What changed in this filing

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Item 5. Other Information

2012-05-09 compared with 2011-11-10 · 524 added, 304 removed, 194 unchanged (81% of the section changed)

5 unchanged sentences

Form of Share Option Plan (1)

Summary translation of lease agreement for product center (2)

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 (2)

Translation of distribution agreement with JMS (2)

Distribution agreement with Heyer (2)

Translation of form of independent distributor agreement (1)

Translation of letter of credit agreement with ICBC (2)

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 Yanying Qi (2)

Translation of Executive Officer Employment Agreement for Xiaoqing Wang (2)

Translation of Executive Officer Employment Agreement for Aileen Qi (2)

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

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

Mortgage Contract between ICBC and BDL (1)

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

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

9 unchanged sentences

Audit Committee Charter (3)

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

XBRL Instance Document (4)

XBRL Taxonomy Extension Schema Document (4)

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

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

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

Filed herewith.

Incorporated by reference to the registrant’s annual report on Form 10-K, File no.

001-34661, filed on September 30, 2010.

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

Furnished herewith.

In accordance with Rule 406T of Regulation S-T, the information in these

exhibits shall not be deemed to be “filed”

for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,

or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement

or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such

In accordance with the requirements of

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

DEHAIER MEDICAL SYSTEMS LIMITED

November 10, 2011

/s/ Ping Chen

5 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

Condensed Consolidated Statements of Income and Comprehensive Income for the nine and three months ended September 30, 2011 and 2010

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011

Notes to the Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

（ UNAUDITED ）

September 30,

CURRENT ASSETS:

Cash and cash equivalents

Accounts receivable-less allowance for doubtful accounts of $90,546 and $87,555 at September 30, 2011 and December 31, 2010, respectively

Accounts receivable -less allowance for doubtful accounts of $860,826 and $859,509

Other receivables

2 unchanged sentences

Tax receivable

Deferred tax asset

Total Current Assets

6 unchanged sentences

Accrued expenses and other current liabilities

Taxes payable

Warranty obligation

Due to officer

Total Current Liabilities

3 unchanged sentences

Commitments and Contingency

Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,510,000 and 4,500,000 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,565,000 and 4,560,000 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

Additional paid in capital

4 unchanged sentences

Total liabilities and equity

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

The accompanying notes are an integral part

of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the nine months ended

September 30,

CONDENSED CONSOLIDATED STATEMENTS OF

For the three months ended

September 30,

Costs of revenue

4 unchanged sentences

Operating Income

Financial expenses (including interest expense of $53,915, $48,255, $26,922 and $21,452 for the nine and three months ended September 30, 2011 and 2010, respectively)

Financial expenses ( including interest expense of $27,163 and $16,177)

Change in fair value of warrants liability

Income before provision for income taxes and non-controlling interest

Income before provision for income tax

Provision for income tax

4 unchanged sentences

Comprehensive Income

Comprehensive income attributable to the non-controlling interest

Comprehensive loss (income) attributable to the non-controlling interest

Comprehensive income attributable to Dehaier Medical Systems Limited

1 unchanged sentence

Weighted average number of common shares used in computation

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

The accompanying notes are an integral part

of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended

September 30,

CONDENSED CONSOLIDATED STATEMENTS OF

For the three months ended

Cash flows from operating activities

3 unchanged sentences

Change in fair value of warrants liability

Recovery of doubtful accounts

Recovery of inventory obsolescence

Provision for warranty reserve

Changes in assets and liabilities:

Increase in accounts receivable

Increase in prepayments and other current assets

Increase in other receivables

Increase in inventories

Increase in tax receivable

Increase (Decrease) in accounts payable

Increase in advances from customers

Increase (Decrease) in accrued expenses and other current liabilities

Increase in tax payable

Decrease (Increase) in prepayments and other current assets

Decrease (Increase) in other receivables

Decrease in inventories

Decrease ( Increase) in tax receivable

Increase (Decrease) Increase in accounts payable

Decrease (Increase) in advances from customers

Increase in accrued expenses and other current liabilities

(Decrease) Increase in tax payable

Net cash used in operating activities

6 unchanged sentences

Repayment of bank loan

Net proceeds from issuance of common shares

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate fluctuations on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of period

3 unchanged sentences

Interest paid

Non-Cash transaction of investing and financing activities

Issuance of common shares for investment relations activities

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

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

ORGANIZATION AND PRINCIPAL ACTIVITIES

Dehaier 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 Systems (Hong Kong) Limited (“DHK”) (collectively, the “Company”).

Both BDL and BTL were incorporated in the People’s 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 condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company for the periods presented.

The results of operations for the nine and three months ended September 30, 2011 are not necessarily indicative of operating results expected for the full year or future interim periods.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on March 7, 2011.

The accompanying condensed consolidated

financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States

of America (“US GAAP”).

In the opinion of the Company’s management,

the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly

the condensed consolidated financial position, results of operations and cash flows of the Company for the periods presented.

results of operations for the three months ended March 31, 2012 are not necessarily indicative of operating results expected for

the full year or future interim periods.

These unaudited condensed consolidated financial statements should be read in conjunction

with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year

ended December 31, 2011, filed on March 19, 2012.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Dehaier, BDL, its majority-owned subsidiary, and its wholly-owned subsidiary, DHK as well as BTL.

The condensed 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 bank loans.

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 bank loans.

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

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 condensed 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, BTL and DHK 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.

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.

Management makes ongoing reassessments of whether BDL is the primary

beneficiary of BTL.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of Consolidation - Continued

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 Condensed Consolidated Balance Sheets are as follows:

September 30,

The carrying amount and classification

of BTL’s assets and liabilities included in the Condensed 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, 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.

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 condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

The preparation of the condensed 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 condensed consolidated financial statements and the reported

amounts of revenues and expenses during the reporting periods.

Estimates are adjusted to reflect actual experience when necessary.

Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability, stock-based compensation and useful lives of property and equipment.

Significant accounting estimates reflected in the Company's condensed consolidated financial statements include revenue recognition,

allowance for doubtful accounts, warranty obligation, warrants liability, Stock-based compensation and useful lives of property

and equipment.

Actual results could differ from those estimates.

Accounts Receivable

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.

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 allowances of $90,546 (RMB 578,068) and $87,555 (RMB 578,068) were required at September 30, 2011 and December 31, 2010, respectively.

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.

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

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 due.

Management has determined that an allowance of $860,826 (RMB5,419,725) and $859,509 (RMB5,419,725)

was appropriate at March 31, 2012 and December 31, 2011 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.

to suppliers were $3,747,665 and $4,348,847 as of March 31, 2012 and December 31, 2011, respectively, which were included in prepayments

and other current assets.

Advances from customers were $194,197 and $303,000 as of March 31, 2012 and December 31, 2011, respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Advances to Suppliers and Advances from Customers

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.

Advances to suppliers were $7,522,544 and $4,515,737 at September 30, 2011 and December 31, 2010, respectively, which were included in prepayment and other current assets.

Advances from customers were $465,848 and $269,189 as of September 30, 2011 and December 31, 2010, respectively.

None of these advances was from or to any related party.

Fair Value of Financial Instruments

The carrying amounts reported in the condensed 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.

The carrying amounts reported in the condensed

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.

Since the Company’s functional 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 condensed consolidated statement of income and comprehensive income (see Note 10).

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.

Since the Company's functional

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 condensed consolidated statement of income and comprehensive income

(see Note 11).

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.

Warrant liabilities qualify as financial instruments.

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, as level 2 inputs, and management recorded the change in earnings.

As a result, the derivative liability is carried on the condensed consolidated balance sheets at its fair value (see Note 10).

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

Warrants liabilities qualify as financial

instruments, and are carried on the condensed consolidated 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 $51,233 (RMB322,556)

and $51,154 (RMB322,556) as of March 31, 2012 and December 31, 2011, respectively, and the provision is included in the operating

expenses in the condensed consolidated statements of operations.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 reserves for obsolescence were $50,524 (RMB 322,559) and $48,855 (RMB 322,556) for September 30, 2011 and December 31, 2010, respectively.

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

5 unchanged sentences

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 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.

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.

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 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

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

For products that 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 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.

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.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition-Continued

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.

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 condensed 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 condensed consolidated statements of income and comprehensive income.

The 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.

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 condensed consolidated statements of income and comprehensive

The 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.

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.

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 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.

Warranty expenses for the nine months ended September 30, 2011 and 2010, and for the three months ended September 30, 2011 and 2010 were $163,538 $111,076, $56,890 and $45,654, respectively.

The reserve for warranty costs was $335,193 (RMB2,110,361),

$334,680 (RMB2,110,361) at March 31, 2012 and December 31, 2011, respectively.

Warranty expense for the three months ended March

31, 2012 and 2011 was $8,311 and $29,527, respectively.

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.

The average stock price for the previous three quarters 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.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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;

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

Value Added Tax

The Company reports revenues net of PRC’s value added tax for all the periods presented in the condensed consolidated statements of income and comprehensive income.

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:

(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 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.

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 each of September 30, 2011 and December 31, 2010, 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 previous years’ 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 condensed 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 each of September 30, 2011 and December 31, 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 each of the nine months ended September 30, 2011 and 2010, the Company did not incur any interest or penalties.

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

The Company reports revenues net of PRC’s

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

Stock-Based Compensation

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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reclassification

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

These modifications did not have any impact to the Company’s Condensed Consolidated statement of income and Comprehensive income.

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:

(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 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.

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.

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 March 31, 2012, the

Company recorded a deferred tax asset for the temporary differences arising from allowance for doubtful accounts and certain accrued

The company believes it can utilize the deferred tax asset to offset future taxable income.

Therefore, no valuation allowance

has been provided as of March 31, 2012 and December 31, 2011.

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 had filed its 2008 and 2009 Value

Added Tax (“VAT”) returns for some of its customers during the year 2011 and three months ended March 31, 2012.

the potential VAT liabilities on these VAT returns occurred in current period were also accrued and included in the accompanying

condensed consolidated financial statements.

The implementation of ASC 740-10 resulted

in no material liability for unrecognized tax benefits.

As of March 31, 2012 and December 31, 2011, 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 three months ended March 31, 2012 and 2011, 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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

OTHER RECEIVABLES

Other receivables consist of the following:

Due from suppliers

Deposits for ongoing contracts

Employee advances

PREPAYMENT AND OTHER CURRENT ASSETS

Prepayment and other current assets consist of the following:

September 30,

and other current assets consist of the following:

Advances to suppliers

Prepayment for equipment purchases

Prepayment for equipment purchase

Other prepaid expenses

1 unchanged sentence

Property and equipment consist of the following:

September 30,

Land use rights

3 unchanged sentences

Property and equipment, net

At September 30, 2011 and December 31, 2010, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB10,000,000 (US$1,547,170) and RMB10,000,000 (US$1,514,620), respectively (see Note 6).

Depreciation and amortization expenses were $333,580, $261,438, $113,604 and $89,124, for the nine and three months ended September 30, 2011 and 2010, respectively.

31, 2012 and December 31, 2011, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB11,000,000

(US$1,747,152) and RMB10,000,000 (US$1,585,890), respectively (see Note 7).

Depreciation and amortization expense was

$118,724 and $109,373, for the three months ended March 31, 2012 and 2011 , respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT, NET (CONTINUED)

Land Use Rights

There is no private ownership of land in the PRC.

There is no private ownership of land in

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

The Company’s land use rights are reported at the purchase price (RMB1,944,000 in 2002).

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s land

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

TAX RECEIVABLE

Tax receivable consists of the following:

September 30,

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 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 September 30, 2011 and December 31, 2010 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 March 31, 2012

and December 31, 2011 represents VAT credit on the purchased products.

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

of the finished product.

SHORT-TERM BORROWINGS

The Company has a line of credit for RMB10,000,000 (USD1,574,620 at December 31, 2010 and USD1,566,350 at September 30, 2011) with a commercial bank in the PRC to finance its working capital.

The credit line bears interest at a variable rate and is due on June 15, 2012.

Any outstanding loan balance must be repaid before annual renewal.

Average interest rates for the nine months ended September 30, 2011 and 2010 were 6.94% and 5.84%, respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see Note 4) and guaranteed by BDL and an officer of the Company.

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 three months ended March 31, 2012 and 2011 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.

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.

Pursuant to the terms of the agreement, the line

of credit is guaranteed by an officer of the Company.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

NON-CONTROLLING INTEREST

Non-controlling interest consists of the following:

September 30,

Original paid-in capital

1 unchanged sentence

Accumulated other comprehensive income

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCY

Common Shares

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 sold in the initial public offering (“IPO”).

The shares were required to remain 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 (the “Make-Good Shares”) were accounted for as an element of the IPO, and the Company would 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 redeem, pro rata, such shares to the extent needed to raise earnings per share to $0.80.

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.

During the period from IPO date to December 31, 2010, there was no day on which the closing price of the common shares was higher than 2.5 times of the IPO offering, so the Make-Good Shares were not returned to the founders prior to the end of 2010.

For the year ended 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.

These 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 for all the periods presented in the accompanying condensed consolidated financial statements.

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.

Approximate future minimum lease payments under these leases at September 30, 2011, are as follows:

Future payment for the twelve months ending September 30,

Total minimum lease payments

Rent expenses for the nine and three months ended September 30, 2011 and 2010, were $131,229, $77,702, $59,074 and $21,097, respectively.

Rent expenses paid to the spouse of the Chief Executive Officer for the nine and the three months ended September 30, 2011 and 2010 were $0, $11,638, $0 and $7,472, respectively.

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.

The Company has estimated its possible severance payments of approximately $217,000 and $188,000 as of September 30, 2011 and December 31, 2010, respectively, which have not been reflected in its condensed consolidated financial statements, because it is more likely than not that this will not be paid or incurred.

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 March 31, 2012, are as follows:

Future payment for the twelve months ending March 31,

Rent expense for the three months ended

March 31, 2012 and 2011 was $21,478 and $17,279, respectively.

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 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 $276,000 and $235,000 as of March 31, 2012 and December 31, 2011, respectively, which have not been reflected

in its condensed 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On March 8, 2011, Dehaier issued 10,000 unregistered common shares for investment relationship activities provided.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Common Shares

On March 8, 2011, Dehaier issued 10,000

unregistered common shares to an investment relations firm.

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

price was $59,300.

On November 16, 2011, Dehaier issued 50,000

unregistered common shares to a consulting firm.

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

WARRANTS LIABILITY

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.

(“Hawk”), the Company’s investor relations consultancy.

The Company had 157,500 warrants outstanding as of September 30, 2011.

All the warrants issued to A&S have the right to purchase one common share for an exercise price of $10.00 per share with a term of 5 years.

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

The fair value of the outstanding warrants at September 30, 2011 for A&S was calculated using the Black Scholes Model with the following assumptions:

Fair value per share

Exercise price

Risk free rate

Dividend yield

Expected term/contractual life (number of years)

Expected volatility

The fair value of the outstanding warrants at September 30, 2011 for Hawk was calculated using the Black Scholes Model with the following assumptions:

Fair value per share

On January 9, 2012, Dehaier issued 5,000

unregistered common shares to an independent contractor.

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

price was $11,000.

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 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 March 31, 2012, 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 three months

ended March 31, statutory surplus reserve activity was as follows:

For the three months ended

March 31, 2012

Balance at December 31, 2011

Addition to statutory reserves

Balance at March 31, 2012

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

EQUITY (CONTINUED)

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 annually installments

over the five years of the agreements.

As of December 29, 2011, none of the 450,000 options have been fully vested.

The Company valued the stock options using

the Black-Scholes model with the following assumptions:

Interest Rate

Directors and officers

The following is a summary of the option activity:

Stock options

Weighted Average

Exercise Price

Intrinsic Value

Outstanding as of December 31, 2011

Outstanding as of March 31, 2012

Following is a summary of the status of options

outstanding and exercisable at March 31, 2012:

Outstanding options

Exercisable options

Average remaining

contractual life

Average remaining

contractual life

For the three months ended March 31, 2012

and 2011, the Company recognized $27,390 and $0, respectively, as compensation expense under its stock option plan.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED 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

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

investor relations consultancy.

On January 10, 2012, the Company issued 100,000 warrants to Firs Trust Group, Inc., (“Firs

Trust”), the Company’s investor relations consultancy.

The Company had 257,500 warrants outstanding as of March 31,

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.

All the warrants granted to Firs Trust have the right to purchase

one share of common stock for an exercise price of $4.00 per share with a term of 5 years.

The fair values of the outstanding warrants

at March 31, 2012 were calculated using the Black Scholes Model with the following assumptions:

Market price per share (USD/share)

Exercise price (USD/share)

4.00 to 10.00

Risk free rate

Dividend yield

Expected term/contractual life (number of years)

Expected term/Contractual life (years)

Expected volatility

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 September 30, 2011.

The following table sets forth by level

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

as of March 31, 2012 and December 31, 2011, respectively.

Carrying Value at

September 30, 2011

Fair Value Measurement at

September 30, 2011

March 31, 2012

Warrants liability

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

WARRANTS LIABILITY (CONTINUED)

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, January 1, 2011

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, September 30, 2011

(1) Fair Value of Underlying Common Shares

The $2.03 is the closing price of the Company’s common shares on September 30, 2011.

Ending balance

Following is a summary of the warrants activity:

Exercise Price

The exercise price of the warrants was determined by the Company’s board of directors.

(3) Risk-free interest rate

Risk-free interest rate was estimated based on the yield to maturity of U.S.

Treasury notes with a maturity period close to the term of the warrants.

(4) Dividend yield

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.

(6) Volatility

The volatility of the underlying common 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 September 30, 2011 was $0.94.

The total fair value of such warrants was $140,751 at September 30, 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 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 condensed consolidated statements of income and comprehensive income.

The fair value of each Hawk warrant at September 30, 2011 was $0.95.

The total fair value of such warrants was $7,146, which has not been reflected in the Company’s condensed consolidated financial statements due to immateriality.

The fair value of the warrants for Hawk was $15,000 at the grant date.

The decrease in fair value of the warrants resulted in a loss of $7,856, which has not been reflected in the Company’s condensed consolidated financial statements due to immateriality.

Weighted Average

Contractual Life

Outstanding as of December 31, 2011

Outstanding as of March 31, 2012

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 registered capital.

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 September 30, 2011, 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 six months ended September 30, 2011 statutory surplus reserve activity was as follows:

Balance at December 31, 2010

Addition to statutory reserves

Balance at September 30, 2011

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

British Virgin Islands

Dehaier is a tax-exempt company incorporated in the 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.

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.

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 three months ended March 31, 2012 and 2011.

The high technology certification will expire and be renewed in

September 2012.

for BTL is 25% in 2012 and 2011.

United States

Breathcare is a limited liability company

and is not subject to federal income tax.

As of March 31, 2012, Breathcare was inactive.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

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 nine months ended September 30, 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.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

CONCENTRATIONS

Major Customers

For the nine months ended September 30, 2011 and 2010, and for the three months ended September 30, 2011 and 2010, approximately 10%, 11%, 22% and 19% of the Company’s revenues were received from one customer.

At September 30, 2011 and 2010, receivables from four customers were approximately 10%, 9%, 8%, 8% and 11%, 11%, 8%, 8%, respectively.

For the nine months ended September 30, 2011 and 2010, and for the three months ended September 30, 2010 and 2011, the Company’s three top selling products accounted, in the aggregate, for approximately 75%, 51%, 87% and 53%, respectively, of its total net revenues.

The following represents the revenues by products, all derived from operations in the PRC:

For the nine months ended

September 30,

For the three months ended March 31, 2012,

approximately 27% of the Company’s revenues was received from one customer.

For the three months ended March 31, 2011, approximately

18% of the Company’s revenues was received from one customer.

At March 31, 2012 and 2011, receivables

from four customers were approximately 11%, 9%, 8%, 8% and 12%, 11%, 11%, 10%, respectively.

For the three months ended March 31, 2012

and 2011, the Company’s three top selling products accounted, in the aggregate, for approximately 81% and 90%, respectively,

of its total net revenues.

The following represents the revenues by

product line, all derived from China:

For the three months ended

September 30,

Medical Devices

Respiratory and Oxygen Homecare

Technical Service

Subsequent Events

The Company issued 5,000 shares to an investor

relationship consultant on April 5, 2012 pursuant to a consulting agreement signed on January 9, 2012.

The fair value of the shares

granted on April 5, 2012 was approximately $12,000 based on the closing price on that date.

On April 23, 2012, the Company signed a

strategic cooperation agreement with Timesco of London Ltd., to be its exclusive distributor in mainland China for Timesco’s

entire laryngoscope Optima series of products in the next three years.

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-Q

Item 5. Other Information