: (1) an $302,000 increase in salary and welfare for the management and administrative staff compared with the same period last year, (2) an $378,000 increase in research and development expenses compared with the same period last year, and (3) the increase in related administrative expenses such as depreciation and amortization for the Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”, for the nine months ended June 30, 2009 in the amount of approximately $1,141,000 with an increase of $259,000 compared to the same period last year.

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Interest Expenses

Interest expenses decreased to approximately $398,000, 0.56% of the total revenue, for the nine months ended June 30, 2009 as compared to approximately $435,000, 0.72% of total revenue, for the same period of 2008, a decrease of approximately $37,000, or 8.51%.  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 $7,758,000 as of June 30, 2009, compared with approximately $16,009,000 as of June 30, 2008, and (2) decreased interest rates of bank loans.

Income taxes

Effective 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. The following table sets forth the tax rates applicable to the Company’s PRC subsidiaries that enjoy 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% to 25%		12.5% to 25%			25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		0%		12.5%		12.5	%		12.5	%		25	%

In October 2006, for the purpose of improving operation efficiency, Hubei Winner Textiles Co., Limited, “Winner Hubei” merged with Winner Medical & Textile Ltd. Tianmen, “Winner Tianmen”. Income from Winner Hubei and Winner Tianmen was separately reported to the local tax office to reflect the different tax incentive status enjoyed by each entity. The applicable income tax rate for Winner Hubei and Winner Tianmen was 12.5% and 25% respectively for calendar years 2008 and 2009. The preferential tax incentives will expire at the end of 2009.

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 United States federal taxation is made as the Company has no assessable income in the US for the nine months ended June 30, 2009 and 2008. The United States enterprise income tax is 34%.

The Company’s income tax provision for the nine months ended June 30, 2009 was $1,414,000 as compared to $113,000 for the nine months ended June 30, 2008, an increase of $1,301,000. 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 18% for the nine months ended June 30, 2009 and 2008 respectively, and Winner Shenzhen’s profits constitutes 80% of the Company’s total profits, and (2) the cancellation of tax return policy for purchasing domestic machinery.

Minority Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income of $74,000 and $64,000 in the nine months ended June 30, 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 $6,183,000 for the nine months ended June 30, 2009, as compared to approximately $3,469,000 for the same period of 2008, an increase of approximately $2,714,000, or approximately 78.24%.  Such increase is mainly attributable to (1) relatively stable RMB against foreign currency exchange rate since calendar year 2009, (2) improved production management to reduce manufacture unit cost and improved production efficiency, and (3) the decrease in transportation expenses for export sales.

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Foreign Currency Translation Difference

The Company incurred foreign currency translation differences, equal to a loss of $88,000 and a gain of $5,774,000 in the nine months ended June 30, 2009 and 2008, respectively. On July 21, 2005, China reformed its foreign currency exchange policy to adopt floating RMB exchange rates.  On June 30, 2009 and 2008, the exchange rates of RMB against US dollar were 6.8319 and 6.8591 respectively; the appreciation of RMB against US dollar was 0.40%. As a result, the Company applied different exchange rates in translating RMB into U.S. dollar in its financial statements for the nine months ended June 30, 2009 and 2008. In the nine months ended June 30, 2009, the exchange rates of 6.8319, 8.277 and 6.8251 were applied in calculating the total assets/liabilities, shareholders’ equity and profit and loss, as compared to the exchange rates of 6.8591, 8.277 and 7.1847 in the nine months ended June 30, 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 nine months ended June 30, 2009. In the nine months ended June 30, 2009, the exchange rates of 7.7500, 7.7940 and 7.7644 were applied in calculating the total assets/liabilities, shareholders’ equity and profit and loss, respectively.

Accounts receivable

Accounts receivable decreased to approximately $11,503,000 as of June 30, 2009 as compared to approximately $13,517,000 as of September 30, 2008, a decrease of approximately $2,014,000, or 14.90%. The Company’s average annualized accounts receivable collection turnover was 7.81 and 7.11 for the nine months ended June 30, 2009 and 2008, respectively. In order to reduce the risk of inability to collect the accounts receivables, the Company entered into a one-year insurance policy with China Export & Credit Insurance Corporation effective on April 25, 2009 and will be automatically renewable subject to a one month written notice given by either party. The maximum insurance coverage from China Export & Credit Insurance Corporation is US$4 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 $14,786,000 as of June 30, 2009 as compared to approximately $15,840,000 as of September 30, 2008, a decrease of approximately $1,054,000, or 6.65%. The Company’s annualized inventory turnover was 4.33 and 4.16 for the nine months ended June 30, 2009 and 2008, respectively. The decrease of inventory is mainly attributable to the decrease of raw materials and semi-finished products as a result of the Company’s lean production and risk control on inventory in order to improve its free cash flow.

Liquidity and Capital Resources

As of June 30, 2009, the Company had cash and cash equivalents of approximately $7,837,000.

Cash Flow (in Thousand US$)
	Nine Months Ended June 30
	2009			2008
Net cash provided by operating activities		9,942			3,875
Net cash (used in) investing activities		(1,362	)		(8,477	)
Net cash (used in) provided by financing activities		(7,253	)		1,975
Effect of exchange rate changes on cash balance		48			798
Net increase (decrease) in cash and cash equivalent		1,375			(1,830	)
Cash and cash equivalents at the beginning of period		6,463			6,377
Cash and cash equivalents at the end of period		7,837			4,547

Operating Activities:

Net cash provided by operating activities was $9,942,000 for the nine months ended June 30, 2009, which increased by an amount of $6,607,000 from net cash provided by operating activities of $3,875,000 in the same period of 2008. The increase was mainly due to the increase in net income during the nine months ended June 30, 2009 compared to the same period last year, and the decrease in 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 nine months ended June 30, 2009 was $1,362,000, a decrease of $7,115,000 from net cash used in investing activities of $8,477,000 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 to reduce or delay some of the investment in fixed assets to achieve a better utilization of cash.

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Financing Activities:

Net cash used in financing activities for the nine months ended June 30, 2009 totaled $7,253,000, as compared to $1,975,000, 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 19.42% as of June 30, 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 June 30, 2009, the Company has loans with Chinese banks totaling $7,758,000. These annual interest rates of these loans are ranging from 4.78%-6.417%.

Bank loans as of June 30, 2009
							Balance as of June 30 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		1,463,722
B	China Merchants Bank, Shenzhen Branch	06-08-2009 to 06-08-2010		4.78	%	Land use rights & buildings		1,463,722
C	China Merchants Bank, Shenzhen Branch	06-10-2009 to 06-10-2010		4.78	%	Land use rights & buildings		1,463,722
D	China Merchants Bank, Shenzhen Branch	06-30-2009 to 06-29-2010		4.78	%	Land use rights & buildings		1,463,721
E	Huanggang Industrial and Commercial Bank of China	02-27-2009 to 02-26-2010		5.31	%	Land use rights & buildings		1,463,722
F	Tianmen Branch of the Industrial and Commercial Bank of China	12-16-2008 to 08-16-2009		6.417	%	Land use rights & buildings		439,116
		Total						7,757,725

As of June 30, 2009, the Company had approximately $24.19 million bank credit facilities from four commercial banks, which remains the same compared with the Company’s bank credit as of September 30, 2008; and excluding the $7.76 million banks loans as of June 30, 2009, there are $16.43 million unused bank credit facilities, consisting of approximately $4.39 million from Shenzhen Branch of China Merchants Bank, approximately $7.32 million from Shenzhen Branch of the Industrial and Commercial Bank of China, approximately $1.14 million form Tianmen Branch of the Industrial and Commercial Bank of China, and approximately $3.58 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.

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 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.

 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

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.

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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.

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.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. SFAS 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date should be disclosed if the financial statements would otherwise be misleading. The Company adopted SFAS No. 165 in the third quarter of fiscal 2009. See Note 15 for required disclosures related to subsequent events.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under SFAS 167, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS 167 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. SFAS 167 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. SFAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. SFAS No. 167 is effective for the Company in the first quarter of fiscal 2011. The Company is currently evaluating the impact the adoption of SFAS 167 will have on its consolidated financial statements.

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In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™; and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“FAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 168 will be effective for our interim and annual financial periods ending after September 15, 2009.  The Company does not anticipate that the provisions of SFAS No. 168 will have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

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

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 and accounts receivable. 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 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 June 30, 2009 and 2008, the exchange rates of RMB against US dollar were 6.8319 and 6.8591 respectively; the appreciation of RMB against US dollar was 0.40%. The exchange rates of RMB against Euro were 9.6408 and 10.8302 respectively; the appreciation of RMB against Euro was 12.34%. 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 appreciates 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.

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 June 30, 2009 would affect the net income before provision for income taxes by approximately $0.07 million for the nine months ended June 30, 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.

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ITEM 4T. 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 June 30, 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 I, 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

None.

ITEM 5. OTHER INFORMATION

None

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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

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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: August 11, 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)

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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

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