Winner Medical 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

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

For the quarterly period ended: March 31, 2011

¨ 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: 001-34484

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 ¨

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  ¨     No ¨

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 ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

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

Yes ¨    No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 11, 2011 is as follows:

Class of Securities	Shares Outstanding
Common Stock, US$0.001 par value	24,130,247

TABLE OF CONTENTS

		Page
	PART I	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	PART II	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Reserved	24
Item 5.	Other Information	24
Item 6.	Index to Exhibits	24

2

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

WINNER MEDICAL GROUP INC.

Condensed Consolidated Financial Statements (Unaudited)

For the three and six months ended March 31, 2011 and 2010

3

WINNER MEDICAL GROUP INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Condensed Consolidated Balance Sheets	F-1
Condensed Consolidated Statements of Income and Comprehensive Income	F-2
Condensed Consolidated Statements of Stockholders’ Equity	F-3
Condensed Consolidated Statements of Cash Flows	F-4
Notes to Condensed Consolidated Financial Statements	F-5 – F-17

4

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31		September 30
	2011		2010
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents		11,994,114		14,818,179
Restricted bank deposits		102,718		285,119
Restricted broker margin account		1,278,754		-
Held-to-maturity investments		-		1,497,607
Accounts receivable, less allowances for doubtful accounts of US$202,667 and US$230,200 at March 31, 2011 and September 30, 2010, respectively		15,667,561		15,672,446
Amounts due from affiliated companies		200,797		999
Inventories		26,490,755		15,945,101
Prepaid expenses and other current assets		12,111,786		6,929,066
Income taxes recoverable		-		33,974
Deferred tax assets		378,868		428,741
Total current assets		68,225,353		55,611,232
Property, plant and equipment, net		61,920,026		60,110,367
Investment in equity investees		2,142,901		2,159,784
Intangible assets, net		116,125		125,079
Prepaid expenses and other receivables		1,552,205		637,748
Deferred tax assets		792,340		331,785
Total assets		134,748,950		118,975,995
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank loans		5,338,295		-
Accounts payable		6,196,214		5,362,155
Accrued payroll and employee benefits		2,512,175		2,393,700
Customer deposits		1,495,112		687,275
Accrued and other liabilities		2,748,419		3,057,445
Amounts due to affiliated companies		125,027		58,338
Income taxes payable		1,897,650		1,477,212
Total current liabilities		20,312,892		13,036,125
Deferred tax liabilities		43,641		42,699
Total liabilities		20,356,533		13,078,824
Commitments and contingencies		-		-
Stockholders’ equity:
Common stock, par value $0.001 per share; authorized 247,500,000, issued and outstanding March 31, 2011 –24,130,247 shares; September 30, 2010 –23,950,740 shares		24,131		23,951
Additional paid-in capital		40,680,575		40,154,494
Retained earnings		54,294,215		48,730,034
Statutory reserves		4,585,731		4,585,731
Accumulated other comprehensive income		14,673,786		12,302,762
Total Winner Medical Group Inc. stockholders’ equity		114,258,438		105,796,972
Non-controlling interests		133,979		100,199
Total equity		114,392,417		105,897,171
Total liabilities and equity		134,748,950		118,975,995

See accompanying notes to condensed consolidated financial statements.

F-1

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three months ended  March 31						Six months ended  March 31
	2011			2010			2011			2010
	US$			US$			US$			US$
Net sales		33,218,003			26,074,927			66,924,320			55,861,732
Cost of sales		(23,865,795	)		(18,718,742	)		(48,091,101	)		(39,073,700	)
Gross profit		9,352,208			7,356,185			18,833,219			16,788,032
Other operating income, net		593,133			48,624			1,112,261			489,087
Realized loss on commodity financial instruments		(1,577,325	)		-			(1,759,669	)		-
Exchange difference, net		(26,346	)		(55,801	)		(144,131	)		(80,181	)
Selling, general and administrative expenses		(5,801,733	)		(4,139,927	)		(11,857,799	)		(9,463,646	)
Income from operations		2,539,937			3,209,081			6,183,881			7,733,292
Interest income		11,627			9,871			46,168			27,743
Interest expense		(47,899	)		(44,657	)		(93,185	)		(98,503	)
Equity in earnings of 50 percent or less owned persons		101,833			75,347			183,117			45,025
Income before income taxes		2,605,498			3,249,642			6,319,981			7,707,557
Income taxes		(348,710	)		(620,209	)		(722,396	)		(1,202,096	)
Net income		2,256,788			2,629,433			5,597,585			6,505,461
Net (income)/loss attributable to non-controlling interests		(20,851	)		47,105			(33,404	)		91,789
Net income attributable to Winner Medical Group Inc.		2,235,937			2,676,538			5,564,181			6,597,250
Comprehensive income:
Net income		2,256,788			2,629,433			5,597,585			6,505,461
Foreign currency translation difference		1,116,731			24,858			2,371,400			(148,066	)
Comprehensive (income)/loss attributable to non-controlling interests		(20,791	)		47,215			(33,780	)		91,950
Comprehensive income attributable to Winner Medical Group Inc.		3,352,728			2,701,506			7,935,205			6,449,345
Net income attributable to Winner Medical Group Inc.  per share
- basic		0.09			0.12			0.23			0.29
- diluted		0.09			0.12			0.23			0.29
Weighted average common stock outstanding
- basic		24,130,247			22,363,740			24,123,266			22,363,740
- diluted		24,533,132			22,805,030			24,534,405			22,639,131

See accompanying notes to condensed consolidated financial statements.

F-2

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

	Equity attributable to Winner Medical Group Inc.
	Common stock				Additional								Accumulated other
	Stock				paid-in			Retained			Statutory		comprehensive		Non-controlling			Total
	outstanding		Amount		capital			earnings			reserves		income		interests			equity
			US$		US$			US$			US$		US$		US$			US$
Balance at September 30, 2009 (restated  to reflect 2 for 1 reverse stock split with effectively on October 6, 2009)		22,363,740		22,364		31,166,123			36,797,172			3,428,095		10,717,850		82,815			82,214,419
Issuance of  common stock – net of offering costs		1,587,000		1,587		8,791,876			-			-		-		-			8,793,463
Restricted stock units granted		-		-		695,758			-			-		-		-			695,758
Net income/(loss)		-		-		-			13,090,498			-		-		(93,136	)		12,997,362
Foreign currency translation difference		-		-		-			-			-		1,584,912		(747	)		1,584,165
Transfer to statutory reserves		-		-		-			(1,157,636	)		1,157,636		-		-			-
Purchase of non-controlling interests		-		-		(499,263	)		-			-		-		111,267			(387,996	)
Balance at September 30, 2010		23,950,740		23,951		40,154,494			48,730,034			4,585,731		12,302,762		100,199			105,897,171
Restricted stock units granted		-		-		526,261			-			-		-		-			526,261
Issuance of restricted stock units		179,507		180		(180	)		-			-		-		-			-
Net income		-		-		-			5,564,181			-		-		33,404			5,597,585
Foreign currency translation difference		-		-		-			-			-		2,371,024		376			2,371,400
Balance at March 31, 2011		24,130,247		24,131		40,680,575			54,294,215			4,585,731		14,673,786		133,979			114,392,417

See accompanying notes to condensed consolidated financial statements.

F-3

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended March 31
	2011			2010
	US$			US$
Cash flows from operating activities
Net income		5,597,585			6,505,461
Adjustment to reconcile net income to net cash from operating activities:
Depreciation and amortization of property, plant and equipment		2,641,153			2,452,298
Amortization of intangible assets		13,506			12,923
Loss/(gain) on disposal of property, plant and equipment		112,045			(9,550	)
Change in fair value of financial instruments, net		(41,970	)		(4,416	)
Equity in earnings of 50 percent or less owned persons		(183,117	)		(45,025	)
Investment income from held-to-maturity investments		(18,614	)		-
Stock-based compensation expenses		526,261			547,118
Deferred tax		(393,896	)		117,532
Changes in operating assets and liabilities:
Restricted bank deposits		184,323			(3,939	)
Restricted broker margin account		(1,273,844	)		-
Accounts receivable		350,777			678,769
Amounts due from affiliated companies		225			(3,333	)
Inventories		(10,193,745	)		(1,608,407	)
Prepaid expenses and other receivables		(4,986,931	)		(1,111,173	)
Income taxes recoverable		34,724			(8,019	)
Accounts payable		715,717			766,579
Accrued payroll and employee benefits		65,646			(225,840	)
Customer deposits		792,669			(38,210	)
Accrued and other liabilities		(167,903	)		(31,537	)
Amounts due to affiliated companies		65,401			11,755
Income taxes payable		397,544			(393,110	)
Net cash (used in)/provided by operating activities		(5,762,444	)		7,609,876
Cash flows from investing activities	��
Purchase of property, plant and equipment		(2,953,754	)		(2,287,863	)
Purchase of intangible assets		(1,903	)		-
Proceeds from disposal of property, plant and equipment		29,291			14,947
Deposits paid for property, plant and equipment		(1,164,225	)		(909,443	)
Proceeds from disposal of held-to-maturity investments		6,066,564			-
Purchase of held-to-maturity investments		(4,531,927	)		-
Net cash used in investing activities		(2,555,954	)		(3,182,359	)
Cash flows from financing activities
Proceeds from bank borrowings		9,649,349			-
Repayment of bank borrowings		(4,362,100	)		(2,929,287	)
Purchase of non-controlling interests		(211,490	)		-
Net cash provided by/(used in) financing activities		5,075,759			(2,929,287	)
Effect of exchange rate changes on cash balance		418,575			(179,072	)
Net (decrease)/increase in cash and cash equivalents		(2,824,064	)		1,319,158
Cash and cash equivalents, beginning of period		14,818,178			9,493,026
Cash and cash equivalents, end of period		11,994,114			10,812,184
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		93,185			98,503
Income taxes		710,082			1,485,722

See accompanying notes to condensed consolidated financial statements.

F-4

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  Basis of Preparation of Financial Statements

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

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the operating results for the six months ended March 31, 2011 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, 2010. The Company follows the same accounting policies in preparation of interim reports.

On October 6, 2009, the Company’s Board of Directors approved and authorized the Company to complete a one-for-two reverse split of the Company’s common stock, decreasing the Company’s authorized capital to 247,500,000 shares of common stock and 2,500,000 shares of preferred stock, par value $0.001 per share. Pursuant to the Nevada Revised Statues, shareholder approval of this action was not required. The authorized shares, the par value per share, earning per share, common stock outstanding and weighted average common stock outstanding as referred to in these condensed consolidated financial statements have been restated where applicable to give retroactive effect of the reverse stock split.

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 disposables.  All activities of the Group are principally conducted by subsidiaries operating in the People’s Republic of China (“PRC”).

3.  Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). This pronouncement is an authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the effect of ASU 2010-06 on its financial statements and results of operation and is currently not yet in a position to determine such effects.

F-5

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4.  Net Income Attributable to Winner Medical Group Inc. Per Share

Net income attributable to Winner Medical Group Inc. per share- Basic net income attributable to Winner Medical Group Inc. per share is computed by dividing net income attributable to Winner Medical Group Inc. available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income attributable to Winner Medical Group Inc. per share gives effect to all dilutive potential ordinary shares outstanding during the period.  The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.  At March 31, 2011 and 2010, the basic and diluted net income attributable to Winner Medical Group Inc. per share calculated in accordance with ASC 260, "Earnings Per Share" are reconciled as follows:

	Three months ended  March 31
	2011		2010
	US$		US$
Basic income per share
Net income attributable to Winner Medical Group Inc. for the period		2,235,937		2,676,538
Weighted average common stock outstanding		24,130,247		22,363,740
Net income attributable to Winner Medical Group Inc. per share		0.09		0.12
Diluted income per share
Net income attributable to Winner Medical Group Inc. for the period		2,235,937		2,676,538
Weighted average common stock outstanding		24,130,247		22,363,740
Effect of dilution
Restricted stock		402,885		441,290
Weighted average common stock outstanding		24,533,132		22,805,030
Net income attributable to Winner Medical Group Inc. per share		0.09		0.12

	Six months ended March 31
	2011		2010
	US$		US$
Basic income per share
Net income attributable to Winner Medical Group Inc. for the period		5,564,181		6,597,250
Weighted average common stock outstanding		24,123,266		22,363,740
Net income attributable to Winner Medical Group Inc. per share		0.23		0.29
Diluted income per share
Net income attributable to Winner Medical Group Inc. for the period		5,564,181		6,597,250
Weighted average common stock outstanding		24,123,266		22,363,740
Effect of dilution
Restricted stock		411,139		275,391
Weighted average common stock outstanding		24,534,405		22,639,131
Net income attributable to Winner Medical Inc. per share		0.23		0.29

On May 7, 2009, options converting to 4,167 potential common shares expired. On February 5, 2010, options converting to 10,000 potential common shares expired. As of March 31, 2011, there was no potential common shares relating to options in the Company.

F-6

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. Held-to-maturity investments

As of March 31, 2011, there is no held-to-maturity investment and as of September 30, 2010, the Company’s held-to-maturity investment securities portfolio consisted of one product purchased from Industrial and Commercial Bank of China. The product was a money management product and matured on January 6, 2011. The carrying value of the investment security, which approximate to the fair value, was US$Nil and US$1,497,607 as of March 31, 2011 and September 30, 2010, respectively. Interest on these investments was included in interest income by US$834 and US$Nil during the three months ended March 31, 2011 and 2010, respectively; US$18,614 and US$Nil during the six months ended March 31, 2011 and 2010, respectively.

6. Inventories

Inventories by major categories are summarized as follows:

	March 31		September 30
	2011		2010
	US$		US$
Raw materials		12,846,049		5,006,853
Work in progress		5,682,583		4,964,070
Finished goods		7,962,123		5,974,178
		26,490,755		15,945,101

7. Credit Facilities and Pledged Assets

The subsidiaries in Shenzhen and Huanggang have credit lines with Shenzhen Commercial Bank, Shenzhen Branch of the Industrial and Commercial Bank of China and Huanggang Branch of the Industrial and Commercial Bank of China, representing trade acceptances, loans and overdrafts.

As of March 31, 2011, the Company had approximately $28.22 million bank credit facilities from three commercial banks and, after utilizing bank loans of $5.34 million, there are $22.88 million unused bank credit facilities, consisting of approximately $6.86 million from Shenzhen Branch of China Merchants Bank, approximately $12.20 million from Shenzhen Branch of the Industrial and Commercial Bank of China, and approximately $3.82 million from Huanggang Branch of the Industrial and Commercial Bank of China. As of September 30, 2010, the Company had approximately $25.87 million bank credit facilities from three commercial banks; and after utilizing $1.80 million letter of credit as of September 30, 2010, included in accounts payable in the accompanying balance sheet, there are $24.07 million unused bank credit facilities. The maturities of these facilities are generally up to August 2011. The weighted average interest rates on short-term borrowings for the six months ended March 31, 2011 and 2010 were 4.41% and 5.80% per annum, respectively. There are no significant covenants or other financial restrictions relating to the Company’s facilities except that at March 31, 2011, buildings with net book values of US$3,818,337 and at September 30, 2010, leasehold land and buildings with net book values of US$6,288,904, have been pledged as collateral for the above facilities. During the six months ended March 31, 2011, the Company obtained charge release from bank on its previously pledged leasehold land.

As of March 31, 2011 and September 30, 2010, the Company had the following short-term bank loans:

	March 31		September 30
	2011		2010
	US$		US$
Bank loans repayable within one year		5,338,295		-
Original currency in Chinese Renminbi		35,000,000		-

Bank loans as of March 31, 2011 are secured by buildings consisting of the following:

					March31,
					2011
					US$
Loan	Loanperiod	Interestrate
A	2010.10.08-2011.09.18		5.58	%		2,287,841
B	2011.03.03-2011.09.03		6.72	%		3,050,454
						5,338,295

F-7

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	March 31		September 30
	2011		2010
	US$		US$
Value added tax receivable		4,519,484		3,533,190
Deferred expenditure		257,424		212,823
Advance to suppliers		5,793,876		2,054,529
Fair value of financial instruments		39,949		387,351
Government subsidy income receivable		472,820		-
Others		1,028,233		741,173
		12,111,786		6,929,066

9. 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 have been made as the Company has no taxable income for the first quarter. There are no current taxes due to Internal Revenue Service of United States as of March 31, 2011. The applicable income tax rate for the Company for the six months ended March 31, 2011 and 2010 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 (“Winner HK”), a 60% owned subsidiary of the Company, is incorporated in Hong Kong. Winner HK is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. Winner HK was incorporated in January 2008 and the applicable statutory tax rate for the subsidiary for the six months ended March 31, 2011 and 2010 is 16.5%.

On January 25, 2011, a wholly-owned subsidiary HK PurCotton Co., Ltd., or “HK PurCotton” was established.  The applicable income tax rate for HK PurCotton was 16.5% for the six months ended March 31, 2011.

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%.

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.

Winner Medical (Huanggang) Co., Ltd. enjoys its full tax exemption from January 1, 2008, and the 50% tax exemption from January 1, 2010. The preferential tax incentives will expire on December 31, 2012. Winner Medical & Textile Ltd., Chongyang enjoys the 50% tax exemption from January 1, 2008, and from January 1, 2011, Winner Medical & Textile Ltd., Chongyang will be subject to an enterprise income tax rate of 25%. Shanghai Winner Medical Apparatus Co., Ltd. enjoys the 50% tax exemption from January 1, 2009, which will expire on December 31, 2011.

F-8

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9. Income Taxes-Continued

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 year 2009 and was 25% for both entities starting from January 1, 2010.

On September 11, 2009, Winner Industries (Shenzhen) Co., Ltd., or "Winner Shenzhen", obtained a High and New Technology Enterprise Certificate from the Ministry of Science and Technology of China, the Ministry of Finance and the State Administration of Taxation. Winner Shenzhen enjoyed an applicable corporate income tax rate of 15% from January 1, 2009 to the year end of 2011. The applicable income tax rates for Winner Shenzhen was 15% for the six months ended March 31, 2011 and 2010.

On December 7, 2009, a wholly-owned subsidiary Shenzhen PurCotton Co., Ltd., or “Shenzhen PurCotton”, was established.  The applicable income tax rates for Shenzhen PurCotton was 25% for the six months ended March 31, 2011.

On September 1, 2010, a wholly-owned subsidiary Beijing PurCotton Co., Ltd., or “Beijing PurCotton”, was established.  The applicable income tax rate for Beijing PurCotton was 25% for the six months ended March 31, 2011.

On October 18, 2010, a wholly-owned subsidiary Huanggang Winner Cotton Co., Ltd. was established.  The applicable income tax rate for Huanggang Winner Cotton Co., Ltd. was 25% for the six months ended March 31, 2011.

On November 19, 2010, a wholly-owned subsidiary Guangzhou PurCotton Co., Ltd., or “Guangzhou PurCotton”, was established.  The applicable income tax rate for Guangzhou PurCotton was 25% for the six months ended March 31, 2011.

On December 3, 2010, a wholly-owned subsidiary Shanghai PurCotton Co., Ltd., or “Shanghai PurCotton”, was established.  The applicable income tax rate for Shanghai PurCotton was 25% for the six months ended March 31, 2011.

On October 1, 2007, the Company adopted FASB ASC 740 (former FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109”). 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 performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. Until March 31, 2011, 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 six months ended March 31, 2011 and 2010, 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.

A reconciliation between the provision for income taxes computed by applying the statutory tax rate in PRC to income before income taxes and the actual provision for income taxes is as follows:

	Sixmonthsended March31,
	2011			2010
	US$			US$
Tax calculated at domestic statutory rate (2011: 25%; 2010: 25%)		1,579,995			1,926,889
Effect of different tax rates in various jurisdictions		92,296			34,977
Tax effect of preferential tax treatment		(798,422	)		(799,113	)
Tax effect of expenses not deductible for tax purpose		9,739			6,935
Tax effect of government subsidies not subject to tax		(53,269	)		(29,565	)
Change in valuation allowance		(68,823	)		5,654
Over provision in previous years		(19,634	)		-
Others		(19,486	)		56,319
		722,396			1,202,096

F-9

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. Related Party Transactions

During the three months ended March 31, 2011 and 2010, the Company purchased goods from L+L Healthcare Hubei Co., Ltd., an equity investee, for US$87,929 and US$40,483 and sold goods to it for US$17,748 and US$252, respectively. During the six months ended March 31, 2011 and 2010, the Company purchased goods from L+L for US$132,956 and US$40,858 and sold goods to it for US$22,093 and US$252, respectively. As of March 31, 2011 and September 30, 2010, the amounts due to L+L Healthcare Hubei Co., Ltd. were US$89,500 and US$20,363, respectively. L+L Healthcare Hubei Co., Ltd declared dividends of US$200,000 and US$Nil to the Company for the six months ended March 31, 2011 and 2010, respectively. The dividend receivable was accounted for as a reduction in equity investments.

During the three months ended March 31, 2011 and 2010, the Company sold goods to Chengdu Winner Likang Medical Appliance Co., Ltd., “Winner Chengdu”, an equity investee, for US$690 and US$2,954 and purchased goods from it for US$23,722 and US$Nil, respectively. During the six months ended March 31, 2011 and 2010, the Company sold goods to Winner Chengdu for US$3,845 and US$25,595 and purchased goods from it for US$41,128 and US$17,358, respectively. As of March 31, 2011 and September 30, 2010, the amounts due to Winner Chengdu were US$35,527 and US$37,975, respectively. As of March 31, 2011 and September 30, 2010, the amounts due from Winner Chengdu were US$797 and US$751, respectively.

The amounts due from/to the above affiliated companies are unsecured, interest free and payable according to the trading credit terms.

On January 1, 2011, Mr. Jianquan Li, the Chief Executive Officer of the Company, entered into agreements with the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd., “Winner Shenzhen,” in relation to commodity derivatives trading activities. In the agreements, as of September 30, 2011, any shortfall between the restricted broker margin account balance maintained for the commodity derivatives trading activities and the balance in that account on January 1, 2011, or US$2,838,000, will be undertaken by Mr. Jianquan Li. The shortfall, if any, will be fully compensated by way of cash payment from Mr. Jianquan Li to Winner Shenzhen on September 30, 2011.The Company accounts for this transaction between Winner Shenzhen and Mr. Jianquan Li in accordance with Staff Accounting Bulletin Topic 5T, under which, any payment due from Mr. Jianquan Li for a shortfall will be recognized to additional paid-in capital on September 30, 2011 upon cash receipt. A loss of US$1,759,665 from trading in commodity financial instruments for the six months ended March 31, 2011 has been recognized in the consolidated statements of income and comprehensive income.

11. Stock-Based Compensation

Stock-Based Compensation - The Company has adopted ASC 718, ''Compensation-Stock Compensation'', 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. Compensation expense is recognized for those awards that are expected to vest, which the Company’s estimates based upon historical forfeitures.

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 10,000 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 4,167 non-qualified options was granted and expired on May 7, 2009. On February 6, 2007, a total of 10,000 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 were still valid to their expiry date on February 5, 2010.

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 at the grant date.  Use of an option valuation model, as required by ASC 718 “Compensation—Stock Compensation”, includes highly subjective assumptions based on long-term prediction, including the expected stock price volatility and average life of each option grant.

On February 5, 2010, 10,000 non−qualified options were expired. There was no stock-based compensation cost recorded for the six months ended March 31, 2011 and 2010, respectively. Instead, the total cash compensation costs for independent directors for the six months ended March 31, 2011 and 2010 are US$57,500 and US$47,500, respectively.

On October 7, 2007, the Board of Directors approved a 2008-09 Restricted Stock Unit Incentive Plan, the “2008-2009 Plan”, a stock incentive compensation program for fiscal years 2008 and 2009.  This 2008-2009 Plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees, where a participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

F-10

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Stock-Based Compensation-Continued

Following this incentive plan, the Company granted 500,000 units out of the total 600,000 authorized restricted stock units 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 attributable to Winner Medical Group Inc.’s annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 7, 2007, which was $3.60 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On October 15, 2008, the Company’s Board of Directors approved to grant the remaining 100,000 units out of the total 600,000 authorized restricted stock units. 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 attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 15, 2008, which was US$0.50 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On September 8, 2009, the Board of Directors approved a 2010-11 Restricted Stock Unit Incentive Plan, the “2010-2011 Plan”, a stock incentive compensation program for fiscal years 2010 and 2011. This 2010-2011 plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees, where a participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Following this incentive plan, the Company granted 250,000 units out of the total 300,000 authorized restricted stock units on September 8, 2009. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on September 7, 2012 and the second 50% on September 7, 2013 if the target of corporate net income attributable to Winner Medical Group Inc.’s annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of September 8, 2009, which was $4.40 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On September 28, 2010, the Company’s Board of Directors approved to grant the remaining 50,000 units out of the total 300,000 authorized restricted stock units. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on October 7, 2012 and the second 50% on October 7, 2013 if the target of corporate net income attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of September 28, 2010, which was US$4.56 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On July 27, 2009, the Company’s subsidiary in Shenzhen entered into a 5-year consulting agreement with a consulting firm for receiving consulting services of developing strategies on rolling out the Company’s own branded consumer products in China. Pursuant to the agreement, the Company granted 500,000 restricted stock units from the Company’s 2006 Equity Incentive Plan to the consulting firm for the 5-year services. As of September 18, 2010, both parties decided to terminate the co-operation relationship and mutually waived the share-based compensation terms agreed in previous agreement.

On October 6, 2010, the Company’s Board of Directors approved the 2011-2013 Restricted Stock Unit Incentive Plan, the "2011-2013 Plan", a stock incentive compensation program for fiscal years 2011 to 2013. This 2011-2013 plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees of the Company’s wholly-owned subsidiary, Shenzhen PurCotton Co., Ltd. (“Shenzhen PurCotton”). The participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Following this incentive plan, the Company granted 300,000 units out of the total 500,000 authorized restricted stock units on October 6, 2010. On each of October 6, 2012, October 6, 2013 and October 6, 2014, a participant will be eligible to vest up to 1/3 of the total number of restricted stock units underlying an award if the target of corporate net income attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 6, 2010, which was $5.31 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On October 7, 2010, under the 2008-2009 Plan, the Company issued 179,507 shares of the Company’s common stock to those entitled employees, representing vesting of the first 50% of the total number of restricted stock awarded.

The Company recorded stock-based compensation expense of US$526,261 and US$547,118 for the six months ended March 31, 2011 and 2010, respectively.

Management considered that the fair value of outstanding restricted share units is approximate to the market value of the Company’s common stock, as at March 31, 2011, the market value of the Company’s common stock is US$4.64.

F-11

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Stock-Based Compensation-Continued

As of March 31, 2011, a cumulative total of 717,368 non-vested restricted stock units have been cancelled. And 179,507 restricted stock units were vested.

A summary of the restricted stock units activity is as follows:

	Incentiveplanon marketing service			2008-09plan			2010-11plan			2011-13plan		Total
	Number of units			Number of units			Number of units			Number of units		Number of units
Nonvested units outstanding at September 30, 2009		-			524,500			250,000			-		774,500
Granted		500,000			-			50,000			-		550,000
Cancelled		(500,000	)		(45,750	)		(12,750	)		-		(558,500	)
Nonvested units outstanding at September 30, 2010		-			478,750			287,250			-		766,000
Granted		-			-			-			300,000		300,000
Cancelled		-			(67,618	)		(15,750	)		-		(83,368	)
Vested		-			(179,507	)		-			-		(179,507	)
Nonvested units outstanding at March 31, 2011		-			231,625			271,500			300,000		803,125

As of March 31, 2010, the unrecognized stock-based compensation expense for the 2008-2009 Plan, 2010-2011 Plan and 2011-2013 Plan was US$87,084, US$724,898 and US$1,305,351, respectively, which totalled US$2,117,333.

12. Commitments and Contingencies

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

	US$
Six months ending September 30, 2011		1,035,992
Year ending September 30
2012		1,593,816
2013		668,317
2014		267,349
On and after 2015		95,326
Total minimum lease payments		3,660,800

Rental expenses under operating leases included in the statement of income were US$578,393 and US$161,102 for the three months ended March 31, 2011 and 2010 respectively. And for six months ended March 31, 2011 and 2010, rental expenses under operating leases included in the statement of income were US$1,017,823 and US$256,409 respectively.

Purchase obligations- The Company has signed agreements with suppliers and other parties to purchase plant and machinery and computer equipment with estimated non-cancelable obligations of US$3,877,627 and US$2,610,641 as of March 31, 2011 and September 30, 2010 respectively.

13. Fair Value Measurement

FASB ASC 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and requires certain disclosures about fair value measurement. FASB ASC topic 820 also establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

Level 1 – Quoted unadjusted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in market that are not active, and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.

F-12

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

13. Fair Value Measurement-Continued

The financial instruments of the Company are cash and cash equivalents, restricted bank deposits, accounts receivable, deposits and other receivable, other current assets, bank loans, accounts payable, other current liabilities and other liabilities are reasonable estimates of their fair values. These financial assets and liabilities are classified either Level 1 or Level 2 in the fair value hierarchy as of March 31, 2011 and September 30, 2010. Fair value of the amounts due to or from affiliates cannot be readily determined because of the nature of the related party transactions.

14. Financial Instruments and Derivatives

The Company uses financial instruments to manage its exposures to movements in foreign exchange rates and commodity prices. The use of these financial instruments modifies the Company’s exposure to these risks with the goal of reducing the risk of cost to the Company. The Company does not use derivative financial instruments for speculative or trading purposes, nor does it hold or issue leveraged derivative financial instruments.

Foreign exchange derivatives-The Company’s operations are exposed to market risk primarily due to changes in currency exchange rates. In order to manage such risks so as to reduce volatility on earnings and cash flows, the Company enters into several foreign exchange forward contracts with a commercial bank to hedge for future trade receipts in U.S. dollars against RMB. The total outstanding foreign exchange forward contracts amounted to US$12,600,000, representing US$6,300,000 selling of U.S. dollars and US$6,300,000 buying of U.S. dollars, as of March 31, 2011. The Company’s foreign exchange forward contracts are classified as Level 2 in the fair value hierarchy under ASC topic 820 since the quote prices of these foreign currency forward contracts can be obtained directly from commercial bank.

The following table summarizes the Company’s fair value of foreign exchange derivatives:

	CondensedConsolidated	March 31		September30
	BalanceSheetPresentation	2011		2010
		US$		US$
Derivatives not designated as hedging instruments
Fair value of foreign exchange forward  contracts	Other current assets		39,949		387,351
	Other liabilities		2,889		174,462

The impact on earnings from derivatives activity, including changes in the fair value of derivatives for the three and six months ended March 31, 2011 and 2010 are as follows:

	Presentationofgainorloss	Threemonthsended March31,
	recognizedonderivatives	2011			2010
		US$			US$
Derivatives not designated as hedging instruments
Foreign exchange forward contracts
	Unrealized exchange gain		22,440			146,064
	Unrealized exchange loss		(3,543	)		(141,648	)
	Other operating income, net		18,897			4,416

	Presentation of gain or loss	Six months ended March 31,
	recognized on derivatives	2011			2010
		US$			US$
Derivatives not designated as hedging instruments
Foreign exchange forward contracts
	Unrealized exchange gain		39,949			146,064
	Unrealized exchange loss		(2,889	)		(141,648	)
	Other operating income, net		37,060			4,416

F-13

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

14. Financial Instruments and Derivatives- Continued

The realized gain on foreign exchange forward contracts included in other operating income, net by US$ 160,559 and US$Nil for the six months ended March 31, 2011 and 2010, respectively.

Commodity derivatives-Cotton is the primary raw material used to manufacture many of the Company’s products and is purchased at market prices. Starting from October 2010, the Company uses commodity financial instruments to manage the risk of cotton purchase cost. Although the commodity financial instruments are economic hedges of specified risks, they are not designated or accounted for as hedging instruments. The commodity financial instruments are valued at fair value. The commodity derivatives require collateral, referred to as margin, in the form of cash. As of March 31, 2011, the Company’s restricted broker margin account was US$1,278,754, net of unrealized gain of US$4,910. Increase in fair value of commodity financial instruments recorded in other operating income was US$4,910 for the six months ended March 31, 2011. The total outstanding cotton futures contracts amounted to US$2,162,391, representing US$1,078,717 buying of cotton and US$1,083,674 selling of cotton, as of March 31, 2011, which will mature in less than one year. The Company’s commodity financial instruments are classified as Level 1 in the fair value hierarchy under ASC topic 820 since the quoted unadjusted prices of these commodity financial instruments are available in active markets.

The realized loss on commodity financial instruments was US$1,577,325 and US$1,759,669 for the three and six months ended March 31, 2011.

15. 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 Co., Ltd and are typically sold on an open account basis.   The sales to Sakai Shoten Co., Ltd accounted for 12% and 13% of the total net sales for the six months ended March 31, 2011 and 2010, respectively, and the sales to Tyco Healthcare Co., Ltd accounted for 11% and 9% of the total net sales for the six months ended March 31, 2011 and 2010, respectively.

A substantial percentage of the Company’s accounts receivable are made of two customers, Tyco Healthcare Co., Ltd and Molnlycke Health Care AB.  The two companies accounted for 13.93% and 14.38%, 10.56% and 14.11% of the total accounts receivable as of March 31, 2011 and September 30, 2010, 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. There was bad debt recovery of US$27,533 and US$12,442 during the six months ended March 31, 2011 and 2010 respectively.

Interest rate risk - The interest rates and terms of repayment of bank and other borrowings ranged from 5.58% to 6.72%.  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 15, 2010, will be expired on December 31, 2011 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$2 million.

Foreign currency risk - The value of the Renminbi, the main currency used in the PRC, fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the Renminbi is not readily convertible into US dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of Renminbi into foreign currencies such as the US dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. On March 31, 2011 and 2010, the exchange rates of RMB against US dollar were 6.5564 and 6.8261 respectively; the appreciation of RMB against US dollar was 3.95%. On March 31, 2011 and 2010, the exchange rates of RMB against Euro were 9.2681 and 9.1588 respectively. 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.

F-14

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16. Geographical Information

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

	Three months ended March 31
	2011		2010
	US$		US$
Europe - (Note a)		10,608,309		10,026,113
China		8,483,577		5,279,456
America - (Note b)		7,493,769		5,084,916
Japan		5,342,197		4,149,434
Others		1,290,151		1,535,008
Total net sales		33,218,003		26,074,927

	Three monthsended March31,
	2011		2010
	US$		US$
Note a
Europe
Britain		3,387,415		2,635,941
Sweden		1,576,684		1,327,005
Other countries in Europe		5,644,210		6,063,167
		10,608,309		10,026,113

	Threemonthsended March31,
	2011		2010
	US$		US$
Note b
America
USA		6,227,355		4,207,807
Brazil		923,547		420,030
Other countries in America		342,867		457,079
		7,493,769		5,084,916

	Sixmonths ended March31
	2011		2010
	US$		US$
Europe- (Note a)		19,613,217		19,021,537
China		16,704,435		13,415,929
America - (Note b)		16,238,277		10,907,628
Japan		10,632,971		9,428,473
Others		3,735,420		3,088,165
Total net sales		66,924,320		55,861,732

F-15

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16. Geographical Information-Continued

	Six monthsended March31,
	2011		2010
	US$		US$
Note a
Europe
Britain		5,203,372		5,414,146
Sweden		3,252,940		2,757,041
Other countries in Europe		11,156,905		10,850,350
		19,613,217		19,021,537

	Six monthsended March31,
	2011		2010
	US$		US$
Note b
America
USA		13,527,202		8,870,457
Brazil		1,923,186		912,363
Other countries in America		787,889		1,124,808
		16,238,277		10,907,628

17. Segment Information

The Company has two reportable segments: medical products (Medical Care, Wound Care, and Home Care) and 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 six months ended March 31, 2011 and 2010 are as follows:

	Three months ended March 31
	2011			2010
	US$			US$
Net Sales:
Segment:
Medical products		29,156,466			24,180,649
PurCotton®products		4,061,537			1,894,278
Consolidated total		33,218,003			26,074,927
Gross Profit:
Segment:
Medical products		7,798,535			6,795,076
PurCotton® products		1,553,673			561,109
Consolidated total		9,352,208			7,356,185
Income from operations before taxes
Segment:
Medical products		3,099,710			3,168,257
PurCotton® products		(494,212	)		81,385
Consolidated total		2,605,498			3,249,642
Net income attributable to Winner Medical Group Inc. :
Segment:
Medical products		2,538,875			2,613,119
PurCotton® products		(302,938	)		63,419
Consolidated total		2,235,937			2,676,538

F-16

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

17. Segment Information-Continued

	Six months ended March 31
	2011			2010
	US$			US$
Net Sales:
Segment:
Medical products		58,371,424			51,445,399
PurCotton®products		8,552,896			4,416,333
Consolidated total		66,924,320			55,861,732
Gross Profit:
Segment:
Medical products		15,913,323			15,216,806
PurCotton® products		2,919,896			1,571,226
Consolidated total		18,833,219			16,788,032
Income from operations before taxes
Segment:
Medical products		7,144,228			6,991,078
PurCotton® products		(824,247	)		716,479
Consolidated total		6,319,981			7,707,557
Net income attributable to Winner Medical Group Inc. :
Segment:
Medical products		6,072,217			5,972,226
PurCotton® products		(508,036	)		625,024
Consolidated total		5,564,181			6,597,250
Depreciation and Amortization:
Segment:
Medical products		1,648,649			1,632,958
PurCotton® products		1,006,010			832,263
Consolidated total		2,654,659			2,465,221

	March 31,			September 30,
	2011			2010
	US$			US$
TotalAssets:
Segment:
Medical products		88,621,550			80,906,150
PurCotton® products		48,303,847			38,069,845
Segment total		136,925,397			118,975,995
Reconciliation to consolidated totals:
Elimination of other receivable from inter-segments		(2,176,447	)		-
Consolidated total		134,748,950			118,975,995

18. Subsequent events

The Company has evaluated transactions, events and circumstances for consideration of recognition or disclosed those items within the condensed consolidated financial statements as deemed appropriate.

F-17

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 registration statement on Form S-3 and 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.

The following management’s discussion and analysis should be read in conjunction with the Company’s financial statements and the notes thereto and the other financial information appearing elsewhere in this Report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. The Company’s financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

Overview

Winner Medical’s business operations consist of the manufacturing and marketing, researching and developing of cotton-based medical dressings and medical disposables, as well as consumer products. The Company has fourteen wholly-owned operating subsidiaries and three joint ventures, all located in China. The Company has established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical dressings and medical disposables, which consist of medical care and wound care, as well as PurCotton® products, which are produced from a spunlace, natural cotton nonwoven material. The Company manufactures its products in China and sells its medical dressings and medical disposables both in China and abroad, with Europe, the United State and Japan serving as the top three markets. The Company also sells its PurCotton® jumbo rolls in both China and abroad, and PurCotton® finished consumer products mainly in China.

The following analysis discusses changes in the financial condition and results of operations at and for the three and six months ended March 31, 2011 and 2010, and should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Report.

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. As of May 11, 2011, the Company’s total outstanding and issued shares were 24,130,247 shares. The Company’s common stock is quoted under the symbol “WWIN” on Nasdaq Global Market. The CUSIP number is 97476P204. Effective October 8, 2009, the Company migrated from the OTC Bulletin Board to the New York Stock Exchange AMEX, changing its symbol from “WMDG.OB.” to “WWIN.” Effective April 6, 2010, the Company migrated from the New York Stock Exchange AMEX to NASDAQ Global Market, under the same symbol of “WWIN.”

Business Operations

Winner Medical’s present business operations commenced February 1991 and it conducts its manufacture and marketing through its operating subsidiaries located in China. The Company generates revenue through domestic (China) and foreign sales of a variety of medical dressings and medical disposables, which include medical care, wound care and home care products, such as gauze, wound dressings, disposable drapes, surgical gowns, face masks, cotton balls, etc. and PurCotton® products, 100% natural cotton non-woven fabric made products which consist of dry and wet tissues, beauty pads, baby wears, cleansing wipes, etc.

The Company has integrated manufacturing lines that provides its clients with the ability to procure certain products from a single supplier. 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 sells its own Winner® medical brand products in developing countries and regions including China, the Middle East, South America, Africa, and Southeast Asia.

5

The Company promotes its PurCotton retail products via its own marketing and sales efforts in the Chinese marketplace. Its product categories contain four types of PurCotton branded personal products and healthcare supplies. The main distribution channels are presently self-operated chain stores (PurCotton stores), online sales, supermarkets and bulk sales to large customers. However, these distribution channels will require higher levels of capital expenditure, such as for inventory, rent, deposits and salary for sales forces, than the Company’s medical business. As such, the Company’s margins may be impacted in the short-term, as this is a new business model and requires a significant level of start-up investment.

Industry Wide Trends Relevant to the Company’s Business

The medical dressings and medical disposables manufacturing markets 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 higher quality 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 a growth in sales of medical dressings and medical disposables and increased revenue for the Company.

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

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 industry trend or consumption pattern in the Company’s industry is that hospitals are increasingly looking to reduce their costs. Hospitals reduce costs by seeking alternative products that increase efficiency or reduce labor costs. For example, disposable catheters reduce the need for frequent changes of diapers and bed sheets. Other popular disposables 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 worldwide will bring an increase in the demand for medical instruments, medical dressings and medical disposables.

The Company believes that there is a geographical shift in product manufacturing from countries with high labor and manufacturing costs to countries where labor and manufacturing costs are generally lower. As a result of the relatively low cost structure and rapid development of the Chinese economy, some foreign multinational companies are entering the Chinese market to seek suppliers to produce their goods. The Company believes that having more large multinational healthcare companies seeking suppliers to produce their products in China will benefit the Company. In addition, the Company is negotiating with several large healthcare companies in developed countries which intend to outsource some of their production lines.

The Company estimates that China’s local market demand for medical dressings and medical disposables will continue to grow. This presents a significant opportunity for the Company. The Company is developing a distribution network to capture opportunities in China, mainly through local distributors, over-the-counter drugstore chains, and direct sales to hospitals. In order to better develop this market, certain employees have been placed in charge of communicating with local distributors in some major cities, such as Guangzhou, Fuzhou, Chengdu, Chongqing, Wuhan, Fuzhou, Shanghai, Beijing and Shenyang. The Company also sells directly to hospitals in Hong Kong.

Also affecting the Company’s industry is the growing sensitivity towards protecting the environment and increased health concerns, as consumers are becoming increasingly concerned about the environmental impact of the products they buy. Nonwoven medical dressings, medical instruments and medical disposables usually contain materials like rubber and polyester, which may result in restrictions on the purchase of these products under environmental protection regulations. At the same time, such materials are not biodegradable and are composed of petroleum, a non-renewable energy resource. In recent years, cases of melamine-tainted milk, recycled edible oil and contaminated vegetables have significantly raised consumers’ awareness about the environment they live in, the food they eat, and the products they use. The Company believes this trend will strengthen one of its competitive advantages because its new PurCotton® products are primarily made of natural cotton and manufactured in an environmentally-friendly fashion. The Company believes its PurCotton® products will be medium- to long-term growth contributor to its revenue, because they can be applied to consumer products as well as to the medical industry.  

6

Recent Developments

PurCotton retail business update:

The Company’s main distribution channels for expanding PurCotton retail business include self-operated stores, online sales and supermarket sales. As of May 11, 2011, the Company operates 34 retail chain stores, composing of 21 in Guangdong province, where the Company’s headquarters are located, 9 in Beijing, the capital of China, and 4 in Shanghai. Six stores were closed because the Company eliminated the stores with unsatisfactory performance. In order to build strong awareness of its high-quality and international brand, the Company believes that Hong Kong will be a good city to launch and promote its PurCotton retail business. Hence, Hong Kong PurCotton Ltd. was established in January, 2011, and the first store in Hong Kong will be opened in mid-May.

Conducting self-operated stores required higher operating expenses and a longer period of investment turnover when compared with other distribution channels. The Company will focus on efficient operating and developing each existing store, rather than accelerating the pace of store opening. However, self-operated stores are vital for marketing new products and for brand building and will remain an important and significant sales channel for the PurCotton products, as marketing PurCotton products require active and efficient customers’ education and products awareness. As of May 11, 2011, approximately 16,000 customer memberships were recorded for the self-operated stores in China.

In addition, the Company  recently started launching its products into mid-and-high end supermarkets in Shenzhen, particularly the top selling products, such as PurCotton® sanitary napkin and 100% natural cotton tissue. The Company expects that its core products will be launched into more supermarkets and in more cities throughout China in the near future.

The Company is selling its PurCotton products online via Taobao.com and owned Business-to-Consumer (B2C) online store. Taobao.com is the largest and leading online platform in China, with approximately 370 million membership, and daily site visits of approximately 60 million in 2010*. In addition, the Company’s own B2C website is attracting more visits since it was launched in December 2010. PurCotton products have received positive feedback and online customer membership has approximately 29,000 as of May 11, 2011.

(*Source: Alibaba.com Company Data)

Cotton futures trading risk-transferred agreements:

Cotton is the Company’s primary raw material used in its manufacturing process. As a result of rising demand caused by global economic recovery and supply shortages due to bad weather, cotton prices have been rapidly increasing and fluctuating in the last half year. Under this rising cost environment, the Company cannot secure stable price quotes from cotton suppliers, resulting in inconsistency in the prices quoted to the Company’s customers. Therefore, the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd., “Winner Shenzhen,” has decided to enter into cotton future transactions in order to manage the impact of volatility in cotton prices on production and not for speculative purposes. In October 2010, the Company opened a cotton futures margin account with a PRC futures broker with a restricted broker margin deposit of approximately $3,006,000.

For the three months ended December 31, 2010, the realized gain and unrealized loss on cotton futures financial instruments were $52,719 and $234,154, respectively. Due to the high levels of volatility in cotton prices, management determined that cotton futures trading has a high risk which may result in losses to the Company despite the goal to manage the impact of volatility in cotton prices. In order to shift risk away from the Company during the initial period of cotton futures trading and protect the interests of the Company’s shareholders, the chief executive officer of the Company, Mr. Jianquan Li, signed agreements with Winner Shenzhen, the subsidiary of the Company responsible for cotton futures trading, effective January 1, 2011 that are scheduled to expire on September 30, 2011.

Under these agreements, Mr. Jianquan Li agrees that, on September 30, 2011, he will assume all net losses, if any, incurred by Winner Shenzhen from cotton futures trading from January 1, 2011 to September 30, 2011. If, however, there is a net gain from trading activities, the gain will be retained by Winner Shenzhen. Specifically, if the restricted broker margin account balance on September 30, 2011 is less than the margin deposit as of January 1, 2011 of $2,838,000 (the “Margin Deposit”), any shortfall will be assumed by Mr. Jianquan Li, who will pay Winner Shenzhen an amount equal to such shortfall on September 30, 2011 up to a maximum of the Margin Deposit. Conversely, if the account balance on September 30, 2011 exceeds the Margin Deposit, all gain will be retained by Winner Shenzhen.

7

For the three months ended March 31, 2011, Winner Shenzhen’s transactions in cotton futures resulted in a net loss of approximately $1,577,000, which was charged to Realized Loss on Commodity Financial Instruments in the condensed consolidated statements of income for the period. The loss was a result of significant increases and fluctuation in cotton prices since January, 2011. During this period, based on management’s expectation that cotton prices would experience a downward correction because of the historically high prices at that time and the expectation that many cotton-related companies could not bear those costs, Winner Shenzhen acquired a short position to hedge against price corrections. However, contrary to management’s expectation, the price increase continued. In order to minimize further losses, management closed its short position, generating a loss for the period. The Company believes that this loss was a result of management’s relative inexperience in cotton futures trading in periods of significant market fluctuation.

Since Winner Shenzhen began trading in cotton futures in October 2010, management has made on-going assessments of its trading performance. As a result of the experience gained over this period, the Company has established more stringent trading procedures and policies, as well as risk-reducing strategies for entering into cotton futures transactions, in regular consultation with the board of directors.

Results of Operations

Comparison for the Three Months Ended March 31, 2011 and 2010

The following sets forth certain of the Company’s income statement information for the three months ended March 31, 2011 and 2010.

Comparison of the Three Months Ended March 31, 2011 and 2010

(All amounts, other than percentages, in thousands of U.S. Dollars)

	THREE MONTHS					THREE MONTHS
	ENDED 3/31/11					ENDED 3/31/10
	In		As a			In		As a			Amount
Item	Thousands		Percentage			Thousands		Percentage			Change		% Change
Net Sales	$	33,218		100	%	$	26,075		100	%	$	7,143		27.39	%
Cost of Sales	$	23,866		71.85	%	$	18,719		71.79	%	$	5,147		27.5	%
Gross Profit	$	9,352		28.15	%	$	7,356		28.21	%	$	1,996		27.13	%
Other Operating Income, Net	$	593		1.79	%	$	49		0.19	%	$	544		1110.2	%
Realized Loss on Commodity Financial Instruments	$	1,577		4.75	%	$	-		-	%	$	1,577		100	%
Exchange Difference, Net	$	26		0.08	%	$	56		0.21	%	$	-30		-53.57	%
Selling, General and Administrative Expenses	$	5,802		17.47	%	$	4,140		15.88	%	$	1,662		40.14	%
Income from Operations	$	2,540		7.65	%	$	3,209		12.31	%	$	-669		-20.85	%
Interest Income	$	12		0.04	%	$	10		0.04	%	$	2		20	%
Interest Expense	$	48		0.14	%	$	45		0.17	%	$	3		6.67	%
Equity in earnings of 50 percent or less owned persons	$	102		0.31	%	$	75		0.29	%	$	27		36	%
Income Tax	$	349		1.05	%	$	620		2.38	%	$	-271		-43.71	%
Non-controlling Interest	$	-21		-0.06	%	$	47		0.18	%	$	-68		-144.68	%
Net Income Attributable to Winner Medical Group Inc.	$	2,236		6.73	%	$	2,676		10.26	%	$	-440		16.44	%

Product Information

Winner Medical is a diversified manufacturer and marketer of cotton-based medical dressings and medical disposables, as well as consumer products. The Company’s operations are conducted in two operating segments by products. The Company’s operation, on-site management, internal reporting and performance assessments are conducted within each of the following two identified product segments:

· Medical Products (Medical Care and Wound Care)

8

· PurCotton® Products (Personal Products and Jumbo Roll Supplies)

The following table illustrates the operating results for each product type for the three months ended March 31, 2011 and 2010.

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

	Medical Products						PurCotton® Products						Consolidated
Item	Three  Months Ended 3/31/11			Three  Months Ended 3/31/10			Three  Months Ended 3/31/11			Three  Months Ended 3/31/10			Three  Months Ended 3/31/11			Three  Months Ended 3/31/10
Net Sales	$	29,156			24,181		$	4,062			1,894		$	33,218			26,075
Gross Profit	$	7,799			6,795		$	1,554			561		$	9,353			7,356
Gross Margin		26.75	%		28.10	%		38.26	%		29.62	%		28.16	%		28.21	%
Income Before Income Taxes	$	3,100			3,168		$	-494			81		$	2,606			3,249
Net Income (Loss) attributable to Winner Medical Group Inc.	$	2,539			2,613		$	*-303			63		$	2,236			2,676
Profit Margin		8.71	%		10.81	%		-7.46	%		3.33	%		6.73	%		10.26	%

*For details regarding the fluctuation of net loss of PurCotton® products, please refer to the discussion relating to Net Income Attributable to Winner Medical Group Inc. below.

Sales by Region

The following table illustrates the sales revenues by regions from major geographic areas for the three months ended March 31, 2011 and 2010. The table also provides the percentage of total revenues represented by each listed region.

Comparison of Sales by Regions for the three months ended March 31, 2011 and 2010

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

	Three  Months Ended 3/31/11 in  Thousands		As a Percentage of Total  Revenues			Three  Months Ended 3/31/10 in  Thousands		As a Percentage of Total  Revenues			Amount Change in  Thousands		As a Percentage Change
Europe		10,608		31.93	%		10,026		38.45	%		582		5.80	%
Britain		3,387		10.20	%		2,636		10.11	%		751		28.49	%
Sweden		1,577		4.75	%		1,327		5.09	%		250		18.84	%
Others		5,644		16.99	%		6,063		23.25	%		-419		-6.91	%
North and South America		7,494		22.56	%		5,085		19.50	%		2,409		47.37	%
U.S.A.		6,227		18.75	%		4,208		16.14	%		2,019		47.98	%
Brazil		924		2.78	%		420		1.61	%		504		120.00	%
Others		343		1.03	%		457		1.75	%		-114		-24.95	%
China*		8,484		25.54	%		5,279		20.25	%		3,205		60.71	%
Japan		5,342		16.08	%		4,149		15.91	%		1,193		28.75	%
Others		1,290		3.88	%		1,536		5.89	%		-246		-16.02	%
Total		33,218		100.00	%		26,075		100	%		7,143		27.39	%

*Note: Sales to the Chinese market include medical sales to hospitals, chain drug stores and local distributors, as well as PurCotton® jumbo roll supplies and retail businesses.

Net Sales

Net sales increased by approximately $7,143,000, or 27.39%, to approximately $33,218,000 for the three months ended March 31, 2011 from approximately $26,075,000 for the three months ended March 31, 2010. The increase in net sales was mainly attributable to increased sales orders from (1) customers in North and South America, particularly the U.S. and Brazil, and (2) domestic consumers for medical products and PurCotton® products in China.

For the three months ended March 31, 2011, net sales from North and South America increased to approximately $7,494,000, from approximately $5,085,000 in the same quarter last year, or a 47.37% increase. The strong sales increase in North and South America, particularly the U.S. and Brazil, where the Company’s products and service won orders from local manufacturers who have been outsourcing their production to the developing countries. The Company expects that this favorable trend will continue for the foreseeable future and the Company will pursue deeper penetration into the North and South American markets.

9

Net sales generated from the Japanese market increased 28.75% during the three months ended March 31, 2011 to $5,342,000 from $4,149,000 during the three months ended March 31, 2010. The Company has been serving the Japanese market for over 15 years, offering quality products to one of the most stringent markets for medical products in the world. The favorable growth is driven by larger orders, as well as higher prices due to the increase of raw material cost.

For this reporting period, the Company, considering the weak economic situation in Europe, reassessed the liquidity of its clients from Europe and rejected orders from those companies about which the Company had liquidity concerns. Therefore, sales from Europe were flat when compared to the same period last year. However, sales from Britain and Sweden increased $751,000, or 28.49%, and $250,000, or 18.84%, respectively, because clients in these countries have better liquidity and they have trusted the Company’s products quality and services, as well as timely delivery.

Revenue from the domestic market in China for medical products and PurCotton® products increased by approximately $3,205,000, or 60.71%, to approximately $8,484,000 for the three months ended March 31, 2011 from approximately $5,279,000 for the three months ended March 31, 2010. This increase is primarily composed of:

(1) Net sales from medical products to the Chinese market reached $4,422,000 from $3,385,000 in the three months ended March 31, 2011, contributing approximately $1,037,000, or a 30.64% increase, due to the Company’s efforts to continuously broaden and expand its sales channels, including increasing the number of local distributors covering more hospitals and deeper penetrating into existing hospitals and chain drug stores, and other channels.

(2) Net sales attributable to the PurCotton® jumbo roll-supply business increased to $3,194,000 in the three months ended March 31, 2011 from $1,791,000 in the same period last year, an increase of $1,403,000, or 78.34%. This large increase was due to increased demand from Chinese customers who used it as a material on hygiene products. With the increasing demand from these customers, the PurCotton® jumbo roll-supply has been steadily growing.

Net sales attributable to the PurCotton retail business, which consists of 33 retail stores and online business, increased approximately $765,000, to $868,000 in this reporting period, compared to $103,000 in the same period last year when the Company had only seven PurCotton retail stores and no online business as of the last day of that reporting period.

Cost of Sales

The Company’s cost of sales increased by approximately $5,147,000, to approximately $23,866,000, for the three months ended March 31, 2011, from approximately $18,719,000 for the three months ended March 31, 2010. The costs of sales as a percentage of net revenues were 71.85% and 71.79% for the three months ended March 31, 2011 and 2010, respectively. The increase of cost of sales during the three months ended March 31, 2011 was mainly attributable to an increase in the price of a core raw material, cotton.

Gross Profit

The Company’s gross profit increased by approximately $1,996,000 to approximately $9,352,000 for the three months ended March 31, 2011, from approximately $7,356,000 for the three months ended March 31, 2010. Gross profit as a percentage of net revenues was 28.15% for the three months ended March 31, 2011, compared with 28.21% for the three months ended March 31, 2010. Despite fluctuation of cotton prices, appreciation of the RMB and rising labor cost the Company still managed to gain an increased gross profit with a flat gross margin, compared to the same period last year, mainly attributable to the following factors:

(1) As a manufacturing enterprise, the Company is well aware of the importance of internal production control and management. The Company has implemented lean production management and upgraded its automatic production equipment in order to decrease labor demand and waste of materials, increasing the overall production efficiency, and

(2) The Company has been adjusting its business portfolio by developing and marketing advanced medical products as well as PurCotton® jumbo rolls and retail products, which are higher gross margin products than traditional medical products, while offering traditional medical products to its international and domestic customers. By doing so, the Company can lower its heavy reliance on traditional business and maintain a stable combined gross margin. Practically, the Company believes that the PurCotton retail business has beenwell received by its target customers. And, although the retail business accounts for only a very small portion of the Company’s net sales, it has a much higher margin than that of the medical products portfolio. The Company expects that PurCotton retail business will play an important role in contributing gross margin in the mid to long run.

Other Operating Income, Net

The Company’s other operating income, net, for the three months ended March 31, 2011, increased $544,000 to $593,000, from $49,000 for the three months ended March 31, 2010. Other operating income, net, mainly consists of gain from sales of leftover materials, change in fair market value on cotton futures contracts, government subsidies, which are financial incentives awarded by the local government authorities to the Company, and change in fair value of foreign currency forward contracts.  Further, the increase in other operating income, net, was primarily due to the fact that, during the three months ended March 31, 2011, the Company was awarded $637,000 by government authorities in recognition of the Company’s contribution to research and development and brand building activities.

10

Realized Loss on Commodity Financial Instruments

Realized loss on commodity financial instruments for the three months ended March 31, 2011 was primarily composed of a loss of approximately $1,577,000 on cotton futures trading, compared to $0 in the same period last year. Cotton is the Company’s primary raw material used in its manufacturing process. As a result of rising demand caused by global economic recovery and supply shortages due to bad weather, cotton prices have been rapidly increasing and fluctuating in the last half year. Under this rising cost environment, the Company cannot secure stable price quotes from cotton suppliers, resulting in inconsistency in the prices quoted to the Company’s customers. Therefore, the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd., “Winner Shenzhen,” has decided to enter into cotton future transactions in order to manage the impact of volatility in cotton prices on production.

For the three months ended March 31, 2011, Winner Shenzhen’s transactions in cotton futures resulted in a net loss of approximately $1,577,000, which was charged to Realized Loss on Commodity Financial Instruments in the condensed consolidated statements of income for the period. The loss was a result of significant increases and fluctuation in cotton prices since January, 2011. During this period, based on management’s expectation that cotton prices would experience a downward correction, Winner Shenzhen acquired a short position to hedge against price corrections. However, contrary to management’s expectation, the price increase continued. In order to minimize further losses, management closed its short position, generating a loss for the period.

In order to shift risk away from the Company during the initial period of cotton futures trading and better protect the interests of the Company’s shareholders, the chief executive officer of the Company, Mr. Jianquan Li, signed agreements with Winner Shenzhen effective January 1, 2011 that are scheduled to expire on September 30, 2011. Under these agreements, Mr. Jianquan Li agrees that, on September 30, 2011, he will assume all net losses, if any, incurred by Winner Shenzhen from cotton futures trading from January 1, 2011 to September 30, 2011. If, however, there is a net gain from trading activities, it will be retained by Winner Shenzhen. Details regarding the loss from trading in cotton futures and the agreements signed by Mr. Jianquan Li are discussed in the Recent Development section of this Report.

Exchange Difference, Net

The Company’s exchange difference, net, for the three months ended March 31, 2011, decreased $30,000 to a loss of $26,000, from a loss of $56,000 for the three months ended March 31, 2010. Such a decrease in loss was mainly due to the Company’s involvement in foreign currency forward contracts to hedge against the depreciation of US Dollar, the currency with which the Company settles the majority of its trades with customers. During the three months ended March 31, 2011 and 2010, the average exchange rates of RMB against US Dollar were 6.6197 and 6.8276 respectively; the appreciation of the RMB against the US Dollar was 3.04%.

The Company expects that the exchange rate of RMB against the US Dollar will continue to appreciate in the future. In order to minimize the currency exchange rate risk, the Company has been (1) reinforcing and expanding its businesses in the Chinese market, (2) inserting clauses into contracts that the selling price is subject to the fluctuation of currency and the price of raw materials, and (3) entering into several foreign currency forward contracts with a commercial bank to hedge future trade receipts in US Dollars against RMB. As of March 31, 2011, the total outstanding foreign currency forward contracts amounted to $12,600,000, of which $6,300,000 was for purchasing US dollars and $6,300,000 was for selling US dollars, intending to hedge against currency fluctuations.

Selling, General and Administrative Expenses

The Company’s selling, general and administrative expenses increased $1,662,000 to approximately $5,802,000 for the three months ended March 31, 2011 from approximately $4,140,000 for the three months ended March 31, 2010. As a percentage of net revenues, the Company’s selling, general and administrative expenses increased to 17.47% for the three months ended March 31, 2011 from 15.88% for the three months ended March 31, 2010. The increase of selling, general and administrative expenses was primarily due to the increase of salary and leasing expenses compared to the same period of last year as follows:

(1) Salaries increased by approximately $864,000, or 86.06%, during the three months ended March 31, 2011, compared to the same period last year. Such increase was primarily due to salaries for sales representatives for the newly opened PurCotton self-operated chain stores and operational and administrative staff responsible for PurCotton retail business.

As of March 31, 2011, the Company had two subsidiaries handling sales channels covering northern and central China respectively, Beijing PurCotton Co., Ltd. and Shanghai PurCotton Co., Ltd. which have 88 and 34 sales representatives and administrative staff respectively, compared to zero for the three months ended March 31, 2010 when the above two subsidiaries had not been established. In addition, the total sales representatives and administrative staff in Shenzhen PurCotton Co., Ltd. and Guangzhou PurCotton Co., Ltd. increased to 185 in the reporting period from 71 in the same period last year.

11

(2) Leasing expense for the Company increased by approximately $409,000 during the three months ended March 31, 2011 compared with the same period last year. The increase was mainly attributable to the rent paid for existing and newly-established PurCotton self-operated chain stores.

Interest Expense

Interest expense increased to approximately $48,000, 0.14% of total revenue, for the three months ended March 31, 2011, as compared to approximately $45,000, 0.17% of total revenue, for the same period of 2010, an increase of approximately $3,000. Although the short-term bank loan, as of March 31, 2011, was approximately $5,338,000, indicating an increase of $1,676,000 compared to approximately $3,662,000 as of March 31, 2010, approximately $3,050,000 was a new loan borrowed on March 3, 2011 and the interest expense for this new loan was calculated for less than a month during the reporting period. The Company’s bank loans are primarily used as a supplement to working capital for daily operations.

Income Taxes

The Company’s income tax provision for the three months ended March 31, 2011 was $349,000 as compared to $620,000 for the three months ended March 31, 2010, a decrease of $271,000. Income tax as a percentage of income before income taxes was 13.40% for the three months ended March 31, 2011, compared with 19.08% for the same period last year. Such a decrease in income tax as a percentage of income before income taxes was mainly due to, during the three months ended March 31, 2011, the deferred tax asset recognized by the Company for total losses generated by Shanghai Winner Medical Apparatus Co., Ltd, thereby decreasing the income taxes expense.

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. The EIT Law gives existing foreign investment enterprises a five-year grandfather period, during which they can continue to enjoy their existing preferential tax treatment. For foreign investment enterprises that currently enjoy full exemption from PRC enterprise income tax for two years starting from the first profit-making year, which is followed by a 50% tax exemption for the next three years, the tax holidays are still valid.

The tax rates applicable to the Company’s wholly-owned subsidiaries are as follows:

				Calendar Year Ending December 31
	2011			2012			2013			2014			2015
Winner Medical & Textile Ltd., Jingmen		25	%		25	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Jiayu		25	%		25	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Yichang		25	%		25	%		25	%		25	%		25	%
Winner Medical(Huanggang) Co., Ltd.		12.5	%		12.5	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Chongyang		25	%		25	%		25	%		25	%		25	%
Hubei Winner Textile Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		12.5	%		25	%		25	%		25	%		25	%
Winner Industries (Shenzhen) Co., Ltd.*		15	%		25	%		25	%		25	%		25	%
Shenzhen PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Huanggang Winner Cotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Beijing PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Guangzhou PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Shanghai PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Hong Kong PurCotton Co., Ltd.		16.5	%		16.5	%		16.5	%		16.5	%		16.5	%

*For years 2012, 2013 and 2014, the preferential tax rate of 15% will be subject to whether Winner Shenzhen can successfully renew the High and New Technology Enterprise Certificate which was awarded in 2009.

Winner Medical (Hong Kong) Limited was incorporated in January 2008, and its applicable statutory tax rate for each of the three months ended March 31, 2011 and 2010 was 16.5%.

No provision for US tax was made as the Company had no assessable income in the US for the three months ended March 31, 2011 and 2010. The enterprise income tax rate in the U.S. was 34%.

12

Non-controlling Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income equal to an income attributable to non-controlling interests of $21,000 and a loss attributable to non-controlling interests of $47,000 in the three months ended March 31, 2011 and 2010, respectively. In the three months ended March 31, 2011, third party non-controlling interests only reflected a 40% interest in Winner Medical (Hong Kong) Limited. In the three months ended March 31, 2010, third party non-controlling interests reflected a 40% interest in Winner Medical (Hong Kong) Limited and 40% in Shanghai Winner Medical Apparatus Co., Ltd., which suffered a loss during such period in 2010. The change in third party non-controlling interests was due to the fact that on September 13, 2010, the Company’s wholly-owned subsidiary, Winner Industries (Shenzhen) Co., Ltd. purchased 40% of Shanghai Winner Medical Apparatus Co., Ltd. from a third party, thus acquiring Shanghai Winner Medical Apparatus Co., Ltd. as another wholly-owned subsidiary.

Net Income Attributable to Winner Medical Group Inc.

The net income attributable to Winner Medical Group Inc. was approximately $2,236,000 for the three months ended March 31, 2011, as compared to approximately $2,676,000 for the three months ended March 31, 2010, a decrease of approximately $440,000, or 16.44%. Net income as a percentage of net sales was 6.73% for the three months ended March 31, 2011, compared with 10.26% for the same period last year.

This decrease in net income was primarily attributable to a realized loss of $1,340,000 (after tax) on cotton futures trading, which is discussed in more detail in Recent Development and Realized Loss on Commodity Financial Instruments.

In addition, the Company’s PurCotton business experienced a loss of $303,000, or a negative 7.46%.  The Company attributes this loss to the fact that the PurCotton retail business has been in operation for only 15 months and that retail businesses, including online and offline channels, require capital expenditures and other investments to grow, which may result in little or no contribution to profit during the initial stage. Management expects that the PurCotton retail business will not turn a profit in the short-term.  However, safe, eco-friendly and low carbon PurCotton® products are gradually recognized and accepted by our targeted customers and the sales performance of the PurCotton retail business has been improving. The Company expects that the PurCotton retail business will play an important role in contributing to net income in the mid to long run.

Comparison for the Six Months Ended March 31, 2011 and 2010

The following sets forth certain of the Company’s income statement information for the six months ended March 31, 2011 and 2010.

Comparison of the Six Months Ended March 31, 2011 and 2010

(All amounts, other than percentages, in thousands of U.S. Dollars)

	SIX MONTHS					SIX MONTHS
	ENDED 3/31/11					ENDED 3/31/10
	In		As a			In		As a			Amount
Item	Thousands		Percentage			Thousands		Percentage			Change		% Change
Net Sales	$	66,924		100	%	$	55,862		100	%	$	11,062		19.8	%
Cost of Sales	$	48,091		71.86	%	$	39,074		69.95	%	$	9,017		23.08	%
Gross Profit	$	18,833		28.14	%	$	16,788		30.05	%	$	2,045		12.18	%
Other Operating Income, Net	$	1,112		1.66	%	$	489		0.88	%	$	623		127.4	%
Realized Loss on Commodity Financial Instruments	$	1,760		2.63	%	$	-		-		$	1,760		100	%
Exchange Difference, Net	$	144		0.22	%	$	80		0.14	%	$	64		80	%
Selling, General and Administrative Expenses	$	11,858		17.72	%	$	9,464		16.94	%	$	2,394		25.3	%
Income from Operations	$	6,184		9.24	%	$	7,733		13.84	%	$	-1,549		-20.03	%
Interest Income	$	46		0.07	%	$	28		0.05	%	$	18		64.29	%
Interest Expense	$	93		0.14	%	$	99		0.18	%	$	-6		-6.06	%
Equity in earnings of 50 percent or less owned persons	$	183		0.27	%	$	45		0.08	%	$	138		306.67	%
Income Tax	$	722		1.08	%	$	1,202		2.15	%	$	-480		-39.93	%
Non-controlling Interest	$	-33		-0.05	%	$	92		0.16	%	$	-125		-135.87	%
Net Income Attributable to Winner Medical Group Inc	$	5,564		8.31	%	$	6,597		11.81	%	$	-1,033		-15.66	%

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Product Information

The following table illustrates the operating results for each product type for the six months ended March 31, 2011 and 2010.

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

	Medical Products						PurCotton® Products						Consolidated
Item	Six  Months Ended 3/31/11			Six  Months Ended 3/31/10			Six  Months Ended 3/31/11			Six  Months Ended 3/31/10			Six  Months Ended 3/31/11			Six  Months Ended 3/31/10
Net Sales	$	58,371			51,446		$	8,553			4,416		$	66,924			55.862
Gross Profit	$	15,913			15,217		$	2,920			1,571		$	18,833			16,788
Gross Margin		27.26	%		29.58	%		34.14	%		35.58	%		28.14	%		30.05	%
Income Before Income Taxes	$	7,144			6,991		$	-824			717		$	6,320			7,708
Net Income (Loss) attributable to Winner Medical Group Inc.	$	6,072			5,972		$	*-508			625		$	5,564			6,597
Profit Margin		10.40	%		11.61	%		-5.94	%		14.15	%		8.31	%		11.81	%

* For details regarding the fluctuation of net loss of PurCotton® products, please refer to the discussion relating to Net Income Attributable to Winner Medical Group Inc. below.

Sales by Region

The following table illustrates the sales revenues by regions from major geographic areas for the six months ended March 31, 2011 and 2010. The table also provides the percentage of total revenues represented by each listed region.

Comparison of Sales by Regions for the six months ended March 31, 2011 and 2010

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

	Six  Months Ended 3/31/11 in  Thousands		As a Percentage of Total  Revenues			Six  Months Ended 3/31/10 in  Thousands		As a Percentage of Total  Revenues			Amount Change in  Thousands		As a Percentage Change
Europe		19,613		29.31	%		19,022		34.05	%		591		3.11	%
Britain		5,203		7.77	%		5,414		9.69	%		-211		-3.90	%
Sweden		3,253		4.86	%		2,757		4.94	%		496		17.99	%
Others		11,157		16.67	%		10,851		19.42	%		306		2.82	%
North and South America		16,238		24.26	%		10,908		19.53	%		5,330		48.86	%
U.S.A.		13,527		20.21	%		8,870		15.88	%		4,657		52.50	%
Brazil		1,923		2.87	%		912		1.63	%		1,011		110.86	%
Others		788		1.18	%		1,126		2.02	%		-338		-30.02	%
China*		16,705		24.96	%		13,416		24.02	%		3,289		24.52	%
Japan		10,633		15.89	%		9,428		16.88	%		1,205		12.78	%
Others		3,735		5.58	%		3,088		5.53	%		647		20.95	%
Total		66,924		100.00	%		55,862		100.00	%		11,062		19.80	%

*Note: Sales to the Chinese market include medical sales to hospitals, chain drug stores and local distributors, as well as PurCotton® jumbo roll supplies and retail businesses.

Net Sales

Net sales increased by approximately $11,062,000, or 19.80%, to approximately $66,924,000 for the six months ended March 31, 2011 from approximately $55,862,000 for the six months ended March 31, 2010. This increase was driven by stronger sales from North and South America, particularly the U.S. and Brazil, and from the Chinese market for medical products and PurCotton® products. Meanwhile, the Company managed to achieve a steady double-digit sales increase in the Japanese market, one of the most stringent markets for medical products in the world.

Net sales to customers in North and South America were approximately $16,238,000 for the six months ended March 31, 2011, an increase of 48.86% compared to approximately $10,908,000 during the same period of 2010. The need to seek lower production costs along with aging demographics in these areas and healthcare reform in the U.S. are driving large-scale healthcare and medical institutions to outsource production. The Company has been widely recognized by its customers in North and South America as having quality and safe products and timely delivery and the Company expects to maintain its business cooperation with these clients while seeking new sales opportunities in America.

14

Revenue from PurCotton® products increased by approximately $4,137,000, or 93.68%, to approximately $8,553,000 for the six months ended March 31, 2011 from approximately $4,416,000 for the six months ended March 31, 2010. PurCotton ® sales include PurCotton® jumbo rolls to customers in China and Japan, PurCotton® medical products to hospitals and PurCotton® retail business which offers personal care products and healthcare supplies through distribution channels including retail chain stores, online sales and bulk sales to large-scale customers in China.

Cost of Sales

The Company’s cost of sales increased by $9,017,000, to $48,091,000, for the six months ended March 31, 2011, from $39,074,000 for the six months ended March 31, 2010. The costs of sales as a percentage of revenues were 71.86% and 69.95% for the six months ended March 31, 2011 and 2010, respectively. The increase in net income as percentage of revenue was mainly attributable to the increase in the price of cotton, the Company’s core raw material.

Gross Profit

The Company’s gross profit increased by $2,045,000 to $18,833,000 for the six months ended March 31, 2011, from $16,788,000 for the six months ended March 31, 2010. Gross profit as a percentage of revenues was 28.14% for the six months ended March 31, 2011, compared with 30.05% for the six months ended March 31, 2010. The increased gross profit with a slightly decreased gross margin was mainly attributable to the following factors:

(1) Due to the cost pressures from rising cotton prices, the Company raised the selling price of its products in October 2010 and the majority of its customers have been accepting the adjusted price since December 2010. In addition, the Company has implemented lean production management and upgraded its automatic production equipment in order to decrease labor demand and waste of materials, increasing the overall production efficiency. Furthermore, the Company has been adjusting its business portfolio by developing and marketing advanced medical products and PurCotton® jumbo rolls and retail products, which are higher gross margin products than traditional medical products. By doing so, the Company managed to minimize the impact of the rising cotton price, resulting in a steadily increased gross profit during the six months ended March 31, 2011, compared to the same period last year.

(2) During the six months ended March 31, 2010, the sales of high margin protective products such as PurCotton® masks and isolation gowns increased as a result of an outbreak of the H1N1 virus. The Company did not enjoy such contribution from these high-margin products during the six months ended March 31, 2011, which resulted in a decrease in gross margin, when compared with the six months ended March 31, 2010.

Other Operating Income, Net

The Company’s other operating income, net, for the six months ended March 31, 2011, increased $623,000 to $1,112,000, from $489,000 for the six months ended March 31, 2010. Other operating income, net, mainly consists of sales of leftover materials, change in fair market value on cotton futures contracts, government subsidies, which are financial incentives awarded by the PRC local government to the Company, and change in fair value of foreign currency forward contracts. Further, the increase in other operating income, net, was primarily due to the fact that, during the six months ended March 31, 2011, the Company was awarded $1,214,000 by government authorities in recognition of the Company’s contribution to research and development and brand building activities.

Realized Loss on Commodity Financial Instruments

Realized loss on commodity financial instruments for the six months ended March 31, 2011 was primarily composed of a loss of approximately $1,760,000, on trading cotton futures, compared to $Nil in the same period last year. Cotton is the Company’s primary raw material used in its manufacturing process.  As a result of rising demand caused by global economic recovery and supply shortages due to bad weather, cotton prices have been rapidly increasing and fluctuating in the last half year.  Under this rising cost environment, the Company cannot secure stable price quotes from cotton suppliers, resulting in inconsistency in the prices quoted to the Company’s customers.  Therefore, the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd., “Winner Shenzhen,” has decided to enter into cotton future transactions in order to manage the impact of volatility in cotton prices on production.

For the six months ended March 31, 2011, Winner Shenzhen’s transactions in cotton futures resulted in a net loss of approximately $1,760,000, which was charged to Realized Loss on Commodity Financial Instruments in the condensed consolidated statements of income for the period. The loss was a result of significant increases and fluctuation in cotton prices since January, 2011.  During this period, based on management’s expectation that cotton prices would experience a downward correction, Winner Shenzhen acquired a short position to hedge against price corrections.  However, contrary to management’s expectation, the price increase continued.  In order to minimize further losses, management closed its short position, generating a loss for the period.

15

In order to shift risk away from the Company during the initial period of cotton futures trading and better protect the interests of the Company’s shareholders, the chief executive officer of the Company, Mr. Jianquan Li, signed agreements with Winner Shenzhen effective January 1, 2011 that are scheduled to expire on September 30, 2011. Under these agreements, Mr. Jianquan Li agrees that, on September 30, 2011, he will assume all net losses, if any, incurred by Winner Shenzhen from cotton futures trading from January 1, 2011 to September 30, 2011.  If, however, there is a net gain from trading activities, it will be retained by Winner Shenzhen.  Details regarding the loss from trading in cotton futures and the agreements signed by Mr. Jianquan Li are discussed in the Recent Development section of this Report.

Exchange Difference, Net

The Company’s exchange difference, net, for the six months ended March 31, 2011, increased to a loss of $144,000, from a loss of $80,000 for the six months ended March 31, 2010. Such an increase in loss was mainly due to the fact that the Company has been using the US Dollar, which depreciated against the RMB during the six months ended 2011, as the main currency to settle the majority of its trades with customers. During the six months ended March 31, 2011 and 2010, the average exchange rates of the RMB against the US Dollar were 6.6197 and 6.8276 respectively; the appreciation of the RMB against the US Dollar was 3.04%.

The Company expects that the exchange rate of the RMB against the US Dollar will continue to appreciate in the future. In order to minimize the currency exchange rate risk, the Company is (1) reinforcing and expanding its businesses in the China market, (2) inserting clauses into contracts that the selling price is subject to the fluctuation of currency and the price of raw materials, and (3) entering into several foreign currency forward contracts with a commercial bank to hedge future trade receipts in US Dollars against RMB. As of March 31, 2011, the total outstanding foreign currency forward contracts amounted to $12,600,000, of which $6,300,000 was for purchasing US dollars and $6,300,000 was for selling US dollars, to hedge against currency fluctuations.

Selling, General and Administrative Expenses

The Company’s selling, general and administrative expenses increased $2,394,000, or a 25.30% increase, to $11,858,000 for the six months ended March 31, 2011 from $9,464,000 for the six months ended March 31, 2010. As a percentage of revenues, the Company’s selling, general and administrative expenses increased to 17.72% for the six months ended March 31, 2011 from 16.94% for the six months ended March 31, 2010. The increase of selling, general and administrative expenses was primarily due to the increase of salary and leasing expenses compared to the same period of last year.

Sales and administrative staff costs increased by $1,474,000, or 65.34%, during the six months ended March 31, 2011, compared to the same period last year. This increase was primarily due to salaries of sales representatives for the newly opened PurCotton chain stores and to other operational and administrative staff responsible for the PurCotton retail business.

As of March 31, 2011, the Company had two subsidiaries handling sales channels covering northern and middle China respectively, Beijing PurCotton Co., Ltd. and Shanghai PurCotton Co., Ltd. which have 88 and 34 staff respectively, compared to zero for the six months ended March 31, 2010 when the above two subsidiaries had not been established. In addition, the total sales representatives and administrative staff in Shenzhen PurCotton Co., Ltd. and Guangzhou PurCotton Co., Ltd. increased to 185 in the reporting period from 71 in the same period last year.

Leasing expense for the Company increased by $733,000 during the six months ended March 31, 2011 compared with the same period last year. The increase was mainly attributable to the rent expense for newly established PurCotton self-operated chain stores. As of March 31, 2011, the Company operates 33 retail chain stores in first-tier cities throughout China: 22 in Guangdong province, where the Company’s headquarters are located, 7 in Beijing, the capital of China, and 4 in Shanghai, as compared with 7 as of March 31, 2010.

Interest Expense

Interest expense decreased to approximately $93,000, 0.14% of total revenue, for the six months ended March 31, 2011, as compared to approximately $99,000, 0.18% of total revenue, for the same period of 2010, a decrease of approximately $6,000, or 6.06%. Short-term bank loans, as of March 31, 2011, were approximately $5,338,000, indicating an increase of $1,676,000 compared to approximately $3,662,000 as of March 31, 2010. Approximately $3,050,000 was a new loan borrowed on March 03, 2011 and the interest expense for this new loan was calculated for less than a month during the reporting period. The Company’s bank loans are primarily used as a supplement to working capital for daily operations.

16

Income Taxes

The Company’s income tax provision for the six months ended March 31, 2011 was $722,000 as compared to $1,202,000 for the six months ended March 31, 2010, a decrease of $480,000. Income tax as a percentage of income before income taxes was 11.42% for the six months ended March 31, 2011, compared with 15.60% for the same period last year. This decrease was primarily due to (1) a tax deduction accrued in the reporting quarter for a 150% tax deductible preferential policy applicable to Winner Medical’s research and development expense, (2) a deferred tax asset generated by the loss on PurCotton retail business; and (3) during the six months ended March 31, 2011, a deferred tax asset recognized by the Company for losses generated by Shanghai Winner Medical Apparatus Co., Ltd, thereby decreasing the income taxes expense.

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. The EIT Law gives existing foreign investment enterprises a five-year grandfather period, during which they can continue to enjoy their existing preferential tax treatment. For foreign investment enterprises that currently enjoy full exemption from PRC enterprise income tax for two years starting from the first profit-making year, which is followed by a 50% tax exemption for the next three years, the tax holidays are still valid.

The tax rates applicable to the Company’s wholly-owned subsidiaries are as follows:

				Calendar Year Ending December 31
	2011			2012			2013			2014			2015
Winner Medical & Textile Ltd., Jingmen		25	%		25	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Jiayu		25	%		25	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Yichang		25	%		25	%		25	%		25	%		25	%
Winner Medical(Huanggang) Co., Ltd.		12.5	%		12.5	%		25	%		25	%		25	%
Winner Medical & Textile Ltd. Chongyang		25	%		25	%		25	%		25	%		25	%
Hubei Winner Textile Co., Ltd		25	%		25	%		25	%		25	%		25	%
Shanghai Winner Medical Apparatus Co., Ltd.		12.5	%		25	%		25	%		25	%		25	%
Winner Industries (Shenzhen) Co., Ltd.*		15	%		25	%		25	%		25	%		25	%
Shenzhen PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Huanggang Winner Cotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Beijing PurCotton Co., Ltd		25	%		25	%		25	%		25	%		25	%
Guangzhou PurCotton Co., Ltd.		25	%		25	%		25	%		25	%		25	%
Shanghai PurCotton Co., Ltd		25	%		25	%		25	%		25	%		25	%
Hong Kong PurCotton Co., Ltd		16.5	%		16.5	%		16.5	%		16.5	%		16.5	%

*For years 2012, 2013 and 2014, the preferential tax rate of 15% will be subject to whether Winner Shenzhen can successfully renew the High and New Technology Enterprise Certificate which was awarded in 2009.

Winner Medical (Hong Kong) Limited was incorporated in January 2008, and its applicable statutory tax rate for each of the six months ended March 31, 2011 and 2010 was 16.5%.

No provision for US tax was made as the Company had no assessable income in the US for the six months ended March 31, 2011 and 2010. The enterprise income tax rate in the U.S. was 34%.

Non-controlling Interest

The Company’s financial statements reflect an adjustment to its consolidated group net income equal to an income attributable to non-controlling interests of $33,000 and a loss attributable to non-controlling interests of $92,000 in the six months ended March 31, 2011 and 2010, respectively. In the six months ended March 31, 2011, third party non-controlling interests reflected a 40% interest in Winner Medical (Hong Kong) Limited. In the six months ended March 31, 2010, third party non-controlling interests reflected a 40% interest in Winner Medical (Hong Kong) Limited and 40% in Shanghai Winner Medical Apparatus Co., Ltd., which suffered a loss during the same period of 2010. The change in third party non-controlling interests was due to the fact that on September 13, 2010, the Company’s wholly-owned subsidiary, Winner Industries (Shenzhen) Co., Ltd. purchased 40% of Shanghai Winner Medical Apparatus Co., Ltd. from the third party, thus acquiring Shanghai Winner Medical Apparatus Co., Ltd. as another  wholly-owned subsidiary.

Net Income Attributable to Winner Medical Group Inc.

The net income attributable to Winner Medical Group Inc. was approximately $5,564,000 for the six months ended March 31, 2011, as compared to approximately $6,597,000 for the same period of 2010, a decrease of approximately $1,033,000, or approximately 15.66%. Net income as a percentage of net sales was 8.31% for the six months ended March 31, 2011, compared with 11.81% for the same period last year.

This decrease in net income was primarily attributable to a realized loss of $1,496,000 (after tax) on cotton futures trading, which is discussed in more detail in Recent Development and Realized Loss on Commodity Financial Instruments.

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In addition, during the six months ended March 31, 2010, sales of high margin protective products such as PurCotton® masks and isolation gowns increased as a result of an H1N1 virus outbreak. The Company did not enjoy the same level of contribution from these high-margin products in the six months ended March 31, 2011, contributing to the decrease in net margin.

Non-GAAP Financial Measures

Non-GAAP net income and non-GAAP net income per basic and diluted share represent net income and net income per basic and diluted share before Realized Loss on Commodity Financial Instruments. The Company believes its presentation of these non-GAAP measures provides meaningful insight into its operating performance and an alternative perspective on the results of operations. The Company believes that non-GAAP net income and net income per basic and diluted share are useful to both management and investors in evaluating the Company’s operating performance compared with that of other companies in its industry. The calculation of non-GAAP net income and net income per basic and diluted share allows the Company to compare its operating results with those of other companies without giving effect to Realized Loss on Commodity Financial Instruments, which may vary from different companies for reasons unrelated to the overall operating performance of a company’s business.

Non-GAAP net income are not measures of performance under accounting principles generally accepted in the United States (U.S. GAAP).  The Company includes them in this Form 10-Q in order to:

· improve transparency for investors;

· assist investors in their assessment of the Company’s performance;

· facilitate comparisons to historical performance;

· ensure that these measures are fully understood in light of how the Company evaluates its operating results; and

· properly define the metrics used and confirm their calculation.

The non-GAAP measures provided herein may not be comparable to similar measures presented by other companies. The Company recognizes that the usefulness of non-GAAP net income and net income per basic and diluted share has certain limitations, including:

· non-GAAP net income and net income per basic and diluted share do not include Realized Loss on Commodity Financial Instruments. Because the Company periodically has engaged in futures trading to manage the impact of volatility in cotton prices on production, gains and losses on commodity financial instruments affect the Company’s ability to generate net income. Therefore, any measure that excludes Realized Loss on Commodity Financial Instruments may have material limitations; and

· the manner in which the Company calculates non-GAAP net income and net income per basic and diluted share may differ from that of other companies, which limits their usefulness as a comparative measure.

The Company compensates for the foregoing limitations by using non-GAAP net income and net income per basic and diluted share as comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of its operating performance.

These non-GAAP results should not be regarded as a substitute for corresponding U.S. GAAP measures, but instead utilized as a supplemental measure of operating performance in evaluating the Company’s business. As such, these non-GAAP measures should be viewed in conjunction with both the Company’s financial statements prepared in accordance with U.S.GAAP. Please refer to the reconciliation of these supplemental non-GAAP financial measures to the most closely related U.S. GAAP measures provided for each period presented below.

Comparison of the Three and Six Months Ended March 31, 2011 and 2010

(All amounts, other than percentages, in thousands of U.S. Dollars)

	THREE MONTHS ENDED						SIX MONTHS ENDED
Item	MARCH 31						MARCH 31
	2011			2010			2011			2010
GAAP net Income attributable to Winner Medical Group Inc.	$	2,236			2,676		$	5,564			6,597
GAAP profit margin		6.73	%		10.26	%		8.31	%		11.81	%
Realized loss from commodity derivatives net of Winner Shenzhen applicable tax rate of 15%	$	1,340			-		$	1,496			-
NON-GAAP net Income attributable to Winner Medical Group Inc.	$	3,576			2,676		$	7,060			6,597
NON-GAAP profit margin		10.76	%		10.26	%	$	10.55	%		11.81	%

The following table illustrates the reconciliation of GAAP to Non-GAAP Net Income Per Basic and Diluted Share.

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	THREE MONTHS ENDED				SIX MONTHS ENDED
Item	MARCH 31				MARCH 31
	2011		2010		2011		2010
GAAP net Income attributable to Winner Medical Group Inc. per basic and diluted share	$	0.09		0.12	$	0.23		0.29
Realized loss from commodity financial instruments net of Winner Shenzhen applicable tax rate of 15%	$	0.06		-	$	0.06		-
NON-GAAP net Income attributable to Winner Medical Group Inc. per basic and diluted share	$	0.15		0.12	$	0.29		0.29
Weighted average ordinary shares outstanding-basic (shares in thousands)		24,130		22,364		24,123		22,364
Weighted average ordinary shares outstanding-diluted (shares in thousands)		24,533		22,805		24,534		22,639

Inventory turnover

The Company’s inventory increased to approximately $26,491,000 as of March 31, 2011, as compared with approximately $15,945,000 as of September 30, 2010, an increase of $10,546,000, or 66.14%. Raw material, work-in-process and finished products accounted for approximately 48.49%, 21.45% and 30.06% of inventory on March 31, 2011, respectively, and 31.40 %, 31.13 % and 37.47% of inventory on September 30, 2010. The Company’s inventory turnover was 4.48 and 5.06 times for the six months ended March 31, 2011 and the year ended September 30, 2010, respectively. The decreased inventory turnover was primarily due to the increase in inventory during the six months ended March 31, 2011, which was driven by the following factors:

First, the Company has been dedicated to using high-quality cotton to ensure the stability of product quality and the cost of this cotton is higher than normal cotton because of quality and shortage in supply. Therefore, the Company purchased more high-quality cotton for continuous production and built up stock for future use, resulting in an increase in the value of raw material, with $7,839,000 from $5,007,000 on September 30, 2010 to $12,846,000 on March 31, 2011, or 156.57%, during the six month period when compared to the balance on September 30, 2010.

Second, with an integrated supply chain from cotton-processing to finished products and with expanded distribution channels from material-supply to retail, the Company expected increased demands for raw materials and finished medical and PurCotton® products for the six months ended March 31, 2010.

Third, for the six months ended March 31, 2011, cotton prices experienced an upward fluctuation. Such a sharp increase in cotton prices increased the raw material costs, since cotton is the core raw material for the Company.

Accounts receivable collection period

Accounts receivable decreased to approximately $15,668,000 as of March 31, 2011, compared to approximately $15,672,000 as of September 30, 2010, a decrease of approximately $4,000, or 0.03%. The Company’s average accounts receivable collection period was 45.29 days and 44.23 days for the six months ended March 31, 2011 and the year ended September 30, 2010, respectively. When compared with 46.52 days for the three months ended December 31, 2010, the Company experienced a shorter collection period for the three months ended March 31, 2011, indicating a smaller balance of account receivables and more cash provided by accounts receivables collection. Such an improvement of accounts receivable during the three months ended March 31, 2011, was mainly due to effective internal accounts receivable management and active monitoring by the Company.

The Company has implemented SAP system for improving business efficiency, with which the Company can have in-depth evaluation and assessment of accounts receivable. Based on such evaluation and assessment, the Company can determine an effective and efficient way to collect its balance of accounts receivable. Furthermore, international sales have long been a major portion of the Company’s net sales and most of such international sales were settled with Letters of Credit (L/C) secured by intermediary banks. Over 99% of accounts receivable as of March 31, 2011 were less than three months.

In addition, in order to reduce losses on bad debts, the Company entered into a one-year insurance policy with China Export & Credit Insurance Corporation effective April 15, 2010, will expire on December 31, 2011, which will be automatically renewed subject to a one month written notice given by either party. The maximum insurance coverage from China Export & Credit Insurance Corporation is $2 million.

The account receivable collection age as of March 31, 2011 is illustrated as follows:

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(All amounts, other than percentages, in thousands of U.S. Dollars)

Periods	Amount in Thousands		As a Percentage
Less than or equal to 3 months	$	15,545		99.22	%
3 to 6 months	$	90		0.58	%
6 to 12 months	$	14		0.09	%
More than 12 months	$	18		0.11	%
Total	$	15,667		100.00	%

Liquidity and Capital Resources

As of March 31, 2011, the Company had cash and cash equivalents of approximately $11,994,000.

Cash Flow

(in Thousands of US$)

	Six Months Ended March 31,
	2011			2010
Net cash (used in) provided by operating activities		(5,762	)		7,610
Net cash used in investing activities		(2,556	)		(3,182	)
Net cash provided by (used in) financing activities		5,076			(2,929	)
Effect of exchange rate changes on cash balance		418			(179	)
Net increase (decrease) in cash and cash equivalents		(2,824	)		1,319
Cash and cash equivalents at the beginning of period		14,818			9,493
Cash and cash equivalents at the end of period		11,994			10,812

Operating Activities:

Net cash used in operating activities was $5,762,000 for the six months ended March 31, 2011,  a decrease of $13,372,000 from the $7,610,000 net cash provided by operating activities for the same period in 2010. This decrease was mainly attributable to the increase in restricted broker margin account, inventories and prepaid expenses and other receivables as illustrated below:

(1) In order to hedge against cotton price volatility, the Company entered into several cotton futures transactions; such trading requires the Company to make certain margin deposits as a guarantee to execute contracts. During the six months ended March 31, 2011, the margin deposit placed for buying cotton future contracts was approximately $1,279,000, compared to $0 in the same period of 2010, as the Company did not trade any commodity derivatives;

(2) With an integrated supply chain from cotton-processing to finished products and an expansion of distribution channels from material-supply to retail, the Company experienced increased demands for raw materials and finished medical and PurCotton® products for the six months ended March 31, 2011. In addition, due to the sharp increase of cotton prices during the six months ended March 31, 2011 and the greater demand of quality cotton as a result of increasing sales, the Company decided to purchase more cotton to maintain continuous production and adequate reserves. As a result, cash used in purchasing inventory increased to approximately $10,194,000 for the six months ended March 31, 2011, compared to approximately $1,608,000 for the six months ended March 31, 2010, an increase of approximately $8,586,000;

(3) Cash flows used in prepaid expenses and other receivables were approximately $4,987,000 during the six months ended March 31, 2011, compared with approximately $1,111,000 for the six months ended March 31, 2010, an increase of approximately $3,876,000. This increase was mainly due to (1) cotton shortages in the six months ended March 31, 2011, the mechanism of purchasing cotton from cotton trading companies required deposits, compared with deposit-free for the same period last year, (2) prepaid deposits for renting PurCotton chain stores, and (3) receivables of export tax rebates.

Overall, compared to the three months ended December 31, 2010, cash flow used in operation activities improved from negative 7,758,000 to negative $5,762,000 during the three months ended March 31, 2011, primarily attributable to the Company’s ability to control costs and expenses while maintaining stronger sales and consistent production performance.

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Investing Activities:

Net cash used in investing activities for the six months ended March 31, 2011 was $2,556,000, a decrease of $626,000 from $3,182,000 for the six months ended March 31, 2010. During the six months ended March 31, 2011, the cash used in investing activities was primarily for the Company’s payments and installments on property, plant and equipment placed in integrated PurCotton product manufacturing lines as well as construction of a warehouse and decoration of PurCotton stores.

Financing Activities:

The Company’s primary net cash provided by financing activities was bank loans.

Net cash provided by financing activities for the six months ended March 31, 2011 totaled $5,076,000, an increase of $8,005,000 from net cash used in financing activities of $2,929,000 in the same period of 2010. This increase was mainly attributable to a net increase of $5,287,000 in borrowing on bank loans in the six months ended March 31, 2011.

The Company’s debt to asset ratio was approximately 15.11% as of March 31, 2011. The Company plans to maintain its debt to asset ratio below 40% in order to provide adequate space for new bank loans if needed. The Company believes that it currently maintains a good business relationship with each of the banks with whom it has loans. As of March 31, 2011, the Company had approximately $5,338,000 of outstanding bank loans with China Merchants Bank. The monthly average amount of bank borrowings was $4.25 million, while the maximum amount was $6.01 million during the first six months. The weighted average interest rate on short-term borrowings for the six months ended March 31, 2011 and 2010 were 4.41% and 5.80% per annum, respectively.

The Company’s subsidiaries in Shenzhen and Huanggang have credit lines with Shenzhen Commercial Bank, the Shenzhen Branch of the Industrial and Commercial Bank of China, and Huanggang Branch of the Industrial and Commercial Bank of China, representing trade acceptances, loans and overdrafts.

Bank loans as of March 31, 2011

					Balance as of March 31, 2011
Item	Bank	Loan period	Interest rate		US$
A	Shenzhen Branch of China Merchants Bank	10-08-2010 to 09-18-2011	5.5755	%		2,287,841
B	Shenzhen Branch of China Merchants Bank	03-03-2011 to 09-03-2011	6.7200	%		3,050,454
		Total				5,338,295

As of March 31, 2011, the Company had approximately $28 million worth of bank credit facilities available from three commercial banks, of which there are $23 million unused bank credit facilities, consisting of approximately $7 million from Shenzhen Branch of China Merchants Bank, approximately $12 million from Shenzhen Branch of the Industrial and Commercial Bank of China, and approximately $4 million from Huanggang Branch of the Industrial and Commercial Bank of China. These loan facilities are all secured by the Company’s real estate. These revolving lines of credit allow the Company to renew short-term loans when due, and the banks reevaluate the Company’s credit line annually. These bank facilities enable the Company to utilize the short-term loans and enjoy a lower interest expense compared with long-term loans.

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:

· Revenue Recognition –The Company derives its revenue primarily from the sales of medical dressings and disposables and PurCotton® products. 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 collectability is reasonably assured. Customers do not have a general right of return on products shipped. Product returns to the Company were insignificant.

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· 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 materials, 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 expenses 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 ASC 360, “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.

· Financial Instruments and Derivatives – The Company does not use derivative financial instruments for speculative trading purpose, nor does it hold or issue leveraged derivative financial instruments. However, the Company’s operations are exposed to market risk primarily due to changes in currency exchange rates. In order to manage such risks so as to reduce volatility on earnings and cash flows, the Company enters into several foreign-currency forward contracts with a commercial bank to hedge for future trade receipts in U.S. dollars against RMB. The Company’s foreign currency forward contracts are classified as Level 2 in the fair value hierarchy under ASC topic 820 since the quote prices of these foreign currency forward contracts can be obtained directly from commercial bank. In order to manage the risk of cotton purchase cost, the Company uses commodity financial instruments to manage the risk of cotton purchase cost. Although the commodity financial instruments are economic hedges of specified risks, the Company has not designated or accounted for as hedging instruments. The Company’s commodity financial instruments are classified as Level 1 in the fair value hierarchy under ASC topic 820 since the quoted unadjusted prices of these commodity financial instruments are available in active markets.

· 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.

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New Accounting Policies

In January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). This pronouncement is an authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the effect of ASU 2010-06 on its financial statements and results of operation and is currently not yet in a position to determine such effects.

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

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, the Company’s management has carried out an evaluation, with the participation and under the supervision of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2011. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of its Chief Executive Officer and the Company’s Chief Financial Officer. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011.

(b) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2011 that materially affected or were reasonably likely to materially affect the Company’s internal control over financial reporting.

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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 it believes it 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 the Company, and no owner of record or beneficial owner of more than 5%, of the Company’s 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

Not applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. RESERVED

ITEM 5. OTHER INFORMATION

None .

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: May 11, 2011

WINNER MEDICAL GROUP INC.
By:	/s/ Jianquan Li
Jianquan Li Chief Executive Officer and Chairman (Principal Executive Officer)
By:	/s/ Xiuyuan Fang
Xiuyuan Fang Chief Financial Officer and Treasurer (Principal Financial Officer)

25

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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