Winner Medical 10-Q/A 2012 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q/A

(Mark One)

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

For the quarterly period ended: June 30, 2012

¨ 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

The People’s Republic of China

(Address of principal executive offices) (Zip Code)

86-(755) 28138888

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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  x     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 the issuer’s class of common equity as of August 14, 2012 was 24,371,872.

TABLE OF CONTENTS

		Page
Explanatory Note		3
	PART I	5
Item 1.	Financial Statements.	5
	PART II	6
Item 1.	Legal Proceedings.	6
Item 6.	Exhibits.	6

2

Explanatory Note

On August 9, 2012 (the “Original Filing Date”), Winner Medical Group Inc. (the “Company”) filedwith the Securities and Exchange Commission (the “SEC”)its Quarterly Report on Form 10-Q for the three months ended June 30, 2012 (the “Initial Form 10-Q”). This Quarterly Report on Form 10-Q/A (the “Form 10-Q/A”) amends Part I – Item 1, “Financial Statements,” Part II – Item 1, “Legal Proceedings,” and Part II – Item 6, “Exhibits,” specifically to include an update on the Company’s class action litigation in Nevada (the “Nevada Litigation Update”) to reflect developments that occurred on the Original Filing Date prior to the Company’s filing of the Initial Form 10-Q. As such, no other changes have been made herein to the Initial Form 10-Q.

The filing of this Form 10-Q/A shall not be deemed as an admission that the original filing, when made, included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading.Except as discussed above, the Company has not modified or updated disclosures presented in the Initial Form 10-Q. Accordingly, this amended quarterly report does not reflect events occurring after the Initial Form 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein, andshould be read in conjunction with the Company’s filings with the SEC subsequent to the filing of the Initial Form 10-Q. Information not affected by the Nevada Litigation Update is unchanged and reflects the disclosures made at the time of the Initial Form 10-Q. References to this “quarterly report on Form 10-Q,” this “quarterly report on Form 10-Q/A” and this “amended quarterly report on Form 10-Q/A” herein shall refer to the Initial Form 10-Q as amended by this amended quarterly report on Form 10-Q/A. The following items have been amended as a result of the Nevada Litigation Update:

· Part I – Item 1. Financial Statements;

· Part II – Item 1. Legal Proceedings; and

· Part II – Item 6. Exhibits.

3

Cautionary Statement

This Quarterly Report on Form 10-Q/A 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 “believes,” “expects,” “anticipates,” “projects,” “targets,” “optimistic,” “intends,” “aims,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk Factors” section of the Company’s Annual Report on Form 10-K; and any statements of assumptions underlying any of the foregoing.

Except as otherwise indicated by the context, references in this report to “the Company,” “Winner,” “Winner Medical,” “we,” “us” or “our” are references to the combined business of Winner Medical Group Inc. and its subsidiaries. The English translation of the names of the Company’s subsidiaries which were incorporated in the People’s Republic of China (the “PRC”) is for reference only. The official names of the PRC subsidiaries are in Chinese.

4

PART I

FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS.

WINNER MEDICAL GROUP INC.

  Condensed Consolidated Financial Statements (Unaudited)

  For the three and nine months ended June 30, 2012 and 2011

5

WINNER MEDICAL GROUP INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	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-20

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,		September 30,
	2012		2011
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents		25,225,650		21,945,105
Restricted bank deposits		107,679		1,836,491
Restricted broker margin account		475,106		0
Accounts and notes receivable, less allowances for doubtful accounts of US$92,213 and US$159,485 at June 30, 2012 and September 30, 2011, respectively		23,789,096		20,982,263
Amounts due from affiliated companies		84,550		157,779
Inventories		25,500,169		25,408,700
Prepaid expenses and other current assets		11,805,719		8,334,504
Income taxes recoverable		234,400		146,408
Deferred tax assets		345,293		376,411
Total current assets		87,567,662		79,187,661
Property, plant and equipment, net		69,678,053		65,461,750
Investment in equity investees		2,573,325		2,421,915
Intangible assets, net		148,340		126,918
Prepaid expenses and other receivables		2,463,983		1,596,354
Deferred tax assets		1,190,522		1,124,089
Total assets		163,621,885		149,918,687
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank loans		6,324,211		6,294,356
Accounts payable		10,137,984		7,420,580
Accrued payroll and employee benefits		3,508,256		3,141,756
Customer deposits		1,099,714		1,115,887
Accrued and other liabilities		6,822,643		4,253,889
Amounts due to affiliated companies		85,402		0
Income taxes payable		1,437,598		1,970,710
Total current liabilities		29,415,808		24,197,178
Deferred tax liabilities		0		45,025
Total liabilities		29,415,808		24,242,203
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.001 per share; authorized 247,500,000, issued and outstanding June 30, 2012 -24,371,872 shares; September 30, 2011 -24,140,247 shares		24,373		24,141
Additional paid-in capital		43,559,598		42,490,464
Retained earnings		65,635,028		58,984,686
Statutory reserves		5,932,049		5,866,970
Accumulated other comprehensive income		18,790,415		18,169,505
Total Winner Medical Group Inc. stockholders’ equity		133,941,463		125,535,766
Noncontrolling interests		264,614		140,718
Total stockholder’s equity		134,206,077		125,676,484
Total liabilities and stockholder’s equity		163,621,885		149,918,687

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  June 30,						Nine months ended  June 30,
	2012			2011			2012			2011
	US$			US$			US$			US$
Net sales		48,191,971			41,536,465			130,827,383			108,460,785
Cost of sales		(35,960,360	)		(30,227,856	)		(97,591,364	)		(78,318,957	)
Gross profit		12,231,611			11,308,609			33,236,019			30,141,828
Other operating income/(loss), net		144,329			(2,831	)		218,960			(104,786	)
Government subsidies		169,784			90,407			416,274			1,304,622
Realized gain/(loss) on commodity financial instruments		92,791			65,037			167,467			(1,694,632	)
Foreign currency exchange gain/(loss)		199,642			(270,910	)		(83,240	)		(415,041	)
Selling, general and administrative expenses		(10,576,805	)		(7,293,780	)		(25,538,616	)		(19,151,578	)
Income from operations		2,261,352			3,896,532			8,416,864			10,080,413
Interest income		109,120			59,088			279,760			105,256
Interest expense		(125,150	)		(134,793	)		(228,701	)		(227,978	)
Equity in earnings of 50 percent or less owned persons		69,945			179,745			151,410			362,860
Income before income taxes		2,315,267			4,000,572			8,619,333			10,320,551
Income taxes		55,227			(565,349	)		(1,840,529	)		(1,287,744	)
Net income		2,370,494			3,435,223			6,778,804			9,032,807
Net income attributable to noncontrolling interests		(43,210	)		(10,698	)		(63,383	)		(44,102	)
Net income attributable to Winner Medical Group Inc.		2,327,284			3,424,525			6,715,421			8,988,705
Comprehensive income:
Net income		2,370,494			3,435,223			6,778,804			9,032,807
Foreign currency translation difference		(600,851	)		1,385,899			621,397			3,757,299
Comprehensive income attributable to noncontrolling interests		(41,732	)		(10,672	)		(63,870	)		(44,452	)
Comprehensive income attributable to Winner Medical Group Inc.		1,727,911			4,810,450			7,336,331			12,745,654
Net income attributable to Winner Medical Group Inc.  per share
- basic		0.10			0.14			0.28			0.37
- diluted		0.09			0.14			0.27			0.37
Weighted average common stock outstanding
- basic		24,371,872			24,130,247			24,365,867			24,125,593
- diluted		25,013,418			24,601,088			24,770,079			24,621,897

See accompanying notes to condensed consolidated financial statements.

F-2

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

													Accumulated
	Common stock				Additional								other		Non-			Total
	Stock				paid-in			Retained			Statutory		comprehensive		controlling			Stockholders’
	outstanding		Amount		capital			earnings			reserves		Income		interests			equity
			US$		US$			US$			US$		US$		US$			US$
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		0		0		618,129			0			0		0		0			618,129
Stockholder’s contribution		0		0		1,718,031			0			0		0		0			1,718,031
Issuance of restricted stock units		189,507		190		(190	)		0			0		0		0			0
Net income		0		0		0			11,535,891			0		0		39,772			11,575,663
Foreign currency translation adjustments		0		0		0			0			0		5,866,743		747			5,867,490
Transfer to statutory reserves		0		0		0			(1,281,239	)		1,281,239		0		0			0
Balance at September 30, 2011		24,140,247		24,141		42,490,464			58,984,686			5,866,970		18,169,505		140,718			125,676,484
Restricted stock units and stock options granted		0		0		1,129,392			0			0		0		0			1,129,392
Issuance of restricted stock units		231,625		232		(232	)		0			0		0		0			0
Net income		0		0		0			6,715,421			0		0		63,383			6,778,804
Transfer from Statutory reserves		0		0		0			(65,079	)		65,079		0		0			0
Foreign currency translation adjustments		0		0		0			0			0		620,910		487			621,397
Contribution from noncontrolling interests		0		0		0			0			0		0		474,593			474,593
Purchase of noncontrolling interests		0		0		(60,026	)		0			0		0		(414,567	)		(474,593	)
Balance at June 30, 2012		24,371,872		24,373		43,559,598			65,635,028			5,932,049		18,790,415		264,614			134,206,077

See accompanying notes to condensed consolidated financial statements.

F-3

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended  June 30,
	2012			2011
	US$			US$
Cash flows from operating activities
Net income		6,778,804			9,032,807
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization of property, plant and equipment		4,594,318			4,030,486
Amortization of intangible assets		26,267			20,789
Loss on disposal of property, plant and equipment		129,211			246,097
Impairment of property, plant and equipment		1,464,403			0
Change in fair value of financial instruments, net		(3,028	)		(71,071	)
Equity in earnings of 50 percent or less owned persons		(151,410	)		(362,860	)
Investment income from held-to-maturity investments		(197,441	)		(55,835	)
Stock-based compensation expenses		1,129,392			644,726
Gain on realized commodity financial instruments		(74,496	)		0
Deferred tax		(73,436	)		(589,145	)
Changes in operating assets and liabilities:
Restricted bank deposits		1,575,114			193,677
Restricted broker margin account		(400,610	)		(1,293,173	)
Accounts receivable		(2,707,311	)		(4,254,544	)
Amounts due from affiliated companies		73,977			(7,208	)
Inventories		29,048			(8,676,339	)
Prepaid expenses and current assets		(3,438,644	)		(3,949,729	)
Income taxes recoverable		(87,298	)		7,061
Accounts payable		2,682,207			2,582,464
Accrued payroll and employee benefits		351,598			458,738
Customer deposits		(21,467	)		11,332
Accrued and other liabilities		1,978,259			309,727
Amounts due to affiliated companies		85,402			653
Income taxes payable		(537,882	)		84,838
Net cash provided by/ (used in)  operating activities		13,204,977			(1,636,509	)
Cash flows from investing activities
Purchase of property, plant and equipment		(7,733,003	)		(5,070,594	)
Purchase of intangible assets		(47,031	)		(23,904	)
Proceeds from disposal of property, plant and equipment		40,585			39,139
Deposits paid for property, plant and equipment		(2,244,371	)		(1,589,928	)
Redemption of held-to-maturity investments		36,480,515			31,229,055
Purchase of held-to-maturity investments		(36,283,074	)		(29,647,424	)
Net cash used in investing activities		(9,786,379	)		(5,063,656	)
Cash flows from financing activities
Proceeds from bank borrowings		9,461,036			12,752,313
Repayment of bank borrowings		(9,461,036	)		(4,390,219	)
Purchase of noncontrolling interests		(425,747	)		(211,490	)
Restricted bank deposits		157,756			0
Net cash (used in)/provided by financing activities		(267,991	)		8,150,604
Effect of exchange rate changes		129,938			723,033
Net increase in cash and cash equivalents		3,280,545			2,173,472
Cash and cash equivalents, beginning of period		21,945,105			14,818,179
Cash and cash equivalents, end of period		25,225,650			16,991,651
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Cash paid for interest, net of capitalized interest of US$183,875 and US$Nil during the nine months ended June 30, 2012 and 2011, respectively		228,701			227,978
Income taxes		2,542,999			1,864,125

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 three and nine months ended June 30, 2012 have been made. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2011. The Company follows the same accounting policies in preparation of interim reports.

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

2.  Description of Business

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

3.  Recently Issued Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (ASC 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This pronouncement is an authoritative guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. In addition, ASU 2011-04 expanded the required disclosures around fair value measurements including (i) reporting the level in the fair value hierarchy used to value assets and liabilities which are not measured at fair value, but where fair value is disclosed, and (ii) qualitative disclosures about the sensitivity of Level 3 fair value measurements to changes in unobservable inputs used. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company’s fiscal year beginning October 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC 220) Presentation of Comprehensive Income (“ASU No. 2011-05”). This pronouncement is an authoritative guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. The Company has adopted ASU No. 2011-05 for its 2012 fiscal year.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”) to ASC 210, Balance Sheet. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective December 1, 2013 and is to be applied retrospectively. This guidance does not amend the existing guidance on when it is appropriate to offset. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

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. For the three and nine months ended June 30, 2012 and 2011, 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  June 30,
	2012		2011
	US$		US$
Basic income per share
Net income attributable to Winner Medical Group Inc. for the period		2,327,284		3,424,525
Weighted average common stock outstanding		24,371,872		24,130,247
Net income attributable to Winner Medical Group Inc. per share		0.10		0.14
Diluted income per share
Net income attributable to Winner Medical Group Inc. for the period		2,327,284		3,424,525
Weighted average common stock outstanding		24,371,872		24,130,247
Effect of dilution
Restricted stock		412,235		470,841
Options		229,311		0
Weighted average common stock outstanding		25,013,418		24,601,088
Net income attributable to Winner Medical Group Inc. per share		0.09		0.14

	Nine months ended  June 30,
	2012		2011
	US$		US$
Basic income per share
Net income attributable to Winner Medical Group Inc. for the period		6,715,421		8,988,705
Weighted average common stock outstanding		24,365,867		24,125,593
Net income attributable to Winner Medical Group Inc. per share		0.28		0.37
Diluted income per share
Net income attributable to Winner Medical Group Inc. for the period		6,715,421		8,988,705
Weighted average common stock outstanding		24,365,867		24,125,593
Effect of dilution
Restricted stock		343,397		496,304
Options		60,815		0
Weighted average common stock outstanding		24,770,079		24,621,897
Net income attributable to Winner Medical Group Inc. per share		0.27		0.37

The number of stock options excluded from the calculation of diluted earnings per share for each of the three months ended June 30, 2012 and 2011, was nil; the number of stock options excluded from the calculation of diluted earnings per share for the nine months ended June 30, 2012 and 2011, was 350,000 and nil, respectively, because their inclusion would have been anti-dilutive. As of June 30, 2011, there were no potential dilutive common shares relating to stock options in the Company.

F-6

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.  Held-to-maturity investments

As of June 30, 2012 and September 30, 2011, there were no held-to-maturity investments. The Company had held-to-maturity investments during the three and nine months ended June 30, 2012 and 2011, which were money management products. Interest on these investments of US$81,455 and US$37,221 was included in interest income during the three months ended June 30, 2012 and 2011, respectively; US$197,441 and US$55,835 during the nine months ended June 30, 2012 and 2011, respectively.

6.  Inventories

Inventories by major categories are summarized as follows:

	June 30,		September 30,
	2012		2011
	US$		US$
Raw materials		10,872,422		10,851,917
Work-in-progress		6,341,270		7,086,688
Finished goods		8,286,477		7,470,095
		25,500,169		25,408,700

7.  Credit Facilities and Pledged Assets

The Company’s 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 Agricultural Development Bank of China, representing trade acceptances, loans and overdrafts.

As of June 30, 2012, the Company had approximately US$30.04 million bank credit facilities from three commercial banks and, after utilizing bank loans of US$6.32 million, there are $23.72 million available under bank credit facilities, consisting of approximately US$6.32 million from Shenzhen Branch of China Merchants Bank, approximately $12.65 million from Shenzhen Branch of the Industrial and Commercial Bank of China and approximately US$4.75 million from Huanggang Branch of Agricultural Development Bank of China. These facilities mature in August 2012 and October 2014. The weighted average interest rates on short-term borrowings as of June 30, 2012 and September 30, 2011, were 7.46% and 6.98% per annum, respectively. There are no significant covenants or other financial restrictions relating to the Company’s facilities except that, at June 30, 2012, buildings with net book values of US$3,752,034, plant and machinery with net book values of US$11,891,465 and, at September 30, 2011, buildings with a net book value of US$3,857,373 have been pledged as collateral for the above-mentioned facilities.

As of June 30, 2012 and September 30, 2011, the Company had the following short-term bank loans:

	June 30,		September 30,
	2012		2011
	US$		US$
Bank loans repayable within one year		6,324,211		6,294,356
Original currency in Chinese Renminbi		40,000,000		40,000,000

Bank loans as of June 30, 2012 that are secured by buildings and plant and machinery consisted of the following:

				June 30,
				2012
Loan		Loan period		US$
	A		November 28, 2011 to September 16, 2012		3,162,105
	B		December 29, 2011 to September 16, 2012		3,162,106
					6,324,211

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:

	June 30,		September 30,
	2012		2011
	US$		US$
Value added tax receivable		6,198,898		4,717,557
Advance to suppliers		3,390,705		1,626,030
Rental deposit		864,628		684,424
Other deposit		538,131		826,325
Deferred expenditure		317,617		130,666
Fair value of financial instruments		0		51,141
Others		495,740		298,361
		11,805,719		8,334,504

9.  Income Taxes

United States

The Company is incorporated in Nevada in the United States of America and is subject to U.S. federal taxation. No provisions for income taxes have been made as the Company has no taxable income for the first quarter. The applicable income tax rate for the Company for each of the three and nine months ended June 30, 2012 and 2011, was 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 three and nine months ended June 30, 2012 and 2011, was 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 three and nine months ended June 30, 2012 and 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 the PRC, 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 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.

Winner Medical (Huanggang) Co., Ltd. enjoyed its full tax exemption from January 1, 2008 and its 50% tax exemption from January 1, 2010 to December 31, 2012. Winner Medical & Textile Ltd., Chongyang enjoyed its 50% tax exemption from January 1, 2008 and was subject to an enterprise income tax rate of 25% from January 1, 2011. Shanghai Winner Medical Apparatus Co., Ltd. enjoyed its 50% tax exemption from January 1, 2009 and would be subject to an enterprise income tax of 25% from January 1, 2012. Hubei Winner Textiles Co., Ltd. was subject to an enterprise income tax rate of 25% from January 1, 2010.

F-8

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9.  Income Taxes - Continued

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 preferential income tax rate of 15% from January 1, 2009 to December 31, 2011. According to the State Administration of Taxation Notice [2011] No. 4, High and New Technology enterprises applying for renewal of their status can file and pay taxes at a 15% rate prior to receiving approval of renewal and within the previously approved qualifying period. Management expects that Winner Shenzhen will be certified as a High and New Technology enterprise during the calendar year ending December 31, 2012. Accordingly, the applicable enterprise income tax rate for Winner Shenzhen is 15% for the period from January 1 to June 30, 2012.

The Company classifies all interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provisions. The Company performed a 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 tax 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. At June 30, 2012, 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 uncertain positions in the future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the three and nine months ended June 30, 2012 and 2011, respectively. The Company’s uncertain tax positions related to open tax years are subject to examination by the relevant tax authorities, the major one being the China Tax Authority. The open period for examination in the PRC is 5 tax 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:

	Nine months ended  June 30,
	2012			2011
	US$			US$
Tax calculated at domestic statutory rate (2012: 25%; 2011: 25%)		2,154,833			2,580,138
Effect of different tax rates in various jurisdictions		293,335			96,791
Tax effect of preferential tax treatment		(1,165,904	)		(1,161,515	)
Tax effect of preferential tax treatment on research and development expenses		(321,570	)		0
Tax effect of expenses not deductible for tax purpose		18,311			32,195
Tax effect of government subsidies not subject to tax		0			(189,764	)
Change in valuation allowance		907,223			(44,260	)
Under/(over) provision in previous years		48,857			(70,523	)
Utilization of tax loss		(77,169	)		0
Others		(17,387	)		44,682
		1,840,529			1,287,744

10. Related Party Transactions

During the three months ended June 30, 2012 and 2011, the Company purchased goods from L+L Healthcare Hubei Co., Ltd. (“L+L”), an equity investee, for US$24,679 and US$6,861, respectively, and sold goods to it for US$315,019 and US$18,373, respectively. During the nine months ended June 30, 2012 and 2011, the Company purchased goods from L+L for US$56,408 and US$139,817, respectively, and sold goods to it for US$$824,169 and US$40,466, respectively. As of June 30, 2012 and September 30, 2011, the amounts due from L+L were US$79,525 and US$119,368, respectively. L+L Healthcare Hubei Co., Ltd declared dividends of US$Nil to the Company for each of the three months ended June 30, 2012 and 2011; US$Nil and US$200,000 to the Company for the nine months ended June 30, 2012 and 2011, respectively.

During the three months ended June 30, 2012 and 2011, the Company sold goods to Chengdu Winner Likang Medical Appliance Co., Ltd. (“Winner Chengdu”), an equity investee, for US$13,596 and US$7,613, respectively, and purchased goods from it for US$66,759 and US$22,305, respectively. During the nine months ended June 30, 2012 and 2011, the Company sold goods to Winner Chengdu, for US$58,564 and US$11,458, respectively, and purchased goods from it for US$237,265 and US$63,433, respectively. As of June 30, 2012 and September 30, 2011, amounts due to Winner Chengdu were US$85,402 and US$Nil, respectively. As of June 30, 2012 and September 30, 2011, amounts due from Winner Chengdu were US$5,025 and US$38,411, respectively.

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

F-9

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. Related Party Transactions - Continued

On January 1, 2011, Mr. Jianquan Li, the chief executive officer of the Company, entered into agreements with the Company in relation to commodity derivatives trading activities. In the agreements, as of September 30, 2011, the 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, was to be undertaken by Mr. Jianquan Li by way of cash payment from Mr. Jianquan Li to the Company on September 30, 2011. The Company accounts for this transaction between the Company and Mr. Jianquan Li in accordance with Staff Accounting Bulletin Topic 5T, under which the payment from Mr. Jianquan Li for the shortfall was recognized in additional paid-in capital as of September 30, 2011. The loss from trading in commodity financial instruments for the nine months ended June 30, 2011 of US$1,694,632 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.

There was no stock-based compensation cost recorded for independent directors for the three and nine months ended June 30, 2012 and 2011, 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.

Under the 2008-2009 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., annual Company sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of the grant date is based on the market price of the common stock as quoted on the NASDAQ Global Market as of October 7, 2007, which was US$3.60 per share, and assumes that the individual achieves the applicable corporate and individual objectives set forth in the award.

On October 15, 2008, the Board of Directors approved the granting of the remaining 100,000 units out of the total 600,000 authorized restricted stock units under the 2008-2009 Plan. 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 Company 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 Global Market 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 the 2010-11 Restricted Stock Unit Incentive Plan, the “2010-2011 Plan”, a stock incentive compensation program for fiscal years 2010 and 2011. The 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.

Under the 2010-2011 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 8, 2012 and the second 50% on September 8, 2013 if the target of corporate net income attributable to Winner Medical Group Inc., annual Company 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 Global Market as of September 8, 2009, which was US$4.40 per share, and assumes that the individual achieves the applicable corporate and individual objectives set forth in the award.

F-10

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Stock-Based Compensation-Continued

On September 28, 2010, the Board of Directors approved the granting of the remaining 50,000 units out of the total 300,000 authorized restricted stock units under the 2010-2011 Plan. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on September 8, 2012 and the second 50% on September 8, 2013 if the target of corporate net income attributable to Winner Medical Group Inc., annual Company 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 Global Market as of September 28, 2010, which was US$4.56 per share, and assumes that the individual achieves 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 consulting services related to developing strategies for 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 as compensation for the services. As of September 18, 2010, both parties decided to terminate the consulting arrangement and mutually waived the share-based compensation terms of the agreement.

On October 6, 2010, the 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. The 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 Technology Co., Ltd. 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.

Under the 2011-2013 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 Company 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 Global Market as of October 6, 2010, which was US$5.31 per share, and assumes that the individual achieves 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 shares of restricted stock awarded.

Pursuant to a one-year consulting agreement signed between the Company and an investor relations consultant firm, 10,000 restricted stock units were granted to the consultant firm on the agreement date, which was May 1, 2010. After evaluating and assessing the accomplishments were achieved by the consultant firm, 10,000 restricted stock units were vested on May 2, 2011. The estimated value of the restricted stock units is based on the market price of the common stock as quoted on the NASDAQ.com as of May 2, 2011, which was US$4.99.

On October 7, 2011, the Company issued 231,625 shares of the Company’s common stock to those entitled employees, representing vesting of the second 50% of the total number of shares of restricted stock awarded.

On November 3, 2011, the Board of Directors approved the 2012-2013 Restricted Stock Unit and Options Incentive Plan, the "2012-2013 Plan", a stock incentive compensation program for fiscal years 2012 to 2013. This 2012-2013 Plan allows the Company to offer a variety of restricted stock units and/or options 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.

Under the 2012-2013 Plan, the Company granted 530,000 restricted stock units on November 3, 2011. Entitled employees are eligible to vest the first 50% of the total number of shares of restricted stock awarded on November 3, 2014 and the second 50% on November 3, 2015 if the target of corporate net income attributable to Winner Medical Group Inc., annual Company 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 Global Market as of November 3, 2011, which was US$3.03 per share, and assumes that the individual achieves the applicable corporate and individual objectives set forth in the award.

F-11

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Stock-Based Compensation-Continued

Under the 2012-2013 Plan, the Company granted 1,350,000 and 350,000 options to purchase one share of the Company’s common stock at US$3.08 and US$3.38, respectively, on November 3, 2011. On each of November 3, 2012, November 3, 2013, November 3, 2014 and November 3, 2015, entitled employees are eligible to vest up to 1/4 of the total number of option awards. The percentage of such vesting is predetermined for each individual and tied to satisfaction of the target corporate net income and annual sales objectives, as well as attainment of each participant’s personal performance targets. Each option award that is vested will expire two years after its vesting date. The Company utilizes the lattice-binomial option-pricing model (“binomial model”) to estimate the fair value of new employee stock option grants. The Company’s determination of fair value of stock option awards on the date of grant using the binomial model is affected by the Company’s stock price as well as assumptions regarding a number of variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, interest rates, option forfeitures and employee stock option exercise behaviors. The estimated weighted average fair value of awards was US$1.07 per option.

A summary of stock option activity is as follows:

					Weighted
			Weighted		Average
	Number of stock		Average		Remaining
	options		Exercise Price		Contractual Life
			US$		Years
Balance at September 30, 2010 and 2011		0		0		0
Options granted		1,700,000		3.14		4.00
Outstanding at June 30, 2012		1,700,000		3.14		4.00
Exercisable at June 30, 2012		0		0

There was no option cancelled or exercised during the three and nine months ended June 30, 2012. As at June 30, 2012, the aggregated intrinsic value of options outstanding was US$1,374,000.

The weighted average estimated fair value of stock options granted during the nine months ended June 30, 2012 was determined using the binomial model with the following weighted average assumptions:

Term structure of risk-free interest rate	0.42%~1.25%
Expected life	4.5 years
Term structure of volatility	44.70%~46.70%
Dividend yield	0
Weighted average estimated fair value per option	US$1.07

The risk-free interest rate assumption for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility and implied volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee termination within the valuation model. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The binomial model estimates employees’ exercise behavior based on the option’s remaining vested life and the extent to which the option is in-the-money. The binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations of all past option grants made by the Company.

The Company recorded stock-based compensation expenses included in selling, general and administrative expenses of US$384,569 and US$118,465 for the three months ended June 30, 2012 and 2011, respectively and US$1,129,392 and US$644,726 for the nine months ended June 30, 2012 and 2011, respectively.

Management considered that the fair value of outstanding restricted share units approximates the market value of the Company’s common stock of US$3.95 per share as at June 30, 2012.

As of June 30, 2012, a cumulative total of 1,051,306 non-vested restricted stock units have been cancelled and a cumulative total of 411,132 restricted stock units were vested. The total fair value of restricted stock units vested during the nine months ended June 30, 2012 and 2011, was US$697,191 and US$536,726, respectively.

F-12

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11.  Stock-Based Compensation-Continued

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

	2008-09 Plan Number of units			2010-11 Plan Number of units			2011-13 Plan Number of units			2012-13 Plan Number of units		Total Number of units			Weighted average grant date fair value US$
Nonvested units outstanding At September 30, 2010		478,750			287,250			0			0		766,000			3.53
Granted		0			0			300,000			0		300,000			5.31
Cancelled		(67,618	)		(49,688	)		(172,000	)		0		(289,306	)		4.60
Vested		(179,507	)		0			0			0		(179,507	)		2.99
Nonvested units outstanding at September 30, 2011		231,625			237,562			128,000			0		597,187			4.07
Granted		0			0			0			530,000		530,000			3.03
Cancelled		0			0			(128,000	)		0		(128,000	)		5.31
Vested		(231,625	)		0			0			0		(231,625	)		3.01
Nonvested units outstanding at June 30, 2012		0			237,562			0			530,000		767,562			3.46

As of June 30, 2012, the unrecognized stock-based compensation expense for the 2010-2011 Plan, 2011-2013 Plan and 2012-2013 Plan was US$130,655, US$Nil and US$2,375,759, respectively, which totals US$2,506,414 and is expected to be amortized over the weighted average period of 1.99 years.

12.  Commitments and Contingencies

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

	US$
Three months ending September 30, 2012		688,574
Years ending September 30,
2013		1,895,772
2014		886,771
2015		322,407
2016 and after		0
Total minimum lease payments		3,793,524

Rental expenses under operating leases included in the consolidated statements of income and comprehensive income were US$909,272 and US$647,159 for the three months ended June 30, 2012 and 2011, respectively. Rental expenses under operating leases for nine months ended June 30, 2012 and 2011, included in the consolidated statement of income and comprehensive income were US$2,630,246 and US$1,664,982, 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$5,997,376 and US$4,233,939 as of June 30, 2012 and September 30, 2011, respectively.

F-13

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12.  Commitments and Contingencies - continued

Legal proceedings - Between April 9 and April 27, 2012, three purported shareholder class actions were filed against the Company, its board of directors and its chief executive officer, Jianquan Li, in District Court, Clark County, Nevada. The three purported shareholder class actions were later consolidated and, on August 9, 2012, the Company received a consolidated complaint (the "Consolidated Complaint"), wherein a purported class action claim was made against the Company, its board of directors and its chief executive officer, Jianquan Li (the “Class Action”). The Class Action arises from Mr. Li’s initial non-binding proposal on April 2, 2012 to acquire all outstanding shares of the Company’s common stock not owned or controlled by him or his wife in a “going private” transaction. The Class Action alleges that the Company’s board of directors have breached their fiduciary duties to the Company as a result of the proposed “going private” transaction, and that the Company has aided and abetted those alleged breaches. The Company has not yet responded to the Class Action, but believes the allegations therein are without merit. The Company intends to defend itself vigorously against the claims.

The Company has not yet been required to respond formally to this lawsuit. In addition, the Consolidated Complaint does not specify any amount of damages to be sought by plaintiffs. Because this matter is in a very early stage, the Company cannot determine whether or not an adverse outcome is probable, nor can it provide a reasonable estimate of any potential losses related to this matter. While the Company believes that it has meritorious defenses to the Class Action and intends to defend it vigorously, an adverse outcome in this matter could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.

Other than the above, 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. In addition, to the Company’s knowledge, no director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than five percent 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.

F-14

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

The financial instruments of the Company are cash and cash equivalents, restricted bank deposits, restricted broker margin account, accounts receivable, deposits and other receivable, other current assets, bank loans, accounts payable and other current liabilities are valued at fair values due to their short-term nature. These financial assets and liabilities are classified as either Level 1 or Level 2 in the fair value hierarchy as of June 30, 2012 and September 30, 2011. Fair value of the amounts due to or from affiliates cannot be readily determined because of the nature of the related party transactions.

Held-to-maturity investments - The Company’s held-to-maturity investments are carried at amortized cost. The fair value of held-to-maturity investments is approximated to the carrying value, based on the quoted prices for securities with similar characteristics and other observable inputs such as interest rates that are observable at commonly quoted intervals can be obtained directly from the commercial bank and such fair value measurement is considered as Level 2 in the fair value hierarchy.

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 in 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. No foreign exchange forward contracts were outstanding as of June 30, 2012. The Company’s foreign exchange forward contracts are classified as Level 2 in the fair value hierarchy under ASC 820 since the quoted prices of these foreign currency forward contracts can be obtained directly from the commercial bank.

F-15

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

13.  Fair Value Measurement -Continued

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

	Condensed Consolidated	June 30,		September 30,
	Balance Sheet Presentation	2012		2011
		US$		US$
Derivatives not designated as hedging instruments
Fair value of foreign exchange forward  contracts	Prepaid expenses and other current assets		0		51,141
Fair value of foreign exchange forward  contracts	Accrued and other liabilities		0		16,482

The impact on earnings from foreign exchange derivatives activity, including changes in the fair value of derivatives for the three and nine months ended June 30, 2012 and 2011 are as follows:

		Three months ended
	Presentation of gain or loss	June 30,
	recognized on derivatives	2012		2011
		US$		US$
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Unrealized exchange gain		0		39,611
	Unrealized exchange loss		0		(4,946	)
	Other operating income, net		0		34,665

		Nine months ended
	Presentation of gain or loss	June 30,
	recognized on derivatives	2012		2011
		US$		US$
Derivatives not designated as hedging instruments
Foreign exchange forward contracts	Unrealized exchange gain		0		79,560
	Unrealized exchange loss		0		(8,489	)
	Other operating income, net		0		71,071

The realized gain on foreign exchange forward contracts included in other operating income, net was US$Nil in each of the three months ended June 30, 2012 and 2011, respectively. The realized loss on foreign exchange forward contracts included in other operating income was US$20,484 and realized gain was US$169,040 for the nine months ended June 30, 2012 and 2011, 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 June 30, 2012, the Company’s restricted broker margin account was US$475,106, net of unrealized gain of US$Nil. As of June 30, 2012 and 2011, the fair value of commodity financial instruments decreased by US$Nil and US$73,738, respectively, which were recorded in other operating income. The total outstanding cotton futures contracts amounted to US$Nil as of June 30, 2012. 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 gain for the three months ended June 30, 2012 and 2011 on commodity financial instruments was US$92,791 and US$65,037, respectively. The realized gain for the nine months ended June 30, 2012 was US$167,467 and the realized loss for the nine months ended June 30, 2011 was US$1,694,632.

F-16

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

14.  Operating Risk

Concentrations of credit risk, major customers and suppliers - A substantial percentage of the Company’s sales are made to one customer, Sakai Shoten Co., Ltd, and are typically sold on an open account basis. The sales to Sakai Shoten Co., Ltd. accounted for 9.93% and 11.39% of the total net sales for the three months ended June 30, 2012 and 2011, respectively, and 9.09% and 12.07% of the total net sales for the nine months ended June 30, 2012 and 2011, respectively.

A substantial percentage of the Company’s accounts receivable are from three customers with balances that represented the following percentages of total accounts receivable at June 30, 2012 and September 30, 2011, respectively: Heng’an Group Ltd, 14.14% and 8.40%; Molnlycke Health Care AB, 9.98% and 15.14%; and Tyco Healthcare Co., Ltd, 9.95% and 10.05%. 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.

Interest rate risk - The interest rates and terms of repayment of bank and other borrowings ranged from 6.36% to 7.87%. Other financial assets and liabilities do not have material interest rate risk.

Credit risk - In order to reduce the risk of inability to collect accounts receivable, the Company entered into an insurance policy with China Export & Credit Insurance Corporation effective on January 1, 2012. This insurance policy will expire on December 31, 2012 and is 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$2.5 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 June 30, 2012 and September 30, 2011, the exchange rates of RMB against the US dollar were 6.3249 and 6.3549, respectively; the appreciation of RMB against the US dollar was 0.47%. On June 30, 2012 and September 30, 2011, the exchange rates of RMB against Euro were 7.8710 and 8.6328 respectively. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could have a material adverse effect on the Company’s business and financial results.

F-17

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

15.  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				Nine months ended
	June 30,				June 30,
	2012		2011		2012		2011
	US$		US$		US$		US$
Europe		16,410,903		16,071,074		43,073,676		35,684,291
PRC		15,923,947		9,020,041		40,175,200		25,724,476
North and South America		7,298,178		8,556,687		22,998,629		24,794,963
Japan		5,426,130		6,201,565		16,779,429		16,834,536
Others		3,132,813		1,687,098		7,800,449		5,422,519
Total net sales		48,191,971		41,536,465		130,827,383		108,460,785

Sales to countries which were in excess of 10% of total sales for the three and nine months ended June 30, 2012 and 2011, are as follows:

	Three months ended				Nine months ended
	June 30,				June 30,
	2012		2011		2012		2011
	US$		US$		US$		US$
PRC		15,923,947		9,020,041		40,175,200		25,724,476
Japan		5,426,130		6,201,565		16,779,429		16,834,536
United States of America		5,804,907		4,920,077		16,217,395		18,447,279
Britain		2,848,530		4,369,665		7,841,422		9,573,037

F-18

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16.  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 nine months ended June 30, 2012 and 2011, are as follows:

	Three months ended
	June 30,
	2012			2011
	US$			US$
Net sales:
Segment:
Medical products		38,980,265			36,177,197
PurCotton®  products		9,211,706			5,359,268
Consolidated total		48,191,971			41,536,465
Gross profits:
Segment:
Medical products		8,711,490			9,641,393
PurCotton®  products		3,520,121			1,667,216
Consolidated total		12,231,611			11,308,609
Income before income taxes:
Segment:
Medical products		2,681,628			5,103,391
PurCotton®  products		(366,361	)		(1,102,819	)
Consolidated total		2,315,267			4,000,572
Net income attributable to Winner Medical Group Inc.:
Segment:
Medical products		2,379,861			4,315,020
PurCotton®  products		(52,577	)		(890,495	)
Consolidated total		2,327,284			3,424,525
Depreciation and amortization:
Segment:
Medical products		855,939			817,117
PurCotton® products		687,716			579,499
Consolidated total		1,543,655			1,396,616

F-19

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16.  Segment Information-Continued

	Nine months ended
	June 30,
	2012			2011
	US$			US$
Net sales:
Segment:
Medical products		107,187,537			94,548,622
PurCotton®  products		23,639,846			13,912,163
Consolidated total		130,827,383			108,460,785
Gross profits:
Segment:
Medical products		25,391,656			25,554,717
PurCotton®  products		7,844,363			4,587,111
Consolidated total		33,236,019			30,141,828
Income before income taxes:
Segment:
Medical products		9,681,607			12,247,619
PurCotton®  products		(1,062,274	)		(1,927,068	)
Consolidated total		8,619,333			10,320,551
Net income attributable to Winner Medical Group Inc.:
Segment:
Medical products		8,003,299			10,387,235
PurCotton®  products		(1,287,878	)		(1,398,530	)
Consolidated total		6,715,421			8,988,705
Depreciation and amortization:
Segment:
Medical products		2,583,065			2,465,766
PurCotton® products		2,037,520			1,585,509
Consolidated total		4,620,585			4,051,275

	June 30,			September 30,
	2012			2011
	US$			US$
Total assets:
Segment:
Medical products		123,003,275			109,317,729
PurCotton® products		50,674,985			45,578,410
Segment total		173,678,260			154,896,139
Reconciliation to consolidated totals:
Elimination of other receivable from inter-segments		(10,056,375	)		(4,977,452	)
Consolidated total		163,621,885			149,918,687

F-20

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Between April 9 and April 27, 2012, three purported shareholder class actions were filed against the Company, its board of directors and its chief executive officer, Jianquan Li, in District Court, Clark County, Nevada. The three purported shareholder class actions were later consolidated and, on August 9, 2012, the Company received a consolidated complaint (the "Consolidated Complaint"), wherein a purported class action claim was made against the Company, its board of directors and its chief executive officer, Jianquan Li (the “Class Action”). The Class Action arises from Mr. Li’s initial non-binding proposal on April 2, 2012 to acquire all outstanding shares of the Company’s common stock not owned or controlled by him or his wife in a “going private” transaction. The Class Action alleges that the Company’s board of directors have breached their fiduciary duties to the Company as a result of the proposed “going private” transaction, and that the Company has aided and abetted those alleged breaches. The Company has not yet responded to the Class Action, but believes the allegations therein are without merit. The Company intends to defend itself vigorously against the claims.

The Company has not yet been required to respond formally to this lawsuit. In addition, the Consolidated Complaint does not specify any amount of damages to be sought by plaintiffs. Because this matter is in a very early stage, the Company cannot determine whether or not an adverse outcome is probable, nor can it provide a reasonable estimate of any potential losses related to this matter. While the Company believes that it has meritorious defenses to the Class Action and intends to defend it vigorously, an adverse outcome in this matter could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.

Other than the above, 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. In addition, to the Company’s knowledge, no director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than five percent 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 6. EXHIBITS.

The list of exhibits required to be filed as exhibits to this Report are listed under the “Exhibit Index,” which is incorporated herein by reference.

6

SIGNATURES

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

DATED: August 14, 2012

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)

7

EXHIBIT INDEX

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.*

The following materials from the Winner Medical Group Inc. Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2012 filed on August 14, 2012 formatted in Extensible Business Reporting Language (XBRL):

(i) Condensed Consolidated Balance Sheets (Unaudited),

(ii) Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited),

(iii) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited),

(iv) Condensed Consolidated Statements of Cash Flows (Unaudited), and

(v) Notes to Condensed Consolidated Financial Statements (Unaudited)

*  filed herewith

+ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

8