What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2012-03-19 compared with 2011-03-07 · 1120 added, 638 removed, 315 unchanged (85% of the section changed)

Financial Statements and

Supplementary Data.

The Companys financial statements and the related notes, together with the report of Friedman

LLP are set forth following the signature pages of this report.

Changes in and Disagreements with

Accountants on Accounting and Financial Disclosure.

Financial Statements and Supplementary Data.

The Company’s financial statements

and the related notes, together with the report of Friedman LLP are set forth following the signature pages of this report.

Changes in and Disagreements with Accountants

on Accounting and Financial Disclosure.

Item 9A/9A(T).

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2010 (the Evaluation Date), the Company carried out an evaluation, under the supervision of and with the participation of management, including the Companys chief

executive officer and chief financial officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).

on the foregoing, the chief executive officer and chief financial officer concluded that as of the Evaluation Date the companys disclosure controls and procedures were effective and designed to ensure that all material information required to

be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure

that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision

regarding required disclosure.

Managements Annual Report on Internal Control over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial

reporting as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended.

The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

The Companys internal control over financial reporting includes those policies and

procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the recording of transactions of the Companys assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S.

that the Companys receipts and expenditures are being made only in accordance with the authorization of its management and directors;

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a

material effect on the consolidated financial statements.

Because of its inherent limitations, a system of

internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements, Also, projections of any evaluation of

effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Companys management assessed the effectiveness of its internal control over financial reporting as of December 31, 2010.

In making this assessment, management used the framework set forth in the report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.

Based on this assessment,

the Companys management believes that, as of the Evaluation Date, its internal control over financing reporting is effective based on the criteria established in the Internal ControlIntegrated Framework issued by COSO.

Changes in Internal Control over Financial Reporting

There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities

Exchange Act of 1934) during the three or twelve months ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the companys internal control over financial reporting.

Evaluation of Disclosure Controls and

As of December 31, 2011 (the “Evaluation

Date”), the Company carried out an evaluation, under the supervision of and with the participation of management, including

the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the

Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act

Based on the foregoing, the chief executive officer and chief financial officer concluded that as of the Evaluation Date

the company’s disclosure controls and procedures were effective and designed to ensure that all material information required

to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and

reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that

information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal

financial officers, or persons performing similar functions, as appropriate to allow timely decision regarding required disclosure.

Management’s Annual Report on Internal

Control over Financial Reporting

The Company’s management is responsible

for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under

the Securities and Exchange Act of 1934, as amended.

The Company’s internal control over financial reporting is designed

to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial

statements for external purposes in accordance with generally accepted accounting principles.

The Company’s internal control

over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the recording of transactions

of the Company’s assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements

in accordance with U.S.

GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the

authorization of its management and directors;

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the

Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, a system

of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement

preparation and presentation and may not prevent or detect misstatements, Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the

effectiveness of its internal control over financial reporting as of December 31, 2011.

In making this assessment, management used

the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission, or COSO.

Based on this assessment, the Company’s management believes that, as of

the Evaluation Date, its internal control over financing reporting is effective based on the criteria established in the Internal

Control—Integrated Framework issued by COSO.

Changes in Internal Control over Financial

There were no changes in the Company’s

internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three

or twelve months ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the company’s

internal control over financial reporting.

Other Information.

Directors, Executive Officers and Corporate Governance.

Directors, Executive Officers and Corporate

Regulation S-K Item 401:

The section of the Registration Statement

and IPO Prospectus entitled Management is incorporated herein by reference.

Executive Officers and Directors

The following table sets forth our executive

officers and directors, their ages and the positions held by them:

Position Held

Ping Chen (1)(2)

Chief Executive Officer and Chairman of Board of Directors

Yanying (Aileen) Qi (1)

Chief Financial Officer

Weibing Yang (1)(3)

Yunxiang (Phil) Fan (1)(3)(4)(5)(6)

Independent Director

Genhui Chen (1)(4)(5)(6)(7)

Independent Director

Mingwei Zhang (1)(4)(5)(6)(7)

Independent Director

The individual’s business address is c/o Suite 501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing 100856 China.

Class III director whose term expires in 2012.

Class II director whose term expires in 2014.

Member of audit committee.

Member of compensation committee.

Member of nominating committee.

Class I director whose term expires in 2013.

our Chief Executive Officer.

Prior to his service as our Chief Executive Officer, from 1993-2000, Mr.

Chen served as the CEO

of Beijing Chengcheng Medical Electronic Equipment Co.

Prior to 1993, Mr.

Chen served as an engineer at the No.

Ministry of Aeronautics and Astronautics from 1987 to 1991 and moved up to the Head of the Civilian Products Division there from

Chen founded BTL in 2001 and has served as CEO since that time.

Chen received his bachelor’s

degree in 1984 from the National University of Defense Technology and his master’s degree in 1987 from the Ministry of Aeronautics

and Astronautics.

Chen has been chosen as a director because he is our CEO, the leader of our Company and a key experienced

member of management.

Yanying (Aileen) Qi .

Qi is familiar with US GAAP and PRC GAAP reporting and has assisted Dehaier with the Company’s IPO and ongoing accounting

reporting responsibilities.

Prior to joining Dehaier, Ms.

Qi served for three years as Financial Manager at Singapore Shoubiao

Qi earned dual degrees in accounting and finance at Renmin University in China.

Weibing Yang.

served as the Registrant’s vice president of sales and marketing since 2003.

Yang was a sales director at

Beijing Dehaier Technology Company Limited from 2001 through 2003.

From 1996 to 1997, Dr.

Yang was a product manager

at Amtronix Inc., a medical equipment company.

From 1993 to 1996, Dr.

Yang served as a sales manager at Planmeca Medical

Equipment Co.

From 1989 to 1992, Dr.

Yang was a doctor at the Affiliated Hospital of Shipbuilding Industry Group.

Yang graduated from the Medical School of SooChow University in 1989.

Yang was chosen as a director because of his

extensive experience in sales and marketing of medical equipment.

Yunxiang (Phil) Fan.

is a director of our company.

Fan co-founded Tri-Tech Holding Inc., a company operating in the water pollution

remediation, software and engineering industry in China (“Tri-Tech”).

He currently serves as the President and a director

Prior to founding Tri-Tech, Mr.

Fan provided technical, engineering and management services in several U.S.

firms, including Black and Beatch, Parsons Brinckerhoff, Inc., and Chastain-Skillman, Inc.

From 2003 through 2005, Mr.

was the Asia Regional Sales Manager for Met-Pro Corporation.

Fan earned his bachelor’s and master’s degrees

in environmental engineering from Hunan University and a master’s degree in civil engineering from Louisiana State University.

Fan has been a registered professional engineer in the United States since 2001.

Fan was chosen as a director

because we believe we can benefit from the guidance of the president of a Chinese company publicly traded in the U.S.

Chen is president

of Beijing Wenfeng Medical Technology Ltd.

(“BWMT”), a privately-held pharmaceutical research and development company

focusing on novel cancer and dermatological products.

Chen has over 15 years of experience, from1993 to 2008, in the pharmaceutical

industry in the areas of clinical research, regulatory compliance, corporate development and management, for a variety of companies

ranging from start-ups to public companies, both in Canada and in China.

Prior to joining BWMT in 2010, Dr.

Chen was a founder,

president and chief executive officer of Welichem Biotech Inc., a Canadian pharmaceutical company listed on the TSX Venture Exchange

From 1999 until he founded Welichem, Dr.

Chen was a senior scientist at Terragen Discovery Inc., a subsidiary of Cubist

Pharmaceuticals.

Chen received his M.Sc.

degrees in biology from Simon Fraser University in Vancouver, Canada in

1988 and 1991, respectively.

Chen was chosen as a director because of his extensive experience in research and development,

regulatory compliance, corporate development and management.

Mingwei Zhang .

Zhang has extensive

knowledge and experience in accounting from the perspective as an academic and a practicing accountant.

Since September 2007, Mr.

Zhang has served as Chief Financial Officer and a Director of Sino-Global Shipping America, Ltd.

From July 2007

through July 2010, Mr.

Zhang also served as a professor and head of the School of Accounting at Tianjin University of Finance and

From May 2001 until December 2007, Mr.

Zhang was a partner in Baker Tilly China, an international public accounting

From July 1994 to June 2003, he served as a Lecturer at Monash University in Australia.

Zhang received a Bachelor’s

degree and a Master’s degree in Accounting from Tianjin University of Finance and Economics.

He also received a Master’s

degree in Commerce from the University of Newcastle.

Zhang is a Certified Management Accountant in Australia.

chosen as a director because of his financial experience.

Employment Agreements

Under Chinese

law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one

month prior to the date on which the employment agreement is scheduled to expire.

If we fail to provide this notice or if we wish

to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary

for each year we have employed the employee.

We are, however, permitted to terminate an employee for cause without penalty to our

company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse

effect to us.

Our employment agreements with our executive

officers generally provide for a term of three (3) years and a salary to be paid monthly.

The agreements also provide that

executive officers are to work an average of forty hours per week and are entitled to all legal holidays as well as other paid

leave in accordance with PRC laws and regulations and our internal work policies.

Under such agreements, our executive officers

can be terminated for cause without further compensation.

The employment agreements also provide that we will pay for all mandatory

social security programs for our executive officers in accordance with PRC regulations.

During the agreement and for one (1) year

afterward, our executive officers are subject to keep trade secrets confidential.

Share Option Pool

In connection with our initial public offering,

we established a pool for share options for our employees.

This pool contains options to purchase up to 450,000 of our common shares.

The options will vest at a rate of 20% per year for five years and have an exercise price of the market price of our shares

on the date the options are granted.

As of the date of this report, we have issued all 450,000 options out of our employee share

Board of Directors and Board Committees

Our board of directors currently consists

of 5 directors.

There are no family relationships between any of our executive officers and directors.

The directors are divided

into three classes.

Class I directors shall face re-election at our annual general meeting of shareholders in 2013 and every three

years thereafter.

Class II directors shall face re-election at our annual general meeting of shareholders in 2014 and every three

years thereafter.

Class III directors shall face re-election at our annual general meeting of shareholders in 2012 and every three

years thereafter.

A director may vote in respect of any contract

or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract

or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter.

A general notice or disclosure

to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof

of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary

to give special notice relating to any particular transaction.

A director may be counted for a quorum upon a motion in respect

of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.

There are no membership qualifications for directors.

Further, there are no share ownership qualifications for directors unless

so fixed by us in a general meeting.

The Board of Directors maintains a majority

of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market

Rule 4200(a)(15).

Fan, Zhang and Chen are our independent directors.

Ping Chen currently holds both

the positions of Chief Executive Officer and Chairman of the Board.

These two positions have not been consolidated into one position;

Chen simply holds both positions at this time.

We do not have a lead independent director because of the foregoing reason

and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company

We believe this leadership structure is appropriate because we are a smaller reporting company in the process of listing

on a public exchange;

as such we deem it appropriate to be able to benefit from the guidance of Mr.

Chen as both our principal

executive officer and Chairman of the Board.

Board Committees

Currently, three committees have been established

under the board:

the audit committee, the compensation committee and the nominating committee.

The audit committee is responsible

for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our company,

including the appointment, compensation and oversight of the work of our independent auditors.

The compensation committee of the

board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all

forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the

authority to interpret those plans).

The nominating committee of the board of directors is responsible for the assessment of the

performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors

and other governance issues.

The nominating committee considers diversity of opinion and experience when nominating directors.

Duties of Directors

Under British Virgin Islands law, our directors

have a duty to act honestly, in good faith and with a view to our best interests.

Our directors also have a duty to exercise the

care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances.

In fulfilling their duty

of care to us, our directors must ensure compliance with our third amended and restated memorandum and articles of association.

We have the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors

include, among others:

appointing officers and determining the term of office of the officers;

authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed

exercising the borrowing powers of the company and mortgaging the property of the company;

executing cheques, promissory notes and other negotiable instruments on behalf of the company;

maintaining or registering a register of mortgages, charges or other encumbrances of the company.

Limitation of Director and Officer Liability

British Virgin Islands law does not limit

the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors,

except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such

as to provide indemnification against civil fraud or the consequences of committing a crime.

Under our third amended and restated memorandum

and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees,

and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection

with civil, criminal, administrative or investigative proceedings to which they are party or are threatened

to be made a party by reason of their acting as our director, officer or liquidator.

To be entitled to indemnification, these persons

must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings,

they must have had no reasonable cause to believe their conduct was unlawful.

Insofar as indemnification for liabilities

arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed

that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore

unenforceable as a matter of United States law.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of

our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors,

or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree

or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities

laws, or a finding of any violation of federal or state securities or commodities laws, any laws respecting financial institutions

or insurance companies, any law or regulation prohibiting mail or wire fraud in connection with any business entity or been subject

to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization,

except for matters that were dismissed without sanction or settlement.

Regulation S-K Item 405:

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under 17 CFR 240.16a-3(e) during its most

recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation referred to in paragraph (b)(1) of this section, the Company is not aware of any director,

officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to Section 12 that failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a)

during the most recent fiscal year or prior years.

Based solely upon a review of Forms 3

and 4 and amendments thereto furnished to the Company under 17 CFR 240.16a-3(e) during its most recent fiscal year and Form 5 and

amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation referred

to in paragraph (b)(1) of this section, the Company is not aware of any director, officer, beneficial owner of more than ten percent

of any class of equity securities of the Company registered pursuant to Section 12 that failed to file on a timely basis,

as disclosed in the above Forms, reports required by Section 16(a) during the most recent fiscal year or prior years.

Regulation S-K Item 406:

The Company has adopted a Code of Ethics and has filed a copy of the Code of Ethics with the Commission as an exhibit to the Registration

The Company has adopted a Code of Ethics

and has filed a copy of the Code of Ethics with the Commission as an exhibit to the Registration Statement.

Regulation S-K Item 407(c)(3):

Regulation S-K Item 407(d)(4) and (5):

The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence

provided by NASDAQ Stock Market Rule 4200(a)(15).

The Board of Directors maintains a majority

of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market

Rule 4200(a)(15).

The Company has an audit committee, consisting solely of independent directors of the Company, Mr.

Yunxiang (Phil) Fan, Mr.

Jimin (Peter)

Zhuo qualifies as the audit committee financial expert.

The Companys audit committee charter was filed as Exhibit 99.2 to the Companys annual

report for the year ended December

31, 2009 and is available on the Companys website (www.chinadhr.com).

Compensation.

The following table shows the annual compensation paid by us for the years ended December 31, 2009 and

2010 to Ping Chen, our principal executive officer.

No other officer had a salary during either of the previous two years of more than $100,000.

Summary Compensation Table

(Phil) Fan, Mr.

Genhui Chen and Mr.

Mingwei Zhang.

Zhang qualifies as the audit committee financial expert.

The Company’s

audit committee charter was filed as Exhibit 99.2 to the Company’s annual report for the year ended December 31, 2009 and

is available on the Company’s website (www.dehaier.com.cn).

Executive Compensation.

Executive Compensation

The following table shows the annual compensation

paid by us for the years ended December 31, 2010 and 2011 to Ping Chen, our principal executive officer.

No other officer

had a salary during either of the previous two years of more than $100,000.

Summary Executive Compensation Table

Name and principal position

Principal Executive Officer

did not grant any equity awards in 2010 or 2009.

$ 183,000 (1)

Principal Executive

(1) On December 29, 2011, 150,000 share options were awarded to

Chen, which options vest over a period of five years, the first 20% of which will vest on December 29, 2012.

The grant date

fair value of the options is $1.22.

Director Compensation

All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected and

until their successors have been duly elected and qualified.

All directors hold office until the next

annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been

duly elected and qualified.

There are no family relationships among our directors or executive officers.

Officers are elected by and serve at the discretion of the Board of Directors.

Employee directors do not

receive any compensation for their services.

Non-employee directors are entitled to receive $2,000 per meeting for serving as directors and may receive option grants from our company.

In addition, non-employee directors are entitled to receive

compensation for their actual travel expenses for each Board of Directors meeting attended, up to a maximum of $6,000 per meeting or $12,000 per year.

Summary Director Compensation Table FY 2010

Director fees earned or

Officers are elected

by and serve at the discretion of the Board of Directors.

Employee directors do not receive any compensation for their services.

Non-employee directors are entitled to receive $4,000 per meeting for serving as directors and may receive option grants from

Summary Director Compensation Table

Fees earned or paid in cash

Option awards

Ping Chen (2)

2 unchanged sentences

Jimin (Peter) Zhuo (4)

None of the directors received any common share awards, option awards, nonqualified deferred compensation earnings or non-equity incentive plan

Genhui Chen (6)

Weibing Yang (2)(6)

Mingwei Zhang (7)

(1) None of the directors received any common share awards, nonqualified deferred compensation earnings or non-equity

incentive plan compensation in fiscal year 2011.

Ping Chen, Ms.

Yang received compensation in their capacity as officers of our company and/or subsidiaries/affiliates

but did not receive any compensation for serving as directors of our company.

Liu ceased to be an officer of our company on September 30, 2011 and ceased to be a director of our company on November

Zhuo ceased to be a director of our company on March 1, 2012.

Qiu ceased to be a director of our company on November 28, 2011.

Genhui Chen and Weibing Yang became directors of our company on November 28, 2011.

Genhui Chen received no cash

compensation in fiscal year 2011.

Liu received payment in their capacity as officers of our company and/or subsidiaries/affiliates but did not receive any

compensation for serving as directors of our company.

Security Ownership of

Certain Beneficial Owners and Management and Related Stockholder Matters.

Zhang became a director of our company on March 1, 2012.

He received no compensation in fiscal year 2011.

Security Ownership of Certain Beneficial

Owners and Management and Related Stockholder Matters.

Plan category

Number of securities to

be issued upon exercise of

warrants and rights (a)

of securities to be issued upon exercise of outstanding options, warrants and rights(a)

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities remaining

available for future issuance

equity compensation plans

(excluding securities reflected in

column (a)) (c)

Equity compensation plans approved by security holders

exercise price of outstanding options, warrants and rights(b)

of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))(c)

Equity compensation

plans approved by security holders

Principal Shareholders

The following table sets forth information with respect to beneficial ownership of our common shares as of March 7, 2011 by:

The following table sets forth information

with respect to beneficial ownership of our common shares as of March 19, 2012 by:

Each person who is known by us to beneficially own more than 5% of our outstanding common shares;

1 unchanged sentence

All directors and named executive officers as a group.

In addition, we have included the share ownership of each of the individuals subject to the Make-Good Share Escrow described above.

See Related Party Transactions Make-Good Shares Subject to

Redemption. The below table assumes no redemption of any shares subject to such Make-Good Share Escrow.

The number and percentage of

common shares beneficially owned before the offering are based on 4,500,000 common shares outstanding as of March 7, 2011.

Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more

than 5% of our common shares.

Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities.

In computing the number of common shares

beneficially owned by a person listed below and the percentage ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of

March 7, 2011 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.

Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws,

all persons listed have sole voting and investment power for all common shares shown as beneficially owned by them.

Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of BDL, Room 908, East Plaza,

15 West 4th Ring North Road, Haidian District, Beijing 100195, Peoples Republic of China.

As of the date of this filing, we had eight (8) shareholders of record.

The number and percentage of common shares

beneficially owned before the offering are based on 4,565,000 common shares outstanding as of March 19, 2012.

with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common

Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have

voting or investment power with respect to securities.

In computing the number of common shares beneficially owned by a person

listed below and the percentage ownership of such person, common shares underlying options, warrants or convertible securities

held by each such person that are exercisable or convertible within 60 days of March 19, 2012 are deemed outstanding, but are not

deemed outstanding for computing the percentage ownership of any other person.

Except as otherwise indicated in the footnotes to

this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for

all common shares shown as beneficially owned by them.

Unless otherwise indicated in the footnotes, the address for each principal

shareholder is in the care of BDL, Room 501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing 100856, People’s Republic

As of the date of this filing, we have eleven (11) shareholders of record.

Named Executive Officers and Directors

Amount of Beneficial

Ownership (1)

Ping Chen, Chief Executive Officer, Director

Zheng (Rita) Liu, Chief Financial Officer, Director

Yunxiang (Phil) Fan, Director

Jimin (Peter) Zhuo, Director

Bin Qiu, Director

Weibing Yang, Vice President of Sales and Marketing

Yong Wang, Vice President of Research and Development

All officers and directors as a group (7 persons)

Amount of Beneficial Ownership (1)

Percentage Ownership (2)

Ping Chen, CEO, Director

1,104,742 (3)

Weibing Yang, VP of Sales and Marketing, Director

All officers and directors as a group

Chen Ping Ltd.

1,104,742 (3)

De-haier Investment Holdings Ltd.

Less than 1%.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares.

The number of our common shares outstanding used in calculating the percentage for each listed person excludes the common shares underlying options held by such person.

In addition, the percentage ownership assumes the return to the shareholder of all shares subject to the Make-Good Escrow.

(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect

to the common shares.

(2) The number of our common shares outstanding used in calculating the percentage for each listed person excludes the common shares

underlying options held by such person.

(3) Ping Chen has the sole power to direct the voting and disposition of the 1,104,742 shares held by Chen Ping Ltd.

These shares are subject to the Make-Good Escrow.

Milestone Capital Management Limited, the sole shareholder of De-haier Investment Holdings Ltd., has discretionary authority to vote and dispose of the 527,693 shares

held by De-haier Investment Holdings Ltd.

(4) Milestone Capital Management Limited, the sole shareholder of De-haier Investment Holdings Ltd., has discretionary authority

to vote and dispose of the 527,693 shares held by De-haier Investment Holdings Ltd.

Yunli Lou and Mr.

Liping Qiu in their capacities as managers of Milestone Capital Management Limited, may also be deemed to have investment discretion and voting power over the shares held by

De-haier Investment Holdings Ltd.

Qiu disclaim any such beneficial ownership of the shares.

Certain Relationships and Related Transactions, and Director

Independence.

The sections of the Registration Statement and IPO Prospectus entitled Related Party

Transactions and Management are incorporated herein by reference.

in their capacities as managers of Milestone Capital Management Limited, may also be deemed to have investment discretion and voting

power over the shares held by De-haier Investment Holdings Ltd.

Qiu disclaim any such beneficial ownership

of the shares.

Certain Relationships and Related Transactions,

and Director Independence.

The sections of the Registration Statement

and IPO Prospectus entitled “Related Party Transactions”

and “Management”

are incorporated herein by reference.

Promoters and Certain Control Persons

We did not have any promoters at any time during the past five fiscal years.

Except as set forth in our discussion above, none of our

directors or officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

We did not have any promoters at any time

during the past five fiscal years.

Except as set forth in our discussion above, none of our directors or officers has been involved

in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed

pursuant to the rules and regulations of the SEC.

Director Independence

The Board of Directors maintains a majority

of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market

Rule 4200(a)(15).

Fan, Zhang and Chen are our independent directors.

Principal Accountant Fees and Services.

Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2010.

Audit services

provided by Friedman LLP for fiscal 2010 included the examination of the consolidated financial statements of the Company;

and services related to periodic filings made with the SEC.

Friedman LLP was appointed by the Company

to serve as its independent registered public accounting firm for fiscal 2011.

Audit services provided by Friedman LLP for fiscal

2011 included the examination of the consolidated financial statements of the Company;

and services related to periodic filings

made with the SEC.

Fees Paid To Independent Registered Public Accounting Firm

During fiscal 2010 and 2009, Friedman LLPs fees for the annual audit of our financial statements and the

quarterly reviews of the financial statements were $190,000 and $120,000, respectively.

During fiscal 2011 and 2010, Friedman

LLP’s fees for the annual audit of our financial statements and the quarterly reviews of the financial statements were $175,000

and $190,000, respectively.

Audit Related Fees

During fiscal 2010 and 2009, the Company paid Friedman LLP $4,319 and $15,000, respectively, for audit-related

These services consisted of assurance and related services that were reasonably related to the performance of the audit and reviews of our financial statements and are not included in Audit Fees above.

The services provided by

our accountants within this category consisted of advice relating to SEC matters and the filing of our registration statement and amendments thereto.

The Company has not paid Friedman LLP for tax services in

fiscal 2010 and 2009.

During fiscal 2011 and 2010, the Company

paid Friedman LLP $0 and $4,319, respectively, for audit-related services.

These services consisted of assurance and related services

that were reasonably related to the performance of the audit and reviews of our financial statements and are not included in “Audit

The services provided by our auditors within this category consisted of advice relating to SEC matters and the

filing of our registration statement and amendments thereto.

The Company has not paid Friedman LLP

for tax services in fiscal 2011 and 2010.

All Other Fees

The Company has not paid Friedman LLP for any other services in fiscal 2010 and 2009.

The Company has not paid Friedman LLP

for any other services in fiscal 2011 and 2010.

Audit Committee Pre-Approval Policies

Before Friedman LLP was

engaged by the Company to render audit or non-audit services, the engagement was approved by the Companys audit committee.

All services rendered by Friedman LLP, Inc.

have been so approved.

Before Friedman LLP was engaged by the

Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee.

rendered by Friedman LLP have been so approved.

Percentage of Hours

The percentage of hours expended on the

principal accountants’

engagement to audit our consolidated financial statements for 2011 that were attributed to work performed

by persons other than Friedman LLP’s full-time permanent employees was approximately 79%.

Exhibits, Financial Statement Schedules.

4 unchanged sentences

Form of Share Option Plan (1)

Make Good Escrow Agreement (1)

Translation of lease agreement for Product Center dated September 23, 2008 (1)

Translation of lease agreement for Principal Executive Office dated December 21, 2009, effective January 1, 2010 (1)

Distribution agreement with IMD (1)

Distribution agreement with Timesco (1)

Translation of distribution agreement with

Distribution agreement with ResMed (1)

Translation of form of independent distributor

agreement (1)

Translation of letter of credit agreement with

Translation of Executive Officer Employment Agreement for Ping Chen (1)

Translation of Executive Officer Employment Agreement for Weibing Yang (1)

Translation of Executive Officer Employment Agreement for Zheng Liu (1)

Translation of Executive Officer Employment Agreement for Yong Wang (1)

Translation of Form of Purchase Agreement with Poverty Aid Office (1)

Translation of Production Agreement with Friend of Health (Chuzhou) Medical Technology Co., Ltd.

Translation of Guarantee Contract between Ping Chen and ICBC (1)

Mortgage Contract between ICBC and BTL (1)

Indemnification and Guarantee Contract between Ping Chen and BTL (1)

Description of oral loan contract between BTL and

Translation of approval dated November 17, 2009 to change ICBC loan repayment schedule (1)

Description of oral loan contract between BTL and BDL (1)

Loss Absorption Agreement between BDL, BTL and shareholders of BTL (1)

Translation of approval dated March 18, 2010 to change ICBC loan repayment schedule (1)

Subsidiaries of the Registrant (2)

Consent of Friedman LLP, independent registered public accounting firm (2)

Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)

6 unchanged sentences

Audit Committee Charter (4)

Incorporated by reference to the registrants registration statement on Form S-1, File no.

333-163041, filed on November 12, 2009, as

XBRL Instance Document (3)

XBRL Taxonomy Extension Schema Document (3)

XBRL Taxonomy Extension Calculation Linkbase Document (3)

XBRL Taxonomy Extension Definition Linkbase Document (3)

XBRL Taxonomy Extension Label Linkbase Document (3)

XBRL Taxonomy Extension Presentation Linkbase Document (3)

(1) Incorporated by reference to the registrant’s registration statement on Form S-1, File no.

333-163041, filed on November 12,

2009, as amended.

(2) Filed herewith.

Incorporated by reference to the registrants Form 10-K, File no.

(3) Furnished herewith.

(4) Incorporated by reference to the registrant’s Form 10-K, File no.

001-34661, filed on March 31, 2010.

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

In accordance with the requirements of

the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEHAIER MEDICAL SYSTEMS LIMITED

March 19, 2012

/s/ PING CHEN

Chief Executive Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed by the following persons in the capacities and on the dates indicated:

(Principal Executive Officer)

Pursuant to the requirements of the Securities

Act of 1933, as amended, this report has been signed by the following persons in the capacities and on the dates indicated:

/s/ PING CHEN

Chief Executive Officer and Director

March 19, 2012

(Principal Executive Officer)

/s/ YANYING (AILEEN) QI

Chief Financial Officer (Principal Accounting and Financial Officer)

March 19, 2012

/ S / Z HENG (R ITA )

Zheng (Rita) Liu

Chief Financial Officer (Principal Accounting and Financial Officer) and Director

Yanying (Aileen) Qi

/s/ WEIBING YANG

March 19, 2012

/ S / Y UNXIANG (P HIL )

Yunxiang (Phil) Fan

/s/ GENHUI CHEN

March 19, 2012

/ S / J IMIN (P ETER )

Jimin (Peter) Zhuo

March 19, 2012

/s/ MINGWEI ZHANG

March 19, 2012

Mingwei Zhang

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and Shareholders

Dehaier Medical Systems Limited

We have audited the accompanying consolidated

balance sheets of Dehaier Medical Systems Limited and Affiliate as of December 31, 2011 and 2010, and the related consolidated

statements of income and comprehensive income, cash flows and equity for the years then ended.

Dehaier Medical Systems Limited

and Affiliate’s management is responsible for these consolidated financial statements.

Our responsibility is to express an

opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with

the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate

in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control

over financial reporting.

Accordingly, we express no such opinion.

An audit also includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable

basis for our opinion.

In our opinion, the consolidated financial

statements referred to above present fairly, in all material respects, the consolidated financial position of Dehaier Medical Systems

Limited and Affiliate as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for

the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Friedman LLP

New York, New York

March 19, 2012

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

4 unchanged sentences

Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010

Consolidated Statements of Shareholders Equity for the Years Ended December

31, 2010 and 2009

Consolidated Statements of Equity for the Years Ended December 31, 2011 and 2010

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010

Notes to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS

DEHAIER MEDICAL SYSTEMS LIMITED

audited the accompanying consolidated balance sheets of Dehaier Medical Systems Limited and Affiliate as of December 31, 2010 and 2009, and the consolidated related statements of operations, cash flows and shareholders equity for the years

Dehaier Medical Systems Limited and Affiliate management is responsible for these consolidated financial statements.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that

we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over

financial reporting.

Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Companys internal control over financial reporting.

Accordingly, we express no such opinion.

An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,

assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of

Dehaier Medical Systems Limited and Affiliate as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United

States of America.

/s/ Friedman LLP

New York, New York

March 7, 2011

1700 BROADWAY, NEW YORK, NY 10019 T 212.842.7000 F 212.842.7001 WWW.FRIEDMANLLP.COM

OFFICES IN NEW YORK LONG ISLAND AND NEW JERSEY AND A MEMBER OF DFK WITH AFFILIATES WORLDWIDE

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

2 unchanged sentences

Cash and cash equivalents

Accounts receivable

-less allowance for doubtful accounts of $ 87,555 and $102,939

Accounts receivable-less allowance for doubtful accounts of $859,509 and $87,555

Other receivables

2 unchanged sentences

Tax receivable

Deferred tax asset

Total Current Assets

Property and equipment, net

LIABILITIES AND SHAREHOLDERS EQUITY

LIABILITIES AND EQUITY

CURRENT LIABILITIES:

3 unchanged sentences

Accrued expenses and other current liabilities

Taxes payable

Warranty obligation

5 unchanged sentences

Commitments and Contingency

Shareholders equity

Common stock, $0.002731 par value, 18,307,038 shares authorized, 4,500,000 and 3,000,000 shares issued and outstanding at

December 31, 2010 and 2009, respectively

Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,560,000 and 4,500,000 shares issued and outstanding at December 31, 2011 and 2010, respectively

Additional paid in capital

3 unchanged sentences

Non-controlling interest

Total shareholders equity

Total liabilities and shareholders equity

The change in par value of common shares pursuant to the stock split was retroactively adjusted for the year 2009.

The accompanying notes are an integral part of these consolidated financial statements.

Total liabilities and equity

The accompanying notes are an integral part

of these consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

2 unchanged sentences

Costs of revenue

(13,696,743 )

(11,981,820 )

Service income

4 unchanged sentences

Financial expenses ( including interest expense of $82,136 and $70,343)

Other expense

Change in fair value of warrants liability

Income before provision for income taxes and non-controlling interest

Income before provision for income tax and non-controlling interest

Provision for income tax

1 unchanged sentence

Net income attributable to Dehaier Medical Systems Limited

Other comprehensive income

Foreign currency translation adjustments

Comprehensive income

Comprehensive income attributable to the non-controlling interest

Comprehensive income attributable to Dehaier Medical Systems Limited

Earnings per share

Weighted average number of common shares used in computation

The accompanying notes

are an integral part of these consolidated financial statements.

The accompanying notes are an integral part

of these consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

CONSOLIDATED STATEMENTS OF EQUITY

Dehaier Medical Systems Limited

(Crystal East)

comprehensive

Paid-in Capital

Comprehensive

1 unchanged sentence

Balance as of January 1, 2010

On October 31, 2009, the Company has converted all preferred shares, 1 to 1 into common Shares

On October 31, 2009, the Company has approved and effectuated a 3.6614-for-1 split of its Common shares

Issuance of shares, net of transaction costs

Foreign currency translation

Comprehensive income

Balance as of December 31, 2010

On April 22, 2010, the Company issued 1,500,000 shares at $8 per share, net of transaction costs

Issuance of 10,000 shares to non-employees

Issuance of 50,000 shares to non-employees

Issuance of 450,000 5 years options to employees at $1.45 per share

Foreign currency translation

Comprehensive income

Balance as of December 31, 2011

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part

of these consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

1 unchanged sentence

For the years ended

Operating Activities

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Cash flows from operating activities

Adjustments to reconcile net income to net cash used in operating activities

Stock-based compensation expense

Depreciation and amortization

Recovery of doubtful accounts

(Recovery of) Provision for inventory obsolescence

Change in fair value of warrants liability

(Recovery of) Provision for doubtful accounts

(Recovery of) Provision for inventory obsolescence

Gain on sale of equipment

Provision for warranty reserve

Deferred tax benefit

Changes in assets and liabilities:

Increase in accounts receivable

Decrease (Increase) in prepayments and other current assets

Increase in other receivables

Increase in inventories

Increase in tax receivable

(Decrease) Increase in accounts payable

(Decrease) Increase in advances from customers

Increase in prepayments and other current assets

Decrease (Increase) in other receivables

Decrease (Increase) in inventories

Decrease ( Increase) in tax receivable

Increase (Decrease) Increase in accounts payable

Increase in advances from customers

(Decrease) Increase in accrued expenses and other current liabilities

Increase in tax payable

Net cash provided by (used in) operating activities

Investing Activities

(Decrease) Increase in tax payable

Net cash used in operating activities

Cash flows from investing activities

Proceeds from sale of equipment

Capital expenditures and other additions

Proceeds from (advances to) related parties

Advances to related parties

Net cash used in investing activities

Financing Activities

Cash flows from financing activities

Proceeds from bank loan

Repayment of bank loan

Net proceeds from issuance of common stock

1 unchanged sentence

Effect of exchange rate fluctuations on cash and cash equivalents

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

8 unchanged sentences

ORGANIZATION AND PRINCIPAL ACTIVITIES

Dehaier Medical Systems Limited (Dehaier) was incorporated in the British Virgin Islands in 2003 as a limited liability company.

distributes and provides after-sale services for medical equipment in China mainly through its majority-owned subsidiary Beijing Dehaier Medical Technology Co.

Limited (BDL) and its affiliate Beijing Dehaier Technology Limited

On October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical System (Hong Kong) Limited (DHK), (collectively, the Company).

Both BDL and BTL were incorporated in

the Peoples Republic of China (PRC).

The Company distributes branded, proprietary medical equipment, such as sleep apnea machines, patient monitors, air compressors, and oxygen generators;

moreover, standard product registration,

product certification and quality management system have been established in the Company.

Medical Systems Limited (“Dehaier”) was incorporated in the British Virgin Islands in 2003 as a limited liability company.

Dehaier distributes and provides after-sale services for medical equipment in China mainly through its majority-owned subsidiary

Beijing Dehaier Medical Technology Co.

Limited (“BDL”) and its affiliate Beijing Dehaier Technology Limited (“BTL”).

On October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical System (Hong Kong) Limited (“DHK”),

DHK was shut down on December 19, 2011 due to a change in business strategy.

On November 9, 2011, Dehaier established a wholly-owned

subsidiary in the United States, Breathcare LLC (“Breathcare”).

Both BDL and BTL were incorporated in the People’s Republic of China (“PRC”).

Dehaier, through its subsidiaries

and affiliate, distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and

oxygen generators.

Standard product registration, product certification and quality management system have been established;

ISO13485 industry standard has also already been passed.

It also has the distribution rights for a number of international medical equipment suppliers for

products including anesthesia equipment, patient monitors, mobile C-arm X-ray machines and other medical equipment accessories.

It also has the distribution rights for a number of international medical equipment suppliers for products including anesthesia

equipment, patient monitors, mobile C-arm X-ray machines and other medical equipment accessories.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying

consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

Basis of Consolidation

The consolidated financial statements include the accounts of

Dehaier, BDL, its majority-owned subsidiary, and its wholly-owned subsidiary, DHK as well as BTL.

All significant inter-company transactions and balances are eliminated in consolidation.

A group of shareholders, including the Chief Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL.

BTL is a variable interest entity, and BDL is the

primary beneficiary.

BTL owns a building which is pledged as collateral for BDLs bank loans.

The consolidated financial statements include

the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the “Company”).

All significant

inter-company transactions and balances are eliminated in consolidation.

A group of shareholders, including the Chief

Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL.

BTL is a variable interest

entity (“VIE”), and BDL is the primary beneficiary.

BTL owns a building which is pledged as collateral for BDL’s

In exchange, BDL loans money to BTL to finance its operations.

BTLs primary operation is to provide repairs and transportation services to

BDLs customers.

Because of these arrangements, BDL is the primary beneficiary of BTL, as the entity that is most closely associated with BTL.

Dehaier has included BTL in its consolidated financial statements through the consolidation with BDL

since December 31, 2006.

Dehaier, BDL and BTL were under common control until October 31, 2009, when each share of preferred share was converted into a common share (see Note 12).

Because the Chief Executive Officer held more than 50% of

the voting ownership interest of each of Dehaier, BDL, BTL and DHK at December 31, 2006, the Company initially measured the assets, liabilities and non-controlling interest of the variable interest entity at the amounts at which they were

carried in the accounts of the reporting entity that controls the variable interest entity pursuant to FASB ASC 810-10.

BTL’s primary operation is to provide repairs

and transportation services to BDL’s customers.

Because of these arrangements, BDL is the primary beneficiary of BTL, as

the entity that is most closely associated with BTL.

Dehaier has included BTL in its consolidated financial statements through

the consolidation with BDL since December 31, 2006.

Dehaier, BDL and BTL were under common control until October 31,

2009, when each share of preferred share was converted into a common share.

Because the Chief Executive Officer held more than

50% of the voting ownership interest of each of Dehaier, BDL and BTL at December 31, 2006, the Company initially measured

the assets, liabilities and non-controlling interest of the VIE at the amounts at which they were carried in the accounts of the

reporting entity that controls the VIE.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

2 unchanged sentences

Basis of Consolidation - Continued

On October 31, 2009, BDL reconsidered whether it is the primary beneficiary of BTL when Dehaiers preferred stock was

converted into common shares.

While such conversion dilutes the Chief Executive Officers interest in BDL such that BDL and BTL are not under common control after October 31, 2009, BDL still has the obligation to absorb the expected losses

BTL is still a variable interest entity because all of its activities either involve or are conducted on behalf of the reporting enterprise and its related parties.

BDL is BTLs only customer referral source.

On March 3rd, 2010,

BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue to loan money to BTL as needed to fund its working capital such that BDL would absorb BTLs losses.

The carrying amount and classification of BTLs assets and liabilities included in the Consolidated Balance Sheets are as follows:

On October 31, 2009, BDL reconsidered whether

it is the primary beneficiary of BTL when Dehaier’s preferred stock was converted into common shares.

While such conversion

dilutes the Chief Executive Officer's interest in BDL such that BDL and BTL are not under common control after October 31, 2009,

BDL still has the obligation to absorb the expected losses of BTL.

BTL is still a VIE because all of its activities either involve

or are conducted on behalf of the reporting enterprise and its related parties.

BDL is BTL’s only customer referral source.

On March 3, 2010, BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue to loan

money to BTL as needed to fund its working capital such that BDL would absorb BTL’s losses.

Management makes ongoing reassessments

of whether BDL is the primary beneficiary of BTL.

The carrying amount and classification of BTL’s

assets and liabilities included in the Consolidated Balance Sheets are as follows:

Total current assets

1 unchanged sentence

Total liabilities

The accounts of BTL are consolidated

in the accompanying financial statements pursuant to Accounting Standards Codification (ASC) 810-10, Consolidation.

As a VIE, BTLs revenues are included in the Companys service income, and its income from

operations is consolidated with the Companys.

Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the Companys and BTLs financial statements.

On January 1, 2009, the Company adopted the transition rules within ASC 810-10-65, regarding accounting and reporting standards for the

non-controlling interest in a subsidiary.

The accounts of BTL are consolidated in the

accompanying financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10, “Consolidation”.

As a VIE, BTL’s revenues are included in the Company’s service income, and its income from operations is consolidated

with the Company’s.

Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation

of the Company’s and BTL’s financial statements.

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Estimates are adjusted to reflect actual experience when

Significant accounting estimates reflected in the Companys consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability and useful

lives of property and equipment.

Actual results could differ from those estimates.

The preparation of the consolidated financial

statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts

of revenues and expenses during the reporting periods.

Estimates are adjusted to reflect actual experience when necessary.

accounting estimates reflected in the Company's consolidated financial statements include revenue recognition, allowance for doubtful

accounts, warranty obligation, warrants liability, Stock-based compensation and useful lives of property and equipment.

results could differ from those estimates.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

2 unchanged sentences

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased.

Company maintains uninsured cash and cash equivalents with various financial institutions mainly in the PRC and Hong Kong.

Accounts receivable are recorded at net realizable value.

Accounts receivable terms typically are net 60-180 days from the end

of the month in which the services were provided, or when goods were delivered.

Cash and cash equivalents consist of cash on

hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or

less when purchased.

The Company maintains uninsured cash and cash equivalents with various financial institutions mainly in the

PRC and the States.

Accounts Receivable

Accounts receivable are recorded at net realizable

Accounts receivable terms typically are net 60-180 days from the end of the month in which the services were provided, or

when goods were delivered.

The company generally does not require collateral or other security to support accounts receivable.

An allowance, if required, is based on a combination of historical

experience, aging analysis, and an evaluation of the collectibility of specific accounts.

Receivables are considered past due after 3 years and written off.

In accordance with the accounting policies, management has determined that an allowance of

$87,555 and $102,939 was required at December 31, 2010 and 2009, respectively.

Advances to Suppliers and Advances from Customers

The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for unassembled parts, or receive advance

payments from customers.

Advances to suppliers were $4,515,737 and $1,511,540 as of December 31, 2010 and 2009, respectively, which were included in prepaid expenses and other current assets.

Advances from customers were $269,189 and $174,253

as of December 31, 2010 and 2009, respectively.

An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of the collectibility

of specific accounts, Prior to 2011, receivables were considered past due after 3 years.

In 2011, after assessing the distributors’

economic factors and Company’s historic experience, management decided that receivables over 1 year will be considered past

Management has determined that an allowance of $859,509 (RMB5,419,725) and $87,555 (RMB578,068) was appropriate at December

31, 2011 and 2010, respectively.

Advances to Suppliers and Advances from

The Company, as is the common practice in the

PRC, often makes advance payments to suppliers for unassembled parts, or receives advance payments from customers.

suppliers were $6,653,890 and $4,515,737 as of December 31, 2011 and 2010, respectively, which were included in prepayments and

other current assets.

Advances from customers were $303,000 and $269,189 as of December 31, 2011 and 2010, respectively.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated financial statements for current assets and current liabilities approximate fair value due to the

short-term nature of these financial instruments.

The Company adopted the provisions of ASC topic 815 (formerly Emerging Issue Task Force

07-5), Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entitys Own Stock.

ASC topic 815 provides a framework for determining whether an instrument is indexed to an entitys own stock.

ASC topic 815

became effective for the Company when warrants were issued in connection with the Companys initial public offering.

The carrying amounts reported in the

consolidated financial statements for current assets and current liabilities approximate fair value due to the short-term nature

of these financial instruments.

The Company adopted the provisions of ASC topic

815, “Derivatives and Hedging”.

ASC topic 815 provides a framework for determining whether an instrument is indexed

to an entity's own stock.

ASC topic 815 became effective for the Company when warrants were issued in connection with the Company's

initial public offering.

Such warrants are indexed to the Company's stock, which is traded in US dollars.

1 unchanged sentence

currency is the RMB, such warrants are considered liabilities.

The fair value of the warrants liability is measured each reporting period with the resulting change in fair value recorded in the statement of operations (see Note 13).

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level

valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels

are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable

for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Warrants liabilities qualify as financial instruments.

The fair value of the warrants liability is measured each reporting

period with the resulting change in fair value recorded in the consolidated statement of income and comprehensive income (see Note

The accounting standards regarding fair value

of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for

disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets

or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities

in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially

the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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Fair Value of Financial Instruments-Continued

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value

The fair value of the warrants was determined using the Black Scholes Model, as level 2 inputs, and recorded the change in earnings.

As a result, the derivative liability is carried on the balance sheet at its fair value.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair

value on a recurring basis as of December 31, 2010.

Carrying Value at

December 31, 2010

Fair Value Measurement at

December 31, 2010

Warrants liability

The following is a reconciliation of

the beginning and ending balances of warrants liability measured at fair value on a recurring basis using significant observable inputs (Level 2) as of December 31, 2010:

Beginning balance

Warrants issued for the year ended December 31, 2010

Ending balance

Inventories are stated at the lower of cost or market and consist of assembled and unassembled parts relating to medical devices.

The Company reviews its

inventory annually for possible obsolete goods and to determine if any reserves are necessary.

The reserve for obsolescence was $48,855 and $52,989 for 2010 and 2009, respectively, and the provision is included in the operating expenses in the

consolidated statements of operations.

Warrants liabilities qualify as financial instruments,

and are carried on the balance sheet at its fair value.

Financial assets and liabilities are classified

in their entirety based on the lowest level of input that is significant to the fair value measurement.

The fair value of

the warrants was determined using the Black Scholes Model, with level 2 inputs, and the change is recorded in earnings.

Inventories are stated at the lower of cost

or market and consist of assembled and unassembled parts relating to medical devices.

The Company reviews its inventory annually

for possible obsolete goods and to determine if any reserves are necessary.

The reserve for obsolescence was $51,154 (RMB322,556)

and $48,855 (RMB322,556) for 2011 and 2010, respectively, and the provision is included in the operating expenses in the consolidated

statements of operations.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization.

Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:

Property and equipment are recorded at cost

less accumulated depreciation and amortization.

Depreciation and amortization are calculated on a straight-line basis over the

following estimated useful lives:

Leasehold improvements

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Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no

longer be recoverable.

When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the asset and eventual

If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset, is recognized.

Management has determined

no impairment exists at the balance sheet dates.

The Company reviews its long-lived assets for

impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.

When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated

undiscounted future cash flows expected to result from the use of the asset and eventual disposition.

If the sum of the expected

future cash flows is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount

over the fair value of the asset, is recognized.

Management has determined no impairment exists at the balance sheet dates.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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Revenue Recognition

The Company recognizes revenues when all the followings conditions have been satisfied:

*Persuasive evidence of an arrangement exists;

*Delivery and/or installation has

occurred (e.g., risks and rewards of ownership has passed);

*The sales price is fixed or determinable;

*Collectibility is reasonably assured.

All revenues are based on firm customer orders with fixed terms and conditions.

Because the products are assembled to the customers specification, there is no right of return.

The Company does not

provide its customers with price protection or cash rebates.

For products which include software, the software is an off-the-shelf package and an integral part of the products being delivered.

The Company does not provide any significant post-sale

customer support services and does not provide customers with upgrades.

The software is incidental to the product as a whole.

The Company recognizes revenues when all the

followings conditions have been satisfied:

*Persuasive evidence of

an arrangement exists;

*Delivery and/or installation

has occurred (e.g.,risks and rewards of ownership has passed);

*The sales price is fixed

or determinable;

*Collectibility is reasonably

All revenues are based on firm customer orders

with fixed terms and conditions.

Because the products are assembled to the customers’

specification, there is no right of

The Company does not provide its customers with price protection or cash rebates.

For products which include software,

the software is an off-the-shelf package and an integral part of the products being delivered.

The Company does not provide any

significant post-sale customer support services and does not provide customers with upgrades.

The software is incidental to the

product as a whole.

For products that do not require installation, revenues are recognized when the products are delivered.

For products that

require installation, revenues are recognized when the installation is completed.

For all service income, the Company recognizes the revenue

upon the completion of the repairs when the equipment has been returned to and accepted by the customers.

In the PRC, value added tax (VAT)

of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities.

The VAT collected is not revenue of the Company;

instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to

the authorities.

products that require installation, revenues are recognized when the installation is completed.

For all service income, the Company recognizes

the revenue upon the completion of the repairs when the equipment has been returned to and accepted by the customers.

In the PRC, value added tax (VAT) of 17% of

the invoice amount is collected in respect of the sales of goods on behalf of tax authorities.

The VAT collected is not revenue

of the Company;

instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.

Cost of Revenues

Cost of revenues primarily includes wages to assemble parts and the costs of unassembled parts, handling charges, and other expenses associated with the assembly and distribution of product.

Cost of revenues primarily includes wages to

assemble parts and the costs of unassembled parts, handling charges, and other expenses associated with the assembly and distribution

Service income and expense

Service income and expense represents activities

related to repair services provided for the customers by BTL.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Service income and expense

Service income and expense represents activities related to repair and transportation service provided for the customers by BTL.

Foreign Currency Translation

The accounts of Dehaier, BDL, BTL and DHK are measured using

the currency of the primary economic environment in which the entity operates (the functional currency).

The accounts of Dehaier, BDL, BTL and

DHK are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).

The accompanying consolidated financial statements are presented in US dollars.

Foreign currency transactions are translated into US

dollars using fixed exchange rates in effect at the time of the transaction.

Generally, foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of operations.

currency accounts of DHK, BDL and BTL are translated in accordance with ASC 830-10, Foreign Currency Matters.

Assets and liabilities are translated at current exchange rates quoted by the Peoples Bank of China at the balance sheet

Foreign currency transactions are translated into

US dollars using fixed exchange rates in effect at the time of the transaction.

Generally, foreign exchange gains and losses resulting

from the settlement of such transactions are recognized in the consolidated statements of income and comprehensive income.

foreign currency accounts of DHK, BDL and BTL are translated in accordance with ASC 830-10, “Foreign Currency Matters”.

Assets and liabilities are translated at current exchange rates quoted by the People’s Bank of China at the balance sheet

dates and revenues and expenses are translated at average exchange rates in effect during the periods.

Resulting translation adjustments are recorded as other comprehensive income (loss) and accumulated as a separate component of equity in

non-controlling interest.

Resulting translation adjustments

are recorded as other comprehensive income (loss) and accumulated as a separate component of equity

Warranty Costs

The Company provides for the estimated cost of product warranties at the time revenue is recognized.

Warranty costs are included in general and administrative expenses.

The Companys warranty

obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting product failure.

Should actual product failure rates, material usage or service delivery costs differ from the Companys

estimates, the Company may be required to revise its estimated product warranty liability.

The Company provides for the estimated

cost of product warranties at the time revenue is recognized.

The Company's warranty obligation is affected by product failure

rates and material usage and service delivery costs incurred in correcting product failure.

Should actual product failure rates,

material usage or service delivery costs differ from the Company's estimates, the Company may revise its estimated product warranty

The term of the product warranty is generally twelve months.

The reserve for warranty costs was $301,464, $178,755 at December 31, 2010 and 2009,

The reserve for warranty costs was $334,680, $301,464 at

December 31, 2011 and 2010, respectively.

Warranty expense for the years ended December 31, 2011 and 2010 was $18,926 and $107,794,

respectively.

Warranty expense for the years ended December 31, 2010 and 2009 was $107,794 and $120,587, respectively.

Development Costs

Research and development costs relating to the development of new products and processes, including significant

improvements and refinements to existing products, are expensed as incurred.

Research and development costs were $82,553 and $82,164 for the years ended December 31, 2010 and 2009, respectively.

Research and Development Costs

Research and development costs relating

to the development of new products and processes, including significant improvements and refinements to existing products, are

expensed as incurred, Research and development costs were $268,038 and $82,553 for the years ended December 31, 2011 and 2010,

respectively.

Shipping and Handling Expenses

and handling expenses of $109,386 and $62,566 for the years ended December 31, 2010 and 2009 were included in the operating expenses in the consolidated statements of operations, respectively.

Shipping and handling expenses of $91,017

and $109,386 for the years ended December 31, 2011 and 2010, were included in the operating expenses in the consolidated statements

of operations, respectively.

Advertising Costs

Advertising costs are

expensed as incurred.

Advertising costs are expensed as incurred,

Advertising costs were $232,400 and $112,441 for the years ended December 31, 2011 and 2010, respectively.

3 unchanged sentences

Earnings per Share

The Company follows the provisions of ASC 260-10, Earnings Per Share.

Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted

average number of common shares outstanding during the years.

Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares.

Convertible preferred shares are included in the computation of diluted earnings per share on an if converted basis, when the impact is dilutive.

The following table sets forth computation of basic and diluted weighted average share information:

Weighted average number of common shares outstanding

Dilutive effect of convertible preferred shares

Dilutive effect of warrants

Weighted average number of common shares outstanding, assuming dilution

Restated to reflect the dilutive effect of convertible preferred shares at December 31, 2009.The weighted average number of common shares outstanding, assuming

dilution originally reported at December 31, 2009 was understated by 923,392 shares.

Diluted earnings per share for the year ended December 31, 2009 as originally reported was overstated by $0.40 per share.

On December 10, 2010, the Company filed an amended Annual Report on Form 10-K/A for the year ended December 31, 2009, to correct the error

described above.

The Company follows the provisions of

ASC 260-10, “Earnings per Share”.

Basic earnings per share is computed by dividing net income attributable to holders

of common shares by the weighted average number of common shares outstanding during the years.

Diluted earnings per share reflect

the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into

common shares.

The average stock price for the year of 2011 did not exceed the exercise price of the outstanding warrants, therefore

none of the outstanding warrants were included in the diluted earnings per share.

Value Added Tax

The Company reports revenues net of PRCs value added tax for all the periods presented in the consolidated statements of operations.

The Company reports revenues net of PRC’s

value added tax for all the periods presented in the consolidated statements of income and comprehensive income.

Stock-Based Compensation

The Company follows the provisions of ASC 718-10,

Share-Based Payment Arrangement. On December 7, 2009, the Companys Board of Directors and shareholders have approved the creation of a share incentive plan.

The plan authorizes the issuance of up to 10% of the number of shares

Pursuant to the plan, the Company may issue options to purchase its common shares to employees and directors of the Company and its affiliates.

The Company will fair value share-based awards to be granted under the plan.

compensation will be measured on the grant date using appropriate valuation models.

As of December 31, 2010, no options were issued under this plan.

The Company follows the provisions of

ASC 718-10, “Compensation-Stock Compensation”.

The Company has a share incentive plan which authorizes the issuance

of up to 10% of the number of shares outstanding.

Pursuant to the plan, the Company may issue options to purchase its common shares

to employees and directors of the Company and its affiliates.

The Company fair values share-based awards granted under the plan.

Accordingly, compensation is measured on the grant date using appropriate valuation models.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, Accounting for Income Taxes. Under this method, income tax expense is recognized

for the amount of:

The Company uses the asset and liability

method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.”

method, income tax expense is recognized for the amount of:

(i) taxes payable or refundable for the current year;

and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entitys financial statements or tax returns.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities

of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and

negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2010 and 2009, the Company was not required to record any deferred tax assets or liabilities.

ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be

taken on a tax return.

Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is more likely than not that the position is sustainable upon examination, based on its

technical merits.

The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all

the relevant information.

A liability (including interest and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon

the outcome of an uncertain tax position.

Related interest and penalties, if any, are included as components of income tax expense and income taxes payable.

The Company is awaiting resolution of certain complex tax issues and has not yet filed its

2008 and 2009 Value Added Tax (VAT) returns for some of its customers.

However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated financial statements.

The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits and no material change to the beginning retained

earnings of the Company.

As of December 31, 2010 and 2009, the Company did not have a liability for any unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense

in the statement of operations.

During the years ended December 31, 2010 and 2009, the Company did not incur any interest or penalties.

Income tax returns for the year prior to 2008 are no longer subject to examination by tax authorities.

deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s

financial statements or tax returns.

Deferred tax assets and liabilities are measured using enacted tax rates expected to

apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that

includes the enactment date.

A valuation allowance is provided to reduce the deferred tax assets reported if, based on the

weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax

assets will not be realized.

As of December 31, 2011, the Company recorded a deferred tax assets for the temporary

differences arising from allowance for doubtful accounts and certain accrued expenses (Note 14).

The Company believes it can

utilize the deferred tax assets to offset future taxable income.

Therefore, no valuation allowance has been provided as of

December 31, 2011.

The Company had no deferred tax assets or liabilities as of December 31, 2010.

ASC 740-10 prescribes a recognition threshold

and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.

Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more

likely than not”

that the position is sustainable upon examination, based on its technical merits.

The tax benefit of a qualifying

position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon

ultimate settlement with a taxing authority having full knowledge of all the relevant information.

A liability (including interest

and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on

a tax return for matters that are considered contingent upon the outcome of an uncertain tax position.

Related interest and penalties,

if any, are included as components of income tax expense and income taxes payable.

The Company is awaiting resolution of certain

complex tax issues and has not yet filed its 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers.

However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated financial

The implementation of ASC 740-10 resulted in

no material liability for unrecognized tax benefits.

As of December 31, 2011 and 2010, the Company did not have a liability for

any unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income

tax expense in the statement of operations.

During the years ended December 31, 2011 and 2010, the Company did not incur any interest

or penalties.

Income tax returns for the year prior to 2009

are no longer subject to examination by tax authorities.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

2 unchanged sentences

Reclassification

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Certain reclassifications have been made to

the prior year financial statements to conform to the current year presentation.

Recently Issued Accounting Standards

21, 2010, the Financial

Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements.

The ASU reports on new disclosure requirements and clarifications of existing requirements

under Accounting Standards Codification (ASC) Subtopic 820-10 (originally issued as FAS 157).

The new disclosure requirements apply to interim and annual reporting periods beginning after Dec.

15, 2009, with one exception:

The new rules regarding

purchases, sales, issuances and settlements associated with Level 3 measurements will be effective for fiscal years beginning after Dec.

15, 2010, and for interim periods within those fiscal years.

The adoption of this accounting standard did not

have a material effect on the Companys consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

On June 16, 2011,

the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update 2011-05 (“ASU 2011-05”),

Comprehensive Income (Topic 220)-Presentation of Comprehensive Income.

ASU 2011-05 eliminates the current option to report

other comprehensive income and its components in the statement of changes in equity, and requires that all nonowner changes in

stockholders’

equity be presented either in a single continuous statement of comprehensive income or in two separate but

consecutive statements.

The amendments in ASU 2011-05 should be applied retrospectively.

For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December

The adoption of this accounting standard is not expected to have a material effect on the Company’s consolidated

financial statements.

December 2011, FASB issued Accounting Standards Update No.

2011-12, “Comprehensive Income Topic 220:

Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of

Accumulated Other Comprehensive Income in Accounting Standards Update No.

Among the new provision in ASU

2011-05”

was a requirement for entities to present reclassification adjustments out of accumulated other comprehensive

income by component in both the statement in which the net income is presented and the statement in which other comprehensive

income is presented (for both interim and annual financial statements);

however this reclassification requirement is

indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date.

The adoption of

this accounting standard is not expected to have a material effect on the Company’s consolidated financial

MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

OTHER RECEIVABLES

Other receivables

consist of the following:

Other receivables consist of the following:

Due from suppliers

2 unchanged sentences

PREPAYMENT AND OTHER CURRENT ASSETS

Prepayment and other current assets consist of the following:

and other current assets consist of the following:

Advances to suppliers

Prepayment for equipment purchase

Initial public offering expenses

Other prepaid expenses

2 unchanged sentences

PROPERTY AND EQUIPMENT, NET

equipment consist of the following:

Property and equipment consist of the following:

Land use rights

3 unchanged sentences

Property and equipment, net

At December 31, 2010 and 2009, BTLs building was pledged to a bank as collateral for short-term borrowings of

RMB10,000,000 (US$1,514,620), RMB10,000,000(US$1,464,770), respectively (see Note 7).

Depreciation and amortization expense was $365,336 and

$249,871, for the years ended December 31, 2010 and 2009, respectively.

At December 31,

2011 and 2010, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB10,000,000 (US$1,585,890),

RMB10,000,000(US$1,514,620), respectively (see Note 7).

Depreciation and amortization expense was $450,518

and $365,336, for the years ended December 31, 2011 and 2010 , respectively.

Land Use Rights

1 unchanged sentence

Land is owned by the government and the government grants land use rights for specified terms.

Companys land use rights are reported at the purchase price (RMB1,944,000 in 2002).

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

The Company’s land use rights

are reported at the purchase price (RMB1,944,000 in 2002).

MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TAX RECEIVABLE

Tax receivable consists

of the following:

Tax receivable consists of the following:

Value added tax receivable

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are

subject to a VAT in accordance with Chinese laws.

The standard VAT is 17% of the gross sales price.

A credit is available whereby VAT paid on the purchases of unassembled medical components of the Companys product used in contract and

production can be used to offset the VAT due on sales of the product.

The tax receivable as of December 31, 2010 and 2009 represents VAT

credit on the purchased products.

These amounts can be used to offset the VAT due on sales of the finished product.

Enterprises or individuals who sell commodities,

engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws.

standard VAT is 17% of the gross sales price.

A credit is available whereby VAT paid on the purchases of unassembled medical components

of the Company’s product used in contract and production can be used to offset the VAT due on sales of the product.

The tax receivable as of December 31, 2011

and 2010 represents VAT credit on the purchased products.

These amounts can be used to offset the VAT due on sales of the finished

SHORT-TERM BORROWINGS

The Company has a

line of credit for RMB10,000,000 with a commercial bank in China to finance its working capital.

The credit line bears interest at a variable rate and is renewed annually on May 18th.

Average interest rates for the years ended December 31,

2010 and 2009 were 5.84% and 5.58%, respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTLs building (see note 5) and guaranteed by BDL and an officer of the Company.

On June 14, 2010, the bank renewed the Companys credit line that bears interest at a variable rate with payments due on January 19, 2011

and June 14, 2011 for RMB4,000,000 and RMB6,000,000, respectively.

The Company has a line of credit for RMB10,000,000

with a commercial bank in China to finance its working capital.

The credit line bears interest at a variable rate and is renewed

annually on May 18th.

Average interest rates for the years ended December 31, 2011 and 2010 were 5.78% and 5.84%, respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see note 5) and guaranteed by BDL

and an officer of the Company.

On June 14, 2011, the bank renewed the Company's

credit line that bears interest at a variable rate with payments due on January 20, 2012 and June 14, 2012 for RMB4,000,000 and

RMB6,000,000, respectively.

On January 19, 2012, RMB 4,000,000 was paid.

2 unchanged sentences

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other payables consist of the following:

Accrued expenses and other payables consist

of the following:

Accrued salaries and social welfare

3 unchanged sentences

TAXES PAYABLE

Taxes payable consists of

the following:

Taxes payable consists of the following:

Value added tax

3 unchanged sentences

NON-CONTROLLING INTEREST

Non-controlling

interest consists of the following:

Non-controlling interest consists of the following:

Original paid-in capital

4 unchanged sentences

COMMITMENTS AND CONTINGENCY

The lease commitments are for office premises and a warehouse facility, all of which are classified as operating leases.

non-cancelable leases have lease terms expiring through April 2012 for one year.

The lease commitments are for office premises

and a warehouse facility, all of which are classified as operating leases.

These non-cancelable leases have lease terms expiring

through December 2012 for one year.

Approximate future minimum lease payments under these leases at December 31, 2011, are as follows:

Year Ending December 31,

Total minimum lease payments

Rent expense for the year ended

December 31, 2010 and 2009 was $143,840 and $56,788, respectively.

Rent expense paid to the spouse of the Chief Executive Officer for

the years ended December 31, 2010 and 2009 was $10,047 and $27,375, respectively.

The company and Chief Executive Officer agreed to terminate the lease agreement by April 30, 2010.

The Company received an overpayment of rent of $1,591 from

the Chief Executive Officer after the termination agreement was signed.

Rent expense for the year ended December 31,

2011 and 2010 was $161,362 and $143,840, respectively.

Rent expense paid to the spouse of the Chief

Executive Officer for the years ended December 31, 2011 and 2010 was nil and $10,047, respectively.

The company and Chief Executive

Officer agreed to terminate the lease agreement by April 30, 2010.

The Company received an overpayment of rent of $1,591 from the

Chief Executive Officer after the termination agreement was signed.

Employment Contracts

Under the PRC labor law, all employees have signed employment contracts with the Company.

Management employees have employment contracts with terms up to

three years and non-management employees have a one year employment contract renewable on an annual basis.

The Labor Contract Law of the Peoples Republic of China, requires employers to assure the liability of the severance payments if employees are

terminated and have been working for the employers for at least two years prior to January 1, 2008.

The Company has estimated its possible severance payments of approximately $188,000 and $124,000 as of December 31, 2010 and 2009,

respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SHAREHOLDERS EQUITY

At December 31, 2008, the Companys Memorandum and Articles of Association authorized share capital of US $50,000

comprised of 4,500,000 common shares and 500,000 Preferred Shares (120,000 shares of Series A Preferred Shares and 380,000 shares of Series B Preferred Shares) with US$0.01 par value.

On October 31, 2009, the board of directors approved a 3.6614-for-1 stock split of the Companys common shares.

Accordingly, all common share and per share information in the accompanying

consolidated financial statements give retroactive effect to the stock split.

Prior to the stock split, there were 516,722 common shares issued and outstanding at December 31, 2008.

Under the PRC labor law, all employees have

signed employment contracts with the Company.

Management employees have employment contracts with terms up to three years and non-management

employees have a one year employment contract renewable on an annual basis.

The Labor Contract Law of the People’s

Republic of China, requires employers to assure the liability of the severance payments if employees are terminated and have been

working for the employers for at least two years prior to January 1, 2008.

The Company has estimated its possible severance payments

of approximately $235,000 and $188,000 as of December 31, 2011 and 2010, respectively, which have not been reflected in its consolidated

financial statements, because it is more likely than not that this will not be paid or incurred.

Common Shares

At December 31, 2008, the Company’s Memorandum

and Articles of Association authorized share capital of US$50,000 comprised of 4,500,000 common shares and 500,000 preferred shares

(120,000 shares of Series A preferred shares and 380,000 shares of Series B preferred shares) with US$0.01 par value.

On October 31, 2009, the board of directors

approved a 3.6614-for-1 stock split of the Company’s common shares.

Accordingly, all common share and per share information

in the accompanying consolidated financial statements give retroactive effect of the stock split.

Prior to the stock split, there

were 516,722 common shares issued and outstanding at December 31, 2008.

The authorized share capital remains at US$50,000.

On March 22, 2010, the founders of the Company placed an aggregate of 600,000 common shares of the Company into escrow.

Such shares equaled 40% of

the maximum number of shares which were sold in the initial public offering (IPO).

The shares will remain in escrow until the Company files its Form 10-K with the Securities and Exchange Commission for the year ended December 31,

The shares in escrow (Make-Good Shares) are accounted for as an element in the IPO and the Company will not recognize any compensation expense upon the return of such Make-Good Shares to the holders.

To the extent the Companys

earnings per share for the year ended December 31, 2010 are less than $.80, the Company shall redeem, pro rata, such shares.

Alternatively, if the closing price of the common shares is equal to at least 2.5 times of the IPO offering price for

five trading days in any ten trading day period, then the Make-Good Shares will be returned to the founders.

At December 31, 2010, the earnings per share of the company is $1.09.

Thus, the Company does not need to redeem or pro rata such

During the period from IPO date to December 31, 2010, there was no such period in which the closing price of the common shares is higher than 2.5 times of the IPO offering.

The shares will be returned to the founders 45 days after the

Companys Form 10K for the year ended December 31, 2010 is filed.

These shares are included as part of the calculation of the basic and diluted earning per share for all the periods presented in the accompanying consolidated financial

The Company completed its IPO on April 22, 2010 and is listed on Nasdaq Capital Market.

On April 22, 2010, the Company

sold 1,500,000 common shares at $ 8.00 per share for US$ 12,000,000 before the transaction costs.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SHAREHOLDERS EQUITY (CONTINUED)

EQUITY (CONTINUED)

Common Shares (Continued)

On March 22, 2010, the founders of the

Company placed an aggregate of 600,000 common shares of the Company into escrow.

Such shares equaled 40% of the maximum

number of shares which were sold in the initial public offering (“IPO”).

The shares remained in escrow until the

Company filed its Form 10-K with the Securities and Exchange Commission for the year ended December 31, 2010.

The shares in

escrow (Make-Good Shares) were accounted for as an element in the IPO and the Company did not recognize any compensation

expense upon the return of such Make-Good Shares to the holders.

To the extent the Company’s earnings per share for the

year ended December 31, 2010 were less than $0.80, the Company would have redeemed the Make Good Shares, pro rata.

Alternatively, if the closing price of the common shares was equal to at least 2.5 times of the IPO offering price for five

trading days in any ten trading day period, then the Make-Good Shares would be returned to the founders.

At December 31,

2010, the earnings per share of the Company were $1.09.

Thus, the Company did not need to redeem any of the Make-Good Shares.

During the period from the IPO date to December 31, 2010, there was no such period in which the closing price of the common

shares was higher than 2.5 times of the IPO offering.

The shares were returned to the founders on May 5, 2011 and are

included as part of the calculation of the basic and diluted earnings per share in the accompanying consolidated financial

On March 8, 2011, Dehaier issued 10,000 unregistered

common shares to an investment relationship firm.

The fair value of the shares on the issuance date based on the closing price

On November 16, 2011, Dehaier issued 50,000

unregistered common shares for capital market relationship activities.

The fair value of the shares on the issuance date based

on the closing price was $84,250.

Convertible Preferred Shares

In October 2003, the Company issued 120,000 Series A convertible preferred shares (Series A Preferred Shares) for total proceeds of $1,200,000.

During 2007, the Company issued in aggregate 182,635 Series B convertible preferred shares (Series B Preferred Shares) for total proceeds of

On October 31, 2009, each share of preferred stock was converted into common shares on a 1-to-1 basis.

Series A Preferred

Shares and Series B Preferred Shares were collectively referred to as the Preferred Shares.

Preferred Shares had priority over

the common stock Ordinary Shares.

Certain rights, preferences and privileges of the Preferred Shares are listed below:

holders of Preferred Shares were entitled to receive noncumulative dividends, when and if declared by the board of directors.

In October 2003, the Company issued 120,000

Series A convertible preferred shares (“Series A Preferred Shares”) for total proceeds of $1,200,000.

During 2007, the Company issued in aggregate

182,635 Series B convertible preferred shares (“Series B Preferred Shares”) for total proceeds of $2,000,000.

31, 2009, each share of preferred stock was converted into common shares on a 1-to-1 basis.

Series A Preferred Shares and Series

B Preferred Shares were collectively referred to as the “Preferred Shares”.

Preferred Shares had priority over the

common stock “Common Shares”.

Certain rights, preferences and privileges of the Preferred Shares are

listed below:

The holders of Preferred Shares were entitled

to receive noncumulative dividends, when and if declared by the board of directors.

Dividends are not mandatory and shall not accrue.

Preferred Shares Series A and B had a liquidation preference of $10 and $10.95074 per share, respectively.

The holders of Preferred Shares were entitled to one vote for each share of common stock the Preferred Shares could be converted to.

Preferred Shares Series A and B had a liquidation

preference of $10 and $10.95074 per share, respectively.

The holders of Preferred Shares were entitled

to one vote for each share of common stock the Preferred Shares could be converted to.

Preferred Shares were non-redeemable.

On October 31, 2009 all the Preferred Shares in

authorized capital were re-designated as ordinary (common) shares.

On October 31, 2009 all the Preferred Shares

in authorized capital were re-designated as common shares.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SHAREHOLDERS EQUITY (CONTINUED)

EQUITY (CONTINUED)

Statutory Surplus Reserves

A PRC company is required to make appropriations to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC ( PRC

Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entitys registered

The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years

losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided

that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital.

Since Dehaier is a

British Virgin Islands company, it will not be subject to the statutory surplus reserve provisions.

BDL is a joint-venture company and the statutory surplus reserve provisions will be determined by its board of directors.

December 31, 2010, BDLs board of directors has not yet made such determination.

A PRC company is required to make appropriations

to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles

of the PRC (“

PRC GAAP ”).

Appropriations to the statutory surplus reserve is required to be at least 10% of the

after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s’

The statutory surplus reserve fund is non-distributable

other than during liquidation and can be used to fund previous years’

losses, if any, and may be utilized for business expansion

or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing

the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue

is not less than 25% of the registered capital.

Since Dehaier is a British Virgin Islands’

company, it will not be subject to the statutory surplus reserve provisions.

BDL is a joint-venture company and the statutory surplus

reserve provisions will be determined by its board of directors.

As of December 31, 2010, BDL’s board of directors has not

yet made such determination.

Therefore, no amount was allocated to the statutory surplus reserve account.

BTL appropriated 10% of its net profits as statutory surplus reserve, which is included as part of the non-controlling interest in the equity section.

For the years ended December 31, statutory

surplus reserve activity was as follows:

Balance beginning of year

BTL appropriated 10% of its net profits as

statutory surplus reserve, which is included as part of the non-controlling interest in the equity section.

For the years ended

December 31, 2011 and 2010 statutory surplus reserve activity was as follows:

Balance –

beginning of year

Addition to statutory reserves

Balance end of year

Balance –end of year

Stock Option Plan

Under the employee stock option plan, the Company’s

stock options expire five years from the date of grant.

On December 29, 2011, the Company entered into five-year agreements with

its employees and directors.

In connection with their services, the Company issued an aggregate of 450,000 options to acquire the

Company’s common shares at an exercise price of $1.45 per share.

The options vest in equal annual installments over the

five years of the agreements.

As of December 29, 2011, all of the 450,000 options have not been fully vested.

The Company valued the stock options using the

Black-Scholes model with the following assumptions:

Interest Rate

Directors and officers

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

On April 21, 2010, the

Company issued to Anderson & Strudwick Incorporated (A&S) 150,000 warrants, as a portion of the placement commission for the IPO.

On the same day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.

(Hawks), the Companys investor relations consultancy.

EQUITY (CONTINUED)

Stock Option Plan (Continued)

The following is a summary of the option activity:

Stock options

Weighted Average

Exercise Price

Intrinsic Value

Outstanding as of December 31, 2010

Outstanding as of December 31, 2011

Following is a summary of the status of options

outstanding and exercisable at December 31, 2011:

Outstanding options Exercisable options

Average remaining

contractual life

Average remaining

contractual life

For the years ended December 31, 2011 and 2010,

the Company recognized $903 and $0, respectively, as compensation expenses under its stock option plan.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

On April 21, 2010, the Company issued to Anderson &

Strudwick Incorporated (“A&S”) 150,000 warrants, as a portion of the placement commission for the IPO.

day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.(“Hawks”), the Company’s investor relations

The Company had 157,500 warrants outstanding as of December 31, 2011.

All the warrants issued to A&S have the right to purchase one share of common stock

for an exercise price of $10.00 per share with a term of 5 years.

All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise price of $9.60 per share with a term of 5 years.

The fair value of the outstanding warrants at December 31, 2010 for A&S was calculated using the Black Scholes Model with the following

All the warrants

issued to “A&S”

have the right to purchase one share of common stock for an exercise price of $10.00 per share

with a term of 5 years.

All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise

price of $9.60 per share with a term of 5 years.

The fair value of the outstanding warrants

at December 31, 2011 for A&S was calculated using the Black Scholes Model with the following assumptions:

Fair value per share (USD/share)

2 unchanged sentences

Dividend yield

Expected term/Contractual Life (number of years)

Expected term/Contractual life (years)

Expected volatility

5 unchanged sentences

Dividend yield

Expected term/Contractual Life (number of years)

Expected term/Contractual life (years)

Expected volatility

(1) Fair Value of

Underlying Ordinary Shares

The $5.94 is the close price of the Company on December 31, 2010.

The following table sets forth by level within

the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of

December 31, 2011 and 2010.

Carrying Value at

December 31, 2011

Fair Value Measurement at

December 31, 2011

Warrants liability

The following is a reconciliation of the beginning

and ending balances of warrants liability measured at fair value on a recurring basis using Level 2 inputs:

Beginning balance

Warrants issued

Fair value change of the issued warrants included in earnings

Ending balance

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

WARRANTS (CONTINUED)

(1) Fair Value of Underlying

Ordinary Shares

$1.42 was the close price

of the Company’s Common Shares on December 31, 2011.

(2) Exercise price

The exercise price of the warrants was determined by the Companys board of directors.

The exercise price of the warrants

was determined by the Company’s board of directors.

(3) Risk-free interest rate

3 unchanged sentences

(4) Dividend yield

Dividend yield of 0% was estimated by management of the Company.

Dividend yield of 0% was estimated

by management of the Company.

(5) Life to Expiration

Life to expiration was based on contractual term of the warrants.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

WARRANTS (CONTINUED)

Life to expiration was based on contractual

term of the warrants.

(6) Volatility

The volatility of the underlying ordinary shares during the life of the warrants was estimated based on the historical stock price

volatility of listed comparable companies over a period comparable to the expected term of the warrants.

The fair value of

the each A&S warrant at December 31, 2010 was $2.12.

The volatility of the underlying

ordinary shares during the life of the warrants was estimated based on the historical stock price volatility of listed comparable

companies over a period comparable to the expected term of the warrants.

The fair value of each A&S warrant at December 31,

2011 was $0.64.

The total fair value of such warrants was $96,469 at December 31, 2011.

The fair value of the warrants for A&S was $270,000 on the date of grant which was recognized as IPO expense.

The increase in the fair value of the warrants during the period was recognized as a

change in fair value of warrants liability which was included in statements of operations.

The fair value of each Hawks

warrant at December 31, 2010 was $2.18.

The total fair value of such warrants was $16,372, which has not been reflected in the Companys consolidated financial statements due to immateriality.

The fair value of the warrants for Hawk at the

grant date was $15,000.

The increase in fair value of the warrants resulted in a loss of $1,372, which has not been reflected in the Companys consolidated financial statements due to immateriality.

The fair value of the warrants for A&S was $270,000

on the date of grant which was recognized as IPO expense.

The decrease in the fair value of the warrants during the period was

recognized as a change in fair value of warrants liability which was included in statements of operations.

The fair value of each Hawks warrant at December 31, 2011

The total fair value of such warrants was $4,894, which has not been reflected in the Company’s consolidated financial

statements due to immateriality.

The fair value of the warrants for Hawk at the grant date

The increase in fair value of the warrants resulted in a loss of $11,478, which has not been reflected in the Company’s

consolidated financial statements due to immateriality.

Following is a summary of the warrants activity:

Exercise Price

Weighted Average Remaining

Contractual Life

Outstanding as of December 31, 2009

Outstanding as of December 31, 2010

Outstanding as of December 31, 2011

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

1 unchanged sentence

British Virgin Islands

Dehaier is a tax-exempt company incorporated in the British Virgin Islands.

BDL and BTL were incorporated in the PRC and are governed by

the PRC laws.

is subject to Hong Kong profits tax at a rate of 17.5% on its assessable profits.

No Hong Kong profits tax has been provided as the Company did not have any taxable profit that was earned in or derived from Hong Kong during the years presented.

PRC enterprise income

tax is calculated based on the Enterprise Income Tax Law (the EIT Law).

Under the EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and

foreign-invested enterprises.

Under the current PRC laws, PRC government grants a preferential income tax rate of 15% to government-certified

high technology companies, and under the new standard the period of validity for the certification of high technology companies is three years.

In 2009, BDL updated its certification for high technology company.

Therefore, BDL used a 15%

income tax rate to calculate the income tax expense for the years ended December 31, 2010 and 2009.

The tax rate for BTL is 25% in 2009

A reconciliation of income tax expense and the amount computed by applying the statutory income tax rate to the income before

income tax provision is as follows:

Dehaier is a tax-exempt company incorporated

in the British Virgin Islands.

BDL and BTL were incorporated in the PRC and are governed by the PRC laws.

DHK is subject to Hong Kong profits tax at a rate

of 17.5% on its assessable profits.

No Hong Kong profits tax has been provided as the Company did not have any taxable profit that

was earned in or derived from Hong Kong during the years presented.

PRC enterprise income tax is calculated based

on the Enterprise Income Tax Law (the “EIT Law”).

Under the EIT Law, a unified enterprise income tax rate of 25% and

unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises.

Under the current PRC laws, PRC government

grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the

period of validity for the certification of high technology companies is three years.

In 2009, BD L updated

its certification for “high technology”

Therefore, BDL used a 15% income tax rate to calculate the income

tax expense for the years ended December 31, 2011 and 2010.

The high technology certification will expire and be renewed by 2012.

The tax rate for

BTL is 25% in 2011 and 2010.

A reconciliation of income tax expense and

the amount computed by applying the statutory income tax rate to the income before income tax provision is as follows:

Year Ended December 31

Tax computed at statutory rate

Increase in income taxes resulting from temporary differences

Decrease in income taxes resulting from temporary differences

Permanent differences

The tax provision consists of a

current provision of $774,327 and $850,034 for 2011 and 2010, respectively, and a deferred benefit of $118,030 and $0,

for 2011 and 2010, respectively.

United States

Breathcare is a limited liability company and

is not subject to federal income tax.

As of December 31, 2011, Breathcare was inactive.

RELATED PARTY TRANSACTIONS

At December 31 2010, the amount due to an officer

was $2,358 representing expenses paid by an officer of the Company.

This amount was repaid in the first three months of 2010 and

no amount was due at December 31, 2011.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY TRANSACTIONS

December 31 2009, the amount due to an officer was $3,861 representing expenses paid by an officer of the Company.

This amount was repaid in the first six months of 2010.

At December 31 2010, the amount due to an officer was $2,358 representing expenses paid for an officer of the Company.

This amount was repaid in the first three months of 2010.

For the year ended

December 31, 2010, the Company received approximately $443,000 (3,000,000 RMB) from the local government in China as a reward for the Company successfully going public and listing on a U.S.

For the year ended December 31, 2010, the

Company received approximately $443,000 (RMB 3,000,000) from the local government in China as a reward for the Company

successfully going public and listing on a U.S.

For the year ended December 31, 2011, the Company

received approximately $27,423 (RMB 177,200) from the local government in China as subsidy.

CONCENTRATIONS

Major Customers

For the year ended December 31, 2010, approximately 8% of the Companys revenues was received from each of two customers.

the year ended December 31, 2009, approximately 7% of the Companys revenues was received from one customer.

At December 31,

2010 and 2009, receivables from four customers were approximately 12%, 11%, 11%, 9% and 9%, 8%, 8%, 7%, respectively.

For the years ended December 31, 2010 and 2009, the Companys three top selling products accounted, in the aggregate, for

approximately 53% and 58%, respectively, of its total net revenues.

The following represents the revenues by products, all derived from

For the year ended December 31, 2011, approximately

13% of the Company’s revenues was received from each of two customers.

For the year ended December 31, 2010, approximately

8% of the Company’s revenues was received from one customer.

At December 31, 2011 and 2010, receivables

from four customers were approximately 12%, 10%, 9%, 9% and 12%, 11%, 11%, 9%, respectively.

For the years ended December 31, 2011 and 2010,

the Company’s three top selling products accounted, in the aggregate, for approximately 27% and 53%, respectively, of its

total net revenues.

The following represents the revenues by

product line, all derived from China:

For the years ended

Product Lines

Medical Devices

Respiratory and Oxygen Homecare

Technical Service

Subsequent Events

On January 10, 2012, the

Company entered into a warrant purchase agreement with the Company’s investment consultant, Firs Trust Group, Inc.,

pursuant to which, the Company issued 100,000 warrants expiring January 10, 2017 to purchase Company’s common shares at

$4.00 a share, as compensation for the services.

The fair value of the warrants was

approximately $98,000, which was calculated by using a fair value option model.

On January 9, 2012, the Company

entered into a consulting agreement with an investor relationship consultant, pursuant to which, the Company will grant this consultant

5,000 shares of restricted stock every quarter as compensation for services rendered.

The first 5,000 shares were granted on February

The fair value of the shares granted on February 13, 2012 was approximately $11,000 based on the closing price on that

On February 2, 2012, the Company

entered into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $792,945 (RMB

5,000,000) with floating interest rate which was approximately 8.2% per year, due on January 30, 2013.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data