What changed in this filing

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Item 5. Other Information

2011-05-03 compared with 2010-11-12 · 345 added, 419 removed, 257 unchanged (75% of the section changed)

42 unchanged sentences

001-34661, filed on March 31, 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.

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 12, 2010

/s/ Z HENG (R ITA )

Zheng (Rita) Liu

Chief Financial Officer

(Principal Financial and Accounting

/s/ Ping Chen

Chief Executive Officer

(Principal Executive

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Condensed Consolidated Statements of Operations for the nine and three months ended September

30, 2010 and 2009

Condensed Consolidated Statements of Cash Flows for the nine months ended September

30, 2010 and 2009

Notes to the Condensed Consolidated Financial Statements

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

Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and

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

Notes to the Unaudited Condensed Consolidated Financial Statements

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

CURRENT ASSETS:

Cash and cash equivalents

Accounts receivable

- less allowance for doubtful accounts of $ 74,179 and $102,939

Accounts receivable-less allowance for doubtful accounts of $88,273 and $87,555 at March 31, 2011 and December 31,

2010, respectively

Other receivables

1 unchanged sentence

Inventories, net

Tax receivable

Total Current Assets

Property and equipment, net

Tax receivable

LIABILITIES AND SHAREHOLDERS EQUITY

5 unchanged sentences

Warranty obligation

Warrants liability

Due to officer

Total Current Liabilities

OTHER LIABILITIES

Warrants liability

Total Liabilities

Commitments and Contingency

1 unchanged sentence

Common stock, $0.002731 par value, 18,307,038 shares authorized, 4,510,000 and 4,500,000 shares issued and outstanding at

September 30, 2010 and December 31, 2009, respectively

March 31, 2011 and December 31, 2010, respectively

Additional paid in capital

5 unchanged sentences

Total liabilities and shareholders equity

The accompanying notes are an integral part of these 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 OPERATIONS

For the nine months ended

September 30,

For the three months ended

September 30,

Costs of revenue

4 unchanged sentences

Operating Income

Financial expenses ( including interest expense of $48,255, $67,704, $21,452 and $23,772)

Financial expenses (including interest expense of $16,177 and $18,828 at March 31, 2011 and December 31, 2010,

respectively)

Change in fair value of warrants liability

6 unchanged sentences

The accompanying notes

are an integral part of these condensed consolidated financial statements.

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

Operating Activities

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

For the three months

Cash flows from operating activities

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

Stock-based compensation expense

Depreciation and amortization

Recovery of doubtful accounts

Recovery of inventory obsolescence

Change in fair value of warrants liability

Provision for warranty reserve

Change in assets and liabilities

Changes in assets and liabilities:

Increase in accounts receivable

Decrease (increase) in prepayments and other current assets

Increase in other receivable

Increase in inventories

(Increase) Decrease in prepayments and other current assets

Decrease (Increase) in other receivables

Decrease (Increase) in inventories

Increase in tax receivable

(Decrease) increase in accounts payable

(Decrease) increase in advances from customers

Increase (Decrease) in accounts payable

Increase (Decrease) in advances from customers

(Decrease) Increase in accrued expenses and other current liabilities

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Net cash provided by (used in) operating activities

Investing Activities

Cash flows from investing activities

Capital expenditures and other additions

Proceeds from (advances to) related parties

Advances to related parties

Net cash used in investing activities

Financing Activities

Net proceeds from issuance of common stock

Net cash provided by financing activities

Cash flows from financing activities

Repayment of bank loan

Net cash used in financing activities

Effect of exchange rate fluctuations on cash and cash equivalents

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

4 unchanged sentences

The accompanying notes

are an integral part of these condensed consolidated financial statements.

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

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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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 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.

ISO13485 industry standard has also already

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.

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.

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.

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 Companys management, the unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the consolidated financial position, results

of operations and cash flows of the Company for the periods presented.

The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of operating results expected for the full year or future

interim periods.

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 Companys 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 three months ended March 31, 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 Companys Annual Report on Form 10-K for the year ended

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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.

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.

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

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

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.

BTL owns a building which is pledged as collateral for

BDLs bank loans.

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.

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

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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 noncontrolling interest of the variable interest entity at the amounts at which they were carried in the accounts of the reporting entity that controls the

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.

3 unchanged sentences

Basis of Consolidation-Continued

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

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 of BTL.

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 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.

BDL is BTLs only customer referral

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 BTLs losses.

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

September 30,

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

Total current assets

6 unchanged sentences

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.

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

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.

Estimates are adjusted to reflect actual experience when necessary.

Significant accounting estimates reflected in the Companys condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts,

inventory obsolescence, warranty obligation, warrants liability 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, inventory obsolescence, warranty obligation, warrants liability, stock-based compensation and useful lives of property and

Actual results could differ from those estimates.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued

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.

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

Accounts Receivable

Accounts receivable are recorded at net realizable

Accounts receivable terms typically are 60 to 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 collectability of specific accounts.

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 an allowance of $74,179 and $102,939 was required at September 30, 2010 and December 31, 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 $6,080,266 and

$1,511,540 as of September 30, 2010 and December 31, 2009, respectively, which were included in prepaid expenses and other current assets.

Advances from customers were $436,625 and $174,253 as of September 30, 2010 and

December 31, 2009, respectively.

In accordance with the accounting policies, management has determined that an allowance of $88,273 and $87,555 was

required at March 31, 2011 and December 31, 2010, respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

Advances to suppliers were $7,410,756 and $4,515,737 at March 31, 2011 and December 31, 2010, respectively, which were included in prepayment and other current assets.

Advances from customers were $294,437 and $269,189 as of

March 31, 2011 and December 31, 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 follows the provisions of ASC 820-10, Fair Value Measurements and

Disclosures, which establishes a single authoritative definition of fair value and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial assets and liabilities.

This standard

defines fair value, provides guidance for measuring fair value and requires certain disclosures.

This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market

prices), the income approach (present value of future income or cash flows) and the cost approach (cost to replace the service capacity of an asset or replacement cost).

For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial liabilities

would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in ASC 820-10-15-15-1A.

On August 26, 2009, the FASB issued Accounting Standard Update (ASU) 2009-05, Measuring Liabilities at Fair Value, to clarify how entities should estimate the fair value of liabilities under the FASB

ASC Topic 820, Fair Value Measurements and Disclosures.

The amendments in ASU 2009-05 reduce potential ambiguity in financial reporting when measuring the fair value of liabilities.

Therefore, preparers, investors, and other users of financial

statements will have a better understanding of how the fair value of liabilities was measured, helping to improve consistency in the application of Topic 820.

The FASB issued ASU 2009-05 as a result of expressed concern that there may be a lack of

observable market information to measure the fair value of a liability.

For example, in the hypothetical transfer of an asset subject to a restriction there will be no observable data available to measure the liability because it is restricted from

being transferred.

This guidance is effective for the first reporting period (including interim periods) beginning after issuance.

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.

Such warrants are indexed to the

Companys stock, which is traded in US dollars.

Since the Companys 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 statement of operations (see Note 10).

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

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

At September 30, 2010, the reserve for obsolescence was $48,223.

At December 31, 2009, the reserve for obsolescence was $52,989, and the

provision is included in the operating expenses in the condensed consolidated statements of operations.

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 (formerly Emerging Issue Task Force

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

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 statement of operations (see Note 9).

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.

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 recorded the change in earnings.

As a result, the derivative liability is carried on the balance sheet at its fair value (see note 10).

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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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 reserve for obsolescence was $49,256 and $48,855 for March 31, 2011 and December 31, 2010, respectively, and the provision is included in the operating expenses in the condensed consolidated

statements of operations.

Property and Equipment

Property and equipment are recorded as 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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Motor vehicles

Impairment of Long-Lived

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 market value of the asset, is

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

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.

Revenue Recognition

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

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 have passed);

Delivery and/or installation has occurred (e.g., risks and rewards of ownership has passed);

The sales price is fixed or determinable;

Collectability is reasonably assured.

Collectibility is reasonably assured.

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

9 unchanged sentences

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.

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.

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 accompanying

consolidated financial statements are presented in US dollars.

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 consolidated statements of operations.

Generally, foreign exchange gains and losses resulting from the settlement of such transactions are

recognized in the condensed consolidated statements of operations.

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

liabilities are translated at current exchange rates quoted by the Peoples 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.

Assets and liabilities are translated at current

exchange rates quoted by the Peoples 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.

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 term of the

product warranty is generally twelve months.

The reserve for warranty costs was $182,444, $178,755 at September 30, 2010 and December 31, 2009, respectively.

Warranty expense for the nine months ended September 30, 2010 and 2009, and

for the three months ended September 30, 2010 and 2009 were $111,076, $83,588, $45,654 and $37,422, 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.

development costs were $51,085, $50,671, $24,032 and $34,392 for the nine months ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009, respectively.

Shipping and Handling Expenses

Shipping and handling expenses of $49,130, $49,591, $20,277 and $23,195 for the nine months ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009 were

included in the operating expenses in the condensed consolidated statements of operations, respectively.

Advertising costs are expensed as incurred.

Advertising costs were $80,296, $42,758, $18,056 and $25,329 for the nine months

ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009, respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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.

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:

Nine Months Ended

September 30,

Three Months Ended

September 30,

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 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 term of the product warranty is generally twelve months.

The reserve for warranty costs was $303,936 and $301,464

at March 31, 2011 and December 31, 2010, respectively.

Warranty expense for the three months ended March 31, 2011 and 2010 was $29,527 and $25,020, respectively.

Earnings per Share

The Company follows the provisions of ASC 260-10, Earnings per

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 following table

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

For the three months ended

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

Value Added Tax

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

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 to be implemented after the Company has completed its public offering, which occurred on March 22, 2010.

This plan authorizes the issuance of up to 10% of the number of shares outstanding after the Company has

completed its public offering.

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

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

As of September 30, 2010, no options were issued under this plan.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

1 unchanged sentence

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:

(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 September 30,

2010 and December 31, 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 September 30, 2010 and December 31, 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 nine months ended September 30, 2010 and the year ended

December 31, 2009, the Company did not incur any interest or penalties.

Income tax returns for the year prior to 2007 are no longer

subject to examination by tax authorities.

Value Added Tax

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

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

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 March 31, 2011 and December 31, 2010 respectively, 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 March 31, 2011 and December 31, 2010 respectively, 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, 2011 and 2010 respectively, 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.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

PREPAID EXPENSES AND OTHER

CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

PREPAYMENT AND OTHER CURRENT ASSETS

Prepayment and other current assets consist of the following:

Advances to suppliers

Prepayment for equipment purchase

Initial public offering expenses

Other prepaid expenses

PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

equipment consist of the following:

Land use rights

3 unchanged sentences

Property and equipment, net

At September 30, 2010 and December 31, 2009, BTLs building was pledged to a bank as collateral for

short-term borrowings of RMB 10,000,000 (US$ 1,495,000) and RMB 10,000,000((US$ 1,464,770), respectively (see Note 6).

Depreciation and

amortization expense was $261,438, $210,231, $89,124 and $71,219 for the nine months ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009, respectively.

At March 31, 2011 and December 31, 2010, BTLs building was pledged to a bank as collateral for short-term

borrowings of RMB6,000,000 (US$916,224), RMB10,000,000 (US$1,514,620), respectively (see Note 6).

Depreciation and amortization expense was

$109,373 and $85,750, for the three months ended March 31, 2011 and 2010, respectively.

Land Use Rights

There is no private ownership of land in China.

There is no private ownership of land in the PRC.

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

The Companys land use rights are reported at the

purchase price (RMB1,944,000 in 2002).

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

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

1 unchanged sentence

TAX RECEIVABLE

Tax receivable consists of the following:

September 30,

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 Value Added Tax (VAT) in accordance with Chinese taxation laws.

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 September 30, 2010

and December 31, 2009 represents VAT credit on the purchased products.

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 March 31, 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.

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 Company has a

line of credit for RMB10,000,000 (USD1,574,620 at December 31, 2010) with a commercial bank in the PRC 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, 2009 and 2008 were 5.58% and 7.84%,

respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTLs building (see note 4) 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 June 14, 2011.

Average interest

rates for the three months ended March 31, 2011 and 2010 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 4) and guaranteed by BDL and an officer of the

NON-CONTROLLING INTEREST

Non-controlling interest consists of the following:

September 30,

Non-controlling

interest consists of the following:

Original paid-in capital

1 unchanged sentence

Accumulated other comprehensive income

SHAREHOLDERS EQUITY

2011, the Company issued 10,000 shares of its restricted common shares to a former investors relation firm pursuant to an agreement.

The total fair value of the common shares issued was $59,300.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

1 unchanged sentence

COMMITMENTS AND CONTINGENCY

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

shares equaled 40% of the maximum number of shares which were sold in the initial public offering (IPO).

The shares would 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 (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 were less than $.80, the Company would 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 shares.

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.

The shares would be returned to the founders 45 days

after the Companys Form 10-K for the year ended December 31, 2010 was filed.

At March 31, 2011, the return of these shares was in progress and 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 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 April 2012.

Approximate future minimum lease payments under these leases at September 30, 2010, are as follows:

Future payments for the twelve months

Ending September 30,

These non-cancelable leases have

lease terms expiring through December 2012.

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

Future payment for the twelve months ending March 31, 2011

Total minimum lease payments

Rent expense for the nine months ended September 30, 2010 and 2009, and for the three months ended September 30,

2010 and 2009 was $77,702, $36,174, $21,097 and $9,933, respectively.

Rent expense paid to the spouse of the chief executive officer for the

nine months ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009 was $11,638, $17,418, $7,489 and $7,456, respectively.

On December 15, 2009, BTL agreed to lease its building to BDL free of any charges through September 24, 2010.

BDL is currently negotiating a new lease with BTL.

Rent expense for the three months

ended March 31, 2011 and 2010 was $17,279 and $13,290, respectively.

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

the three months ended March 31, 2011 and 2010 was $0 and $7,472, 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 Peoples Republic of China, effective as of January 1, 2008, 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 $178,000 as of September 30,

2010, which have not been reflected in its condensed consolidated financial statements, because it is not more likely than not that this will be paid or incurred.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SHAREHOLDERS EQUITY

Common Shares

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 condensed consolidated financial statements give retroactive effect to the stock

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 equal 40% of the maximum number of shares sold in the initial

public offering (IPO).

The shares will remain in escrow until such time as the Company files its Form 10-K with the Securities and Exchange Commission for the year ending December 31, 2010.

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 ending

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 the IPO offering price for five trading days in any period, then the

Make-Good Shares will be returned to the founders.

These shares are included as part of the calculation of the basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 in the accompanying condensed

consolidated financial statements.

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

April 22, 2010, the Company sold 1,500,000 common shares at $ 8.00 per share for US$ 12,000,000 before the IPO costs.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SHAREHOLDERS EQUITY-continued

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.

In addition, all preferred shares in authorized capital on October 31, 2009, were re-designated as common shares.

Series A Preferred Shares and Series B Preferred Shares are collectively referred to as the Preferred Shares.

Preferred Shares have priority over the common stock Ordinary Shares.

Certain rights, preferences and privileges of the Preferred Shares are

listed below:

The holders of Preferred Shares are entitled to receive noncumulative dividends, when and if declared by the board of

Dividends are not mandatory and shall not accrue.

Preferred Shares Series A and B have a liquidation preference of $10 and

$10.95074 per share, respectively.

The holders of Preferred Shares are entitled to one vote for each share of common stock the Preferred

Shares could be converted to.

Preferred Shares are non-redeemable.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SHAREHOLDERS EQUITY-continued

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 entitys 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, 2010, BDLs 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 nine months ended September 30, 2010, statutory surplus reserve activity was as follows:

Balance December 31, 2009

Addition to statutory reserves

Balance September 30, 2010 (Unaudited)

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.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

The Company had 157,500 warrants outstanding as of

September 30, 2010.

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 September 30, 2010 for A&S was calculated using the Black Scholes Model with the following assumptions:

COMMITMENTS AND CONTINGENCY (CONTINUED)

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 $226,000 and $188,000 as of March 31, 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.

WARRANTS LIABILITY

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

(Hawk), the Companys investor relations consultancy.

The Company had 157,500 warrants outstanding as of March 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 Hawk 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 March 31, 2011 for A&S was calculated using the Black Scholes Model with the following

Fair value per share (USD/share)

5 unchanged sentences

The fair value of the outstanding

warrants at September 30, 2010 for Hawks was calculated using the Black Scholes Model with the following assumptions:

warrants at March 31, 2011 for Hawk was calculated using the Black Scholes Model with the following assumptions:

Fair value per share (USD/share)

4 unchanged sentences

Expected volatility

(1) Fair Value of

Underlying Ordinary Shares

The $5.24 is the close price of the Company on September 30, 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 March 31, 2011.

Carrying Value at

Fair Value Measurement

March 31, 2011

Warrants liability

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 significant observable inputs (Level 2) as of March 31, 2011:

Beginning balance at December 31, 2010

Warrants issued for the three months ended March 31, 2011

Fair value change of the issued warrants included in earnings

Ending balance at March 31, 2011

(1) Fair Value of Underlying Ordinary Shares

The $5.23 is the close price of the Company on March 31, 2011.

(2) Exercise price

8 unchanged sentences

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

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

WARRANTS-continued

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 September 30, 2010 was $1.03.

The total fair value of such warrants was $155,194 at

September 30, 2010.

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

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 September 30, 2010 was $1.09.

The total fair value of such warrants was $8,161, which has

not been reflected in the Companys condensed consolidated financial statements due to immateriality.

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

The decrease in fair value of the warrants resulted in a gain of

$6,839, which has not been reflected in the Companys condensed consolidated financial statements due to immateriality.

value of the each A&S warrant at March 31, 2011 was $2.06.

The total fair value of such warrants was $308,583 at March 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 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.

fair value of each Hawk warrant at March 31, 2011 was $2.11.

The total fair value of such warrants was $15,806, which has not been reflected in the Companys 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 gain of $806, which has not been reflected in the Companys condensed consolidated financial statements due to immateriality.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 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 entitys 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 March 31, 2011, BDLs 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, 2011

Balance at December 31, 2010

Addition to statutory reserves

Balance at March 31, 2011

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 16.5% 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 periods ended

September 30 2010 and 2009.

The tax rate for BTL is 25% in 2009 and 2010.

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.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RELATED PARTY TRANSACTIONS

At December 31, 2009, the amount due to an officer of $3,861 represents expenses paid by an officer of the Company.

This amount was

repaid in the first six months of 2010.

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 three months ended March 31, 2011 and 2010.

The tax rate for BTL is 25% in 2010 and 2011.

CONCENTRATIONS

Major Customers

For the nine months ended September 30, 2010 and 2009,

and for the three months ended September 30, 2010 and 2009 approximately 11%,8%, 19% and 15% , respectively, of the Companys revenues were to one customer.

At September 30, 2010 and December 31, 2009, receivables from four customers were approximately 11%, 11% 8%, 8% and 9%, 8%, 8%, 7%, respectively.

For the nine months ended September 30, 2010 and 2009, and for the three months ended September 30, 2010 and 2009, the Companys three top

selling products accounted, in the aggregate, for approximately 51%, 56%, 53% and 54%, respectively, of its total net revenues.

The following

represents the revenues by products, all derived from China:

Nine Months Ended

September 30,

Three Months Ended

September 30,

For the three months ended March 31, 2011 and 2010, approximately 18% and 17% of the Companys revenues was received from one

At March 31, 2011 and 2010, receivables from four customers were approximately 12%, 11%, 11%, 10% and 9%, 8%, 8%, 7%,

respectively.

the three months ended March 31, 2011 and 2010, the Companys three top selling products accounted, in the aggregate, for approximately 90% and 61%, respectively, of its total net revenues.

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

For the three months ended

Medical Devices

Technical Service

Respiratory and Oxygen Homecare

Technical Service

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENTS

In April 2011, BTL

signed strategic cooperation agreements with Taiyo Nippon Sanso Shenwei (Shanghai) Medical Gas Co., Ltd (Taiyo-Shanghai) and Beijing Orient Medical Gas Co., Ltd (Beijing Orient) to develop oxygen therapy services for the home

use market in Beijing.

Leveraging the expertise of each company, these agreements include oxygen production, oxygen filling, selling and providing home service for medical oxygen in Beijing.

On April 29, 2011, BDL signed a cooperation agreement with Beijing Kanglian Medicines Co, Ltd, to develop, operate and implement a new rural healthcare construction project in Hunan and

Anhui provinces.

This project is supported by China Development Bank Corp (CDB), one of Chinas three national policy banks.

It is aimed at improving the national healthcare system through the development and upgrade of medical

facilities and health centers in nearly 2,900 counties, cities and districts across China.

BDL was selected for this project as a result of its broad product portfolio, which includes solutions at a variety of price points, including those

that meet the requirements of cost conscious facilities.

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