##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 20-F





(Mark One)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR



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

For the fiscal year ended March 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

OR



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Commission file number: 000-51440





CHINA MEDICAL TECHNOLOGIES,
INC.

(Exact name of Registrant as specified in its charter)





N/A

(Translation of Registrants name into English)

Cayman Islands

(Jurisdiction of
incorporation or organization)

No. 24 Yong Chang North Road

Beijing Economic-Technological Development Area

Beijing 100176

Peoples Republic of China

(Address of principal executive offices)

Takyung (Sam) Tsang

Chief Financial Officer

No. 24 Yong
Chang North Road

Beijing Economic-Technological Development Area

Beijing 100176

Peoples Republic of China

Telephone: (86) 10 6788 4694

Fax: (86) 10 6788 9588

Email: sam.tsang@chinameditech.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)





Securities registered or to be registered pursuant to Section 12(b) of the Act:



|                                                                                             |  |                                          
|-------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                                                          |  | Name of Each Exchange on Which Registered
|American Depositary Shares, each representing ten ordinary shares, par value $0.10 per share |  | Nasdaq National Market                   

Securities registered or to be registered pursuant to Section 12(g) of the Act

Name of each exchange and Title of each class on which registered:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)





Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the
annual report. 274,066,661 Ordinary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.    Yes  x    No   ̈

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.    Yes   ̈    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                    Accelerated filer   ̈                        Non-accelerated filer   ̈

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing: U.S. GAAP   x

International Financial Reporting Standards as
issued by the International Accounting Standards Board   ̈    Other   ̈

If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.     Item 17   ̈    Item 18   ̈

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈     No  x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by
check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.     Yes   ̈     No   ̈









---

##### Table of Contents

TABLE OF CONTENTS



|         |  |           |  |                                                                              |  |   
|-------- |  | --------- |  | ---------------------------------------------------------------------------- |  | --
|         |  |           |  | Page                                                                        
|PART I   |  |           |  |                                                                             
|         |  |           | 
|         |  | Item 1.   |  | Identity of Directors, Senior Management and Advisers                        |  | 4 
|         |  | Item 2.   |  | Offer Statistics and Expected Timetable                                      |  | 4 
|         |  | Item 3.   |  | Key Information                                                              |  | 4 
|         |  | Item 4.   |  | Information on the Company                                                   |  | 30
|         |  | Item 4A.  |  | Unresolved Staff Comments                                                    |  | 52
|         |  | Item 5.   |  | Operating and Financial Review and Prospects                                 |  | 53
|         |  | Item 6.   |  | Directors, Senior Management and Employees                                   |  | 74
|         |  | Item 7.   |  | Major Shareholders and Related Party Transactions                            |  | 81
|         |  | Item 8.   |  | Financial Information                                                        |  | 83
|         |  | Item 9.   |  | The Offer and Listing                                                        |  | 84
|         |  | Item 10.  |  | Additional Information                                                       |  | 85
|         |  | Item 11.  |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 91
|         |  | Item 12.  |  | Description of Securities Other Than Equity Securities                       |  | 92
|         |  |          
|PART II  |  |           |  |                                                                             
|         |  |           | 
|         |  | Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 93
|         |  | Item 14.  |  | Material Modifications to the Rights to Security Holders and Use of Proceeds |  | 93
|         |  | Item 15.  |  | Controls and Procedures                                                      |  | 94
|         |  | Item 16A. |  | Audit Committee Financial Expert                                             |  | 96
|         |  | Item 16B. |  | Code of Ethics                                                               |  | 96
|         |  | Item 16C. |  | Principal Accountant Fees and Services                                       |  | 96
|         |  | Item 16D. |  | Exemptions From the Listing Standards for Audit Committees                   |  | 97
|         |  | Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       |  | 97
|         |  |          
|PART III |  |           |  |                                                                             
|         |  |           | 
|         |  | Item 17.  |  | Financial Statements                                                         |  | 98
|         |  | Item 18.  |  | Financial Statements                                                         |  | 98
|         |  | Item 19.  |  | Exhibits                                                                     |  | 98



---

##### Table of Contents

INTRODUCTION

Unless otherwise indicated, references in this annual report on Form 20-F to:



| |  |  | ADRs are to the American depositary receipts, which, if issued, evidence our ADSs;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | ADSs are to our American depositary shares, each of which represents ten ordinary shares;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Articles of association are to our memorandum and articles of association, as amended and restated from time to time;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | China and the PRC are to the Peoples Republic of China, excluding, for the purposes of this annual report on Form 20-F only, Taiwan
and the special administrative regions of Hong Kong and Macau;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | RMB and Renminbi are to the legal currency of China;
| | - |  | --------------------------------------------------------



| |  |  | shares and ordinary shares are to our ordinary shares, par value US$0.10 per share; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | US$ and U.S. dollars are to the legal currency of the United States.
| | - |  | ------------------------------------------------------------------------

Unless the context indicates otherwise, we, us, our company, our, China Medical and
CMED refer to China Medical Technologies, Inc., its predecessor and wholly owned subsidiary, YDME Beijing, and all other direct and indirect consolidated subsidiaries of China Medical Technologies, Inc.

In addition, unless otherwise indicated, references in this annual report on Form 20-F to:



| |  |  | BBE are to Beijing Bio-Ekon Biotechnology Co., Ltd.;
| | - |  | ------------------------------------------------------



| |  |  | Beijing Chengxuan are to Beijing Chengxuan Economic and Trade Co., Ltd.;
| | - |  | --------------------------------------------------------------------------



| |  |  | Beijing GP are to Beijing GP Medical Technologies, Ltd., one of our wholly owned subsidiaries in China;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Beijing Weixiao are to Beijing Weixiao Biological Technology Development Co., Ltd.;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Chengxuan are to Chengxuan International Ltd.;
| | - |  | ------------------------------------------------



| |  |  | GE are to General Electric Company or to one or more of its wholly owned subsidiaries, as the case may be and where applicable, to its relevant
subsidiaries and its related companies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Golden Meditech are to Golden Meditech (BVI) Company Ltd.;
| | - |  | ------------------------------------------------------------



| |  |  | PUPH are to Peking University Peoples Hospital; and
| | - |  | ------------------------------------------------------



| |  |  | YDME Beijing are to Beijing Yuande Bio-Medical Engineering Co., Ltd., our predecessor and wholly owned subsidiary in China.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

The following technical and industry specific terms used in this annual report on Form 20-F have the meanings set forth
below:



| |  |  | Ablation means elimination or removal;
| | - |  | ----------------------------------------



| |  |  | CCD camera means charge-couple-device camera equipped with a chip to control the brightness and brilliance of colors of the recorded images;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | DNA means deoxyribonucleic acid, a nucleic acid molecule that contains the genetic instructions for the development and functioning of all known living
organisms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ECLIA analyzer means an IVD instrument capable of detecting minute levels of light triggered by combining reagents with body fluid samples to produce
quantitative diagnostic results;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1



---

##### Table of Contents

| |  |  | ECLIA system means an integrated luminescence immunoassay IVD system comprised of an analyzer and reagents for detecting and quantifying a specific
antigen or antibody in a blood or body fluid sample using an immunological reaction;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH imaging analysis system means an integrated system comprised of a fluorescent microscope, CCD camera and FISH imaging analysis software that enable
medical practitioners to visualize and locate DNA sequences in human cells for identifying chromosomal abnormalities using fluorescent in situ hybridization technology;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH business means the business of manufacturing and selling FISH imaging analysis system and FISH probes that we acquired in March 2007;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH probes or DNA probes means a synthetic piece of DNA coupled with a fluorescent indicator, or tag, so that the chromosomes or genes that
it binds to can be directly visualized under a fluorescent microscope;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH products or FISH system means the FISH imaging analysis system and the FISH probes;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Fluorescent in situ hybridization technology or FISH technology means a molecular diagnostic technology that uses a
fluorescent-labeled probe to detect and localize the presence or absence of specific DNA sequences on chromosome;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | HIFU means high intensity focused ultrasound;
| | - |  | -----------------------------------------------



| |  |  | HIFU tumor therapy system or HIFU therapy system means an ultrasound-guided ablation system that is used for the non-invasive treatment of
solid tumors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | HIV means human immunodeficiency virus, a retrovirus that can lead to acquired immunodeficiency syndrome,a condition in humans in which the
immune system begins to fail, leading to life-threatening opportunistic infections;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In-vitro diagnostics or IVD means the detection and monitoring of diseases through laboratory evaluation and the analysis of bodily fluids
and tissues from patients;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | IVD systems consists of the ECLIA analyzer, ECLIA reagents, FISH imaging analysis system and probes;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Luminescence immunoassay IVD system means an advanced, light-based IVD system commonly used in the United States and Western Europe;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | MAIA means Magnetic Antibody Immunoassay, a separation technology suitable for high volume and fully automatic ECLIA analyzers and can enhance test
results;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Probes means a piece of labeled DNA used to detect the presence of a complementary DNA sequence by molecular hybridization;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Reagent means a substance used in a chemical reaction to detect, measure and produce other substances; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Reagent kits means commercially prepared reagent sets, with accessory devices, containing all major components necessary to perform IVD tests; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SARS means severe acute respiratory syndrome.
| | - |  | -----------------------------------------------

We and certain selling shareholders of our company completed the initial public offering of 7,360,000 ADSs, each representing ten ordinary shares in August 2005. On August 10, 2005, we listed our ADSs on the
Nasdaq National Market under the symbol CMED. On March 27, 2006, we completed a follow-on offering of 5,750,000 ADSs, which were sold by certain of our existing shareholders. On November 21, 2006, we completed an offering of
US$150 million principal amount of 3.5% Convertible Senior Subordinated Notes due 2011 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the



2



---

##### Table of Contents

Securities Act). Concurrently with the offering of convertible notes, we entered into a prepaid forward repurchase contract with an affiliate of
Merrill Lynch & Co. Pursuant to the forward repurchase contract, we repurchased contemporaneously with the sales of the convertible notes, an aggregate of US$30 million of ADSs, equivalent to 1,163,692 ADS at US$25.78 per ADS. We filed a
registration statement on Form F-3 to register the resale of the convertible notes and the ADSs issuable upon conversion of the convertible notes in January 2007 and the registration statement was declared effective by the SEC on January 26,
2007.



3



---

##### Table of Contents

PART I



|ITEM1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------ | -----------------------------------------------------

Not applicable.



|ITEM2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------ | ---------------------------------------

Not applicable.



|ITEM3. | KEY INFORMATION
|------ | ---------------



|A.    Selected | Financial Data
|-------------- | --------------

The following selected
consolidated statement of income data (other than ADS data) for the fiscal years ended March 31, 2006, 2007 and 2008 and the selected consolidated balance sheet data as of March 31, 2007 and 2008 have been derived from our audited
consolidated financial statements included elsewhere in this annual report on Form 20-F. The following selected consolidated statement of income data (other than ADS data) for the fiscal years ended March 31, 2004 and 2005 and the selected
consolidated balance sheet data as of March 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which are not included in this annual report on Form 20-F. You should read this information together with
the consolidated financial statements and related notes and information under Item 5. Operating and Financial Review and Prospects included elsewhere in this annual report on Form 20-F. Our consolidated financial statements are prepared
and presented in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP). Our historical results do not necessarily indicate our results expected for any future periods.



|                                              |  |                                                                         |   |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|--------------------------------------------- |  | ----------------------------------------------------------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                              |  | Year ended March 31,                                                    |  
|                                              |  | 2004                                                                    |   |  | 2005        |   |  | 2006        |   |  | 2007        |   |  | 2008        |   |  | 2008        |  
|                                              |  | RMB                                                                     |   |  | RMB         |   |  | RMB         |   |  | RMB         |   |  | RMB         |   |  | US$         |  
|                                              |  | (in thousands, except for number of shares, per share and per ADS data) |  
|Consolidated Statement of Income Data:        |  |                                                                         |   |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|Revenues                                      |  | 110,750                                                                 |   |  | 217,547     |   |  | 371,767     |   |  | 546,970     |   |  | 915,738     |   |  | 130,596     |  
|Gross profit                                  |  | 76,767                                                                  |   |  | 152,968     |   |  | 261,273     |   |  | 395,356     |   |  | 569,302     |   |  | 81,190      |  
|Operating income                              |  | 66,480                                                                  |   |  | 128,549     |   |  | 193,263     |   |  | 290,271     |   |  | 423,952     |   |  | 60,461      |  
|Other income (expense)                        |  | 14                                                                      |   |  | 1,748       |   |  | 23,838      |   |  | 29,541      |   |  | (20,533     | ) |  | (2,928      | )
|Earnings before income taxes                  |  | 66,494                                                                  |   |  | 130,297     |   |  | 217,101     |   |  | 319,812     |   |  | 403,419     |   |  | 57,533      |  
|Income tax expense                            |  | (4,933                                                                  | ) |  | (11,854     | ) |  | (18,088     | ) |  | (30,094     | ) |  | (78,197     | ) |  | (11,152     | )
|Net income                                    |  | 61,561                                                                  |   |  | 118,443     |   |  | 199,013     |   |  | 289,718     |   |  | 325,222     |   |  | 46,381      |  
|Earnings per share(1)                         |  |                                                                         |   |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|Basic                                         |  | 0.31                                                                    |   |  | 0.59        |   |  | 0.81        |   |  | 1.08        |   |  | 1.24        |   |  | 0.18        |  
|Diluted                                       |  | 0.31                                                                    |   |  | 0.59        |   |  | 0.81        |   |  | 1.07        |   |  | 1.20        |   |  | 0.17        |  
|Earnings per ADS (basic and diluted)(2)       |  |                                                                         |   |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|Basic                                         |  | 3.10                                                                    |   |  | 5.90        |   |  | 8.10        |   |  | 10.80       |   |  | 12.40       |   |  | 1.80        |  
|Diluted                                       |  | 3.10                                                                    |   |  | 5.90        |   |  | 8.10        |   |  | 10.70       |   |  | 12.00       |   |  | 1.70        |  
|Dividend declared per share                   |  | 0.14                                                                    |   |  |            |   |  |            |   |  |            |   |  | 0.28        |   |  | 0.04        |  
|Weighted average number of shares outstanding |  |                                                                         |   |  |             |   |  |             |   |  |             |   |  |             |   |  |             |  
|Basic                                         |  | 200,000,001                                                             |   |  | 200,000,001 |   |  | 246,878,001 |   |  | 269,232,171 |   |  | 262,218,999 |   |  | 262,218,999 |  
|Diluted                                       |  | 200,018,001                                                             |   |  | 200,018,001 |   |  | 247,163,001 |   |  | 286,979,793 |   |  | 310,396,680 |   |  | 310,396,680 |  



4



---

##### Table of Contents



|(1) | If YDME Beijing and Beijing BP had not had any preferential tax rate or tax holiday, our basic and diluted earnings per share for the following periods would have been reduced as
follows:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  |                                                                        |  |      |  |      |  |      |  |      |  |     
|------------------ |  | ---------------------------------------------------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----
|                   |  | Year ended March 31,                                                  
|                   |  | 2004                                                                   |  | 2005 |  | 2006 |  | 2007 |  | 2008 |  | 2008
|                   |  | RMB                                                                    |  | RMB  |  | RMB  |  | RMB  |  | RMB  |  | US$ 
|                   |  | (in thousands, except for number of shares, per shareand per ADS data)
|Earnings per share |  |                                                                        |  |      |  |      |  |      |  |      |  |     
|Basic              |  | 0.02                                                                   |  | 0.03 |  | 0.05 |  | 0.06 |  | 0.26 |  | 0.04
|Diluted            |  | 0.02                                                                   |  | 0.03 |  | 0.05 |  | 0.05 |  | 0.22 |  | 0.03



|(2) | Each ADS represents 10 ordinary shares
|--- | --------------------------------------



|                                                                                   |  |                      |  |         |   |  |           |  |           |  |           |  |        
|---------------------------------------------------------------------------------- |  | -------------------- |  | ------- | - |  | --------- |  | --------- |  | --------- |  | -------
|                                                                                   |  | Year ended March 31,
|                                                                                   |  | 2004                 |  | 2005    |   |  | 2006      |  | 2007      |  | 2008      |  | 2008   
|                                                                                   |  | RMB                  |  | RMB     |   |  | RMB       |  | RMB       |  | RMB       |  | US$    
|                                                                                   |  | (in thousands)      
|Consolidated Balance Sheet Data:                                                   |  |                      |  |         |   |  |           |  |           |  |           |  |        
|Cash                                                                               |  | 24,114               |  | 14,646  |   |  | 843,791   |  | 1,173,640 |  | 682,679   |  | 97,359 
|Working capital(1)                                                                 |  | 52,238               |  | (66,707 | ) |  | 906,875   |  | 764,090   |  | 671,990   |  | 95,834 
|Goodwill and intangible assets                                                     |  |                     |  | 239,662 |   |  | 224,744   |  | 1,565,362 |  | 1,550,447 |  | 221,113
|Total assets                                                                       |  | 192,161              |  | 457,768 |   |  | 1,375,84  |  | 3,192,228 |  | 2,931,804 |  | 418,112
|Amounts due to related parties (current and non-current)                           |  | 4,807                |  | 102,714 |   |  |          |  |          |  |          |  |       
|Convertible notes                                                                  |  |                     |  |        |   |  |          |  | 1,158,480 |  | 1,051,800 |  | 150,000
|Payables and deferred credit related to FISH acquisition (current and non-current) |  |                     |  |        |   |  |          |  | 530,598   |  | 65,793    |  | 9,383  
|Total liabilities                                                                  |  | 56,651               |  | 203,815 |   |  | 129,307   |  | 1,906,489 |  | 1,409,043 |  | 200,947
|Total shareholders equity                                                         |  | 135,510              |  | 253,953 |   |  | 1,246,534 |  | 1,285,739 |  | 1,522,761 |  | 217,165



|(1) | Working capital is calculated using current assets minus current liabilities.
|--- | -----------------------------------------------------------------------------



5



---

##### Table of Contents

Exchange Rate Information

This annual report on Form 20-F contains translations of certain RMB amounts into U.S. dollar amounts at specified rates. All translations from RMB to U.S. dollars were made at the noon buying rate in The City of New
York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the noon buying rate in effect
on March 31, 2008, which was RMB7.0120 to US$1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this annual report on Form 20-F could have been or could be converted into U.S. dollars or RMB, as the case may be,
at any particular rate or at all. See Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaFluctuations in the value of the Renminbi may have a material adverse effect on your investment and
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively for discussions of the effects of fluctuating exchange rates and currency control on the value of our ADSs. On June 25, 2008
the noon buying rate was RMB6.8653 to US$1.00.

The following table sets forth information concerning exchange rates between the RMB and
the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other
information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.



|                       |  |                  |  |            |  |        |  |       
|---------------------- |  | ---------------- |  | ---------- |  | ------ |  | ------
|                       |  | Noon Buying Rate
|Period                 |  | PeriodEnd        |  | Average(1) |  | Low    |  | High  
|                       |  | (RMB per $1.00) 
|2003                   |  | 8.2767           |  | 8.2772     |  | 8.2800 |  | 8.2765
|2004                   |  | 8.2765           |  | 8.2768     |  | 8.2771 |  | 8.2765
|2005                   |  | 8.0702           |  | 8.1826     |  | 8.2765 |  | 8.0702
|2006                   |  | 7.8041           |  | 7.9579     |  | 8.0702 |  | 7.8041
|2007                   |  | 7.2946           |  | 7.6058     |  | 7.8127 |  | 7.2946
|2007                   |  |                  |  |            |  |        |  |       
|December               |  | 7.2946           |  | 7.3682     |  | 7.4120 |  | 7.2946
|2008                   |  |                  |  |            |  |        |  |       
|January                |  | 7.1818           |  | 7.2405     |  | 7.2946 |  | 7.1818
|February               |  | 7.1115           |  | 7.1644     |  | 7.1973 |  | 7.1100
|March                  |  | 7.0120           |  | 7.0722     |  | 7.1110 |  | 7.0105
|April                  |  | 6.9870           |  | 6.9997     |  | 7.0185 |  | 6.9840
|May                    |  | 6.9400           |  | 6.9725     |  | 7.0000 |  | 6.9377
|June (through June 25) |  | 6.8653           |  | 6.9057     |  | 6.9633 |  | 6.8653



|(1) | Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|B. | Capitalization and Indebtedness
|-- | -------------------------------

Not applicable.



|C. | Reasons for the Offer and Use of Proceeds
|-- | -----------------------------------------

Not
applicable.



6



---

##### Table of Contents

|D. | Risk Factors
|-- | ------------

Risks Related to Our Company

We may not succeed in sustaining and expanding the market for our ECLIA system.

We began marketing and selling our ECLIA system in September 2004. Our ECLIA system is referred to as a closed system since our ECLIA analyzer
can only use reagent kits manufactured by us and our reagent kits can only be used with our ECLIA analyzer. The segment income derived from ECLIA system was RMB87.2 million, RMB157.8 million and RMB277.4 million (US$39.6 million) for the fiscal
years ended March 31, 2006, 2007 and 2008, respectively. In addition, through the acquisition of BBE in January 2008, we commenced the sales of ECLIA analyzer utilizing MAIA technology, which is also a closed system, and related reagent kits in
January 2008. Going forward, the long-term success of our ECLIA system depends on several factors, including our ability to:



| |  |  | successfully promote product awareness of our ECLIA system in China;
| | - |  | --------------------------------------------------------------------



| |  |  | competitively price our ECLIA system, including the ECLIA analyzer and reagent kits;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | develop new reagent kits to expand the applications of our ECLIA system and to respond to new forms of diseases and disorders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | select effective distributors; and
| | - |  | ----------------------------------



| |  |  | comply with new or changing regulatory requirements and obtain additional regulatory approvals or clearances for new reagent kits in a timely manner.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Luminescence immunoassay technology is a well established method of clinical diagnosis. As a result, our ECLIA system is
competing in a market in which there are already many established industry players. We cannot assure you that we will be able to successfully market or sell our ECLIA system in the future. We also cannot assure you that our ECLIA system, or any
future enhancements to our ECLIA system, will generate adequate revenue to offset our investments and costs in acquiring, developing or marketing our ECLIA system. If there is insufficient demand for our ECLIA system, our business, financial
condition and results of operations may be harmed. In addition, any announcement of new products, services or enhancements by us or our competitors may cause our customers to cancel or postpone purchasing decisions for our existing products in
anticipation of these new products, services or enhancements.

We may not succeed in sustaining and expanding the market for our FISH
products.

We only introduced our FISH products to the market in June 2007. We develop and manufacture FISH probes internally. The
fluorescent microscope, CCD camera and imaging analysis software that we sourced from component suppliers are integrated into our FISH imaging analysis system. Our FISH probes can be used with a fluorescent microscope offered by other manufacturers.
The success of our FISH products depends on several factors, including our ability to:



| |  |  | successfully promote product awareness of FISH imaging analysis system and probes in China;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | competitively price our FISH products;
| | - |  | --------------------------------------



| |  |  | develop new FISH probes to expand the applications of our FISH operation for diagnosis of new diseases and disorders;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | build and strengthen our direct sales force; and
| | - |  | ------------------------------------------------



| |  |  | comply with new or changing regulatory requirements and obtain additional regulatory approvals or clearances for new FISH probes in a timely manner.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

FISH technology is an established method of clinical diagnosis in prenatal and postnatal and cancer applications in
Western countries. As a result, our FISH products are competing in a market in which there are



7



---

##### Table of Contents

international players with extensive experience. Although the adoption rate of FISH imaging analysis system and probes in China is low due to a lack of
affordable products, we cannot assure you that we will be able to successfully market or sell our FISH products with our cost advantage together with our distribution experience in China. We also cannot assure you that our FISH products, or any
future enhancements to our FISH products, will generate adequate revenue to offset our investments and costs in acquiring, developing or marketing our FISH products. If there is insufficient demand for our FISH products, our business, financial
condition and results of operations may be adversely affected. In addition, any announcement of price change, new products, services or enhancements by our competitors may cause our customers to cancel or postpone purchasing decisions for our
products.

We derive an increasingly large portion of our revenues from sales of our ECLIA system and FISH products. A reduction in,
or a failure to increase, the revenues of our ECLIA system and FISH products would cause our revenues to decline and could materially harm our business.

We derive an increasingly large portion of our revenues from sales of our ECLIA system and FISH products. Sales of our ECLIA system and FISH products accounted for 34%, 39% and 60% of our total revenues for the fiscal
years ended March 31, 2006, 2007 and 2008, respectively. We expect sales of our ECLIA system and FISH products as a percentage of our revenue to increase further in the future. Therefore, failure to increase revenues of our ECLIA system and
FISH products could materially harm our business, financial condition and results of operations. In addition, sales of our ECLIA system and FISH products currently comprise, and we expect they will continue to comprise, a substantial portion of our
revenues. As a result, continued market acceptance of our ECLIA system and FISH products will remain vital to our success, and a reduction in revenues from sales of our ECLIA system and FISH products will have a direct negative impact on our
business, financial condition and results of operations.

We generate a substantial portion of our revenues from sales of our HIFU
therapy system and a reduction in revenues of our HIFU therapy system would cause our revenues to decline and could materially harm our business.

We derive a substantial percentage of our revenues from sales of our HIFU therapy system . Our HIFU therapy system accounted for 66%, 61% and 40% of our total revenues for the fiscal years ended March 31, 2006,
2007 and 2008, respectively. The segment income derived from HIFU therapy system was RMB174.0 million, RMB237.6 million and RMB267.3 million (US$38.1 million) for the fiscal years ended March 31, 2006, 2007 and 2008, respectively. Going
forward, continued market acceptance of our HIFU therapy system will remain important to our success, and a reduction in revenues from sales of our HIFU therapy system will have a direct negative impact on our business, financial condition and
results of operations.

If we fail to increase awareness and acceptance of our HIFU therapy system in the medical community and among
patients, we will not be able to grow or even sustain the market for our HIFU therapy system.

Our HIFU therapy system uses a
relatively new, high intensity focused ultrasound technology that is very different from conventional treatments for tumors, such as surgery, radiotherapy and chemotherapy. As of March 31, 2008, we have sold over 425 units of our HIFU therapy
system. To achieve greater penetration of the potential market in China, we must increase market awareness and use of our HIFU therapy system, which depends on, among other things, the following:



| |  |  | the general levels of awareness and acceptance in the medical community and among patients of HIFU technology and our HIFU therapy system;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effectiveness of our HIFU therapy system, which we intend to further investigate through long-term studies;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the relative costs and benefits of treatment using our HIFU therapy system as compared to other treatments;
| | - |  | -----------------------------------------------------------------------------------------------------------



8



---

##### Table of Contents

| |  |  | the financial or other benefits gained by hospitals that use our HIFU therapy system;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the amount of resources we have available to increase product awareness and to educate potential purchasers and users of our HIFU therapy system;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to continue to develop and enhance our HIFU therapy system;
| | - |  | -----------------------------------------------------------------------



| |  |  | our ability to provide good technical support and customer service; and
| | - |  | -----------------------------------------------------------------------



| |  |  | our ability to keep up with technological changes and remain competitive.
| | - |  | -------------------------------------------------------------------------

We may not have the financial and operational resources required to promote awareness and acceptance of our HIFU therapy system as widely or rapidly as
is necessary to grow or sustain the market for our HIFU therapy system. Even if we were to devote a substantial portion of our resources to promoting our product, we may not succeed in raising the levels of awareness and acceptance of our HIFU
therapy system as quickly as is necessary to grow or sustain the market for our HIFU therapy system, if at all. If we fail to increase awareness and acceptance of our HIFU therapy system in the medical community and among patients, we will not be
able to grow, or even sustain, the market for our HIFU therapy system as planned and our financial condition and results of operations will be harmed.

The long-term effectiveness of HIFU medical devices for tumor treatment has not been proven.

HIFU therapy for tumors is a relatively new type of tumor therapy. We sold our first HIFU therapy system in November 1999. Although current studies on the use of HIFU medical devices for tumor treatment, including our HIFU therapy system,
have shown a reduction in short-term side effects compared to radiotherapy and chemotherapy and suggest an improvement in long-term results, there are presently very few long-term studies of over five years on the effectiveness of using HIFU
technology for the treatment of tumors. We plan to continue our participation in future long-term studies of the effectiveness of our HIFU therapy system. These long-term studies include a large scale clinical study in collaboration with the
Ministry of Health of the Peoples Republic of China, or MOH, and a clinical trial conducted in the United States on pancreatic cancer based on the conditional approval received for our Investigational Device Exemption (IDE) application. If any
of these studies fail to confirm the effectiveness of our HIFU therapy system or other HIFU medical devices, our sales could decline. In addition, some of the data produced in currently available studies were not randomized and/or included small
patient sample sizes. Consequently, the results of these studies may not be representative of the results that may be achieved in studies involving larger patient sample sizes. Moreover, there may be other clinical studies published on our HIFU
therapy system of which we are not aware and which contain different conclusions with respect to the safety, effectiveness or other aspects of our technologies. Our customers and users of our products may conclude that our HIFU therapy system is not
an acceptable treatment regimen, that the technologies underlying our system are ineffective or unsafe, or that our system is less effective or safe than other therapies. This could result in a decrease in our sales, which would have a material
adverse effect on our business, results of operations and financial condition.

If we fail to protect our intellectual property
rights, our competitors may take advantage of our proprietary technology and know-how and compete directly against us.

Our success
depends, in part, on our ability to protect our proprietary technologies. In China, we own eight invention patents and two utility patents directed towards various aspects of our HIFU therapy system and three invention patents and six utility
patents relating to our ECLIA system. Invention patents are granted for invention or discovery of any new and useful process or article of manufacture, or any new and useful improvement thereof. Utility patents are granted for invention of a new and
practical structure or form, or a combination of both, for an article of manufacture.

In addition, we have made applications for fourteen
patents directed toward our HIFU technology in countries outside China, including the United States, the United Kingdom, Germany, South Korea and India. As



9



---

##### Table of Contents

of May 31, 2008, we had been granted all four of the patents we applied for in the United Kingdom, two out of the three patents we applied for in India
and two out of four patents we applied for in South Korea. We also applied for three enhanced chemiluminescence immunoassay technology patents in the United States of which we have been granted one. These overseas patents will be valid until March
2022. We also have filed a patent application directed towards our FISH methodology in the United States.

Due to the different regulatory
bodies and varying requirements in these countries, we cannot assure you that we will be able to obtain patent protection for all or any aspects of our HIFU technology, enhanced chemiluminescence immunoassay technology, MAIA technology and FISH
technology in all or any of these countries. The process of seeking patent protection can be lengthy and expensive, and we cannot assure you that our patent applications will result in patents being issued or that our existing or future issued
patents will be sufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may be challenged, invalidated or circumvented in the future. We cannot assure you that our current or potential
competitors, many of which have substantial resources and have made substantial investments in competing technologies, do not have, and will not develop, products that compete directly with our products despite our intellectual property rights.

We also rely on trade secrets, proprietary know-how and other non-patentable technology, which we seek to protect through non-disclosure
agreements with employees. We cannot assure you that these non-disclosure agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets, proprietary know-how and other non-patentable technology will
not otherwise become known to, or be independently developed by, our competitors.

Implementation and enforcement of PRC intellectual
property-related laws has historically been deficient and ineffective, and is hampered by corruption and local protectionism. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United
States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of
our proprietary rights or those of others. The experience and capabilities of PRC courts in handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and
management efforts and could adversely affect our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may adversely affect our business, prospects
and reputation.

We may be exposed to intellectual property infringement and other claims by third parties, which, if successful,
could cause us to pay significant damage awards and incur other costs.

Our success also depends in large part on our ability to use
and develop our technology and know-how without infringing the intellectual property rights of third parties. As litigation becomes more common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual
property infringement claims. The validity and scope of claims relating to medical device technology patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of
intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be costly and time consuming, with unpredictable outcomes, and may significantly divert the efforts and resources of our technical and
management personnel. Courts in some jurisdictions in China are inexperienced in these types of cases, and may be influenced by local protectionism. An adverse determination in any such litigation or proceedings to which we may become a party could
subject us to significant liability, including damage awards, to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing the manufacture and sale of
our products. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.



10



---

##### Table of Contents

Unauthorized use of our brand name by third parties, and the expenses incurred in developing and
preserving the value of our brand name, may adversely affect our business.

Our brand name is critical to our success. Unauthorized
use of our brand name by third parties may adversely affect our business and reputation, including the perceived quality and reliability of our products. We rely on trademark law, company brand name protection policies, and agreements with our
employees, customers, business partners and others to protect the value of our brand name. Despite our precautions, we cannot assure you that those procedures provide effective prevention for unauthorized third-party use of our brand name.
Enforceability, scope and validity of protection of trademarks in the PRC are uncertain and still evolving, and we may not be successful in prosecuting unauthorized third-party use. Future litigation could also result in substantial costs and
diversion of our resources, and could adversely affect our business, financial condition and results of operations.

Our business
strategy to grow through acquisitions of new products or technologies may result in integration costs, failures and dilution to existing stockholders.

An important business strategy of ours is to acquire medical technologies with significant market potential and bring them to the market. We continue to seek suitable opportunities both inside and outside China to
acquire new products or technologies, particularly those that could assist us in advancing our current products, technologies and market penetration, or in expanding our product offerings or technologies. If we decide to acquire another company or
its assets in order to obtain its products or technologies, we would face a number of risks including consummating the acquisition on unfavorable terms and not obtaining adequate financing, which may adversely affect our ability to develop new
products and services and to compete in our rapidly changing marketplace. These acquisitions could also require that our management develop expertise in new areas, manage new business relationships and trade models, and attract new customers.
Successful management and integration of acquisitions are subject to a number of risks, including difficulties in assimilating acquired operations and managing remote operations, potential loss of key employees, diversion of managements
attention from existing business operations, assumption of contingent liabilities and incurrence of potentially significant write-offs, which may adversely affect our business or results of operations. In addition, if we consummate such an
acquisition through an exchange of our securities, our existing stockholders could suffer dilution.

Rapid growth and a rapidly
changing operating environment may strain our limited resources.

Our growth strategy includes our efforts to build our brand,
develop new products, increase market penetration of our ECLIA system by targeting small to large hospitals and accelerate market acceptance of our FISH probes in large hospitals. This growth strategy requires significant capital resources, and we
may not generate an adequate return on our investment. Our growth may involve the acquisition of new technologies, businesses, products or services or the creation of strategic alliances in areas in which we do not currently operate. This could
require our management to develop expertise in new areas, manage new business relationships and attract new types of customers. We may also experience difficulties integrating these acquired businesses, products or services into our existing
business and operations. The success of our growth strategy also depends in part on our ability to utilize our financial, operational and management resources and to attract, train, motivate and manage an increasing number of employees. The success
of our growth strategy depends on a number of internal and external factors, such as:



| |  |  | the growth of the market for medical devices and supplies in China;
| | - |  | -------------------------------------------------------------------



| |  |  | increase customer awareness and acceptance of our products;
| | - |  | -----------------------------------------------------------



| |  |  | continued enhancement of our research and development capabilities;
| | - |  | -------------------------------------------------------------------



| |  |  | develop new ECLIA reagent kits and FISH probes to expand the applications of our ECLIA system and FISH system;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | competition from other companies that offer IVD products in China; and
| | - |  | ----------------------------------------------------------------------



11



---

##### Table of Contents

| |  |  | competition from other manufacturers of HIFU tumor therapy devices and alternative methods of tumor therapy,
| | - |  | ------------------------------------------------------------------------------------------------------------

many of which are beyond our control. We may not be able to implement our growth strategy successfully or manage our expansion effectively.

Our limited operating history makes evaluating our business and prospects difficult.

We commenced operations in July 1999, and delivered the first commercial unit of our HIFU therapy system in November 1999. We started to market and sell
our second product, the ECLIA system, in September 2004. Aiming to expand and diversify our IVD portfolio, we consummated the acquisition of FISH technology in March 2007 and the acquisition of BBE in January 2008. We began to ship FISH imaging
analysis system in June 2007 and ECLIA system using MAIA technology in January 2008. Our limited operating history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. We may not have sufficient
experience to address the risks frequently encountered by early-stage companies, and as a result we may not be able to:



| |  |  | maintain profitability;
| | - |  | -----------------------



| |  |  | preserve our leading position in the market of HIFU tumor therapy devices;
| | - |  | --------------------------------------------------------------------------



| |  |  | increase our revenue from IVD products by successfully marketing and selling our IVD products;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | commercialize our new FISH products effectively;
| | - |  | ------------------------------------------------



| |  |  | acquire and retain customers;
| | - |  | -----------------------------



| |  |  | attract, train, motivate and retain qualified personnel;
| | - |  | --------------------------------------------------------



| |  |  | keep up with evolving industry standards and market developments;
| | - |  | -----------------------------------------------------------------



| |  |  | increase the market awareness of our products;
| | - |  | ----------------------------------------------



| |  |  | respond to competitive market conditions;
| | - |  | -----------------------------------------



| |  |  | maintain adequate control of our expenses;
| | - |  | ------------------------------------------



| |  |  | manage our relationships with our suppliers, distributors and direct-selling hospitals; or
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | protect our proprietary technologies.
| | - |  | -------------------------------------

If we are unsuccessful in addressing any of these risks, our business may be materially and adversely affected.

We have a
major shareholder that could exert substantial influence over our business, and its interests may not be aligned with the interests of our other shareholders.

Currently, Chengxuan and its affiliated entities beneficially own approximately 26% of our outstanding ordinary shares. Chengxuan could exert substantial influence over matters such as electing directors and approving
material mergers, acquisitions or other business combination transactions. The interests of Chengxuan may differ from the interests of our other shareholders. In addition, the concentration of ownership in Chengxuan, may discourage, delay or prevent
a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are
opposed by our other shareholders. In cases where the interests of our significant shareholders are aligned and they vote together, these shareholders will also have the power to prevent or cause a change in control. In addition, Chengxuan could
divert business opportunities from us to themselves or others.



12



---

##### Table of Contents

We are highly dependent on senior management and key research and development personnel.

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for
the development of new technologies and applications and the enhancement of our existing products. In particular, we rely substantially on our chairman and chief executive officer, Mr. Xiaodong Wu, to manage our operations. We also depend on
our key research personnel. In addition, we also rely on customer service personnel for the installation and support of our products and on marketing and sales personnel, engineers and other personnel with technical and industry knowledge to market,
sell, install and service our products. We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any of our senior management or key personnel could have a material adverse effect on our business and
operations. Competition for senior management and research and development personnel is intense, and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key research and
development personnel that we lose. In addition, if any member of our senior management or key research and development personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other
key professionals and staff members of our company. Although each of our senior management and key research and development personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot
assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key research and development personnel.

We compete for qualified personnel with other medical technology companies, medical device and supplies manufacturers, universities and research
institutions. Intense competition for these personnel could cause our compensation costs to increase significantly, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will
depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial
goals.

We need to expand our existing sales force and distribution network to maintain and grow our business and revenues. If we
fail to expand and maintain an effective sales force or successfully develop our relationship with distributors, our business, prospects and brand may be materially and adversely affected.

We currently market and sell our HIFU therapy system and ECLIA system to third-party distributors, while our FISH products are promoted and marketed
solely through our own direct sales force. As part of our growth plan, we intend to increase the number of distributors we utilize to distribute our HIFU therapy system and ECLIA system. Our plan also includes strengthening and growing our direct
sales force for distribution of our FISH products. We have limited experience in managing a large sales force and distributor network. We cannot assure you that we will be able to maintain an effective sales force or successfully develop our
relationships with third-party distributors. If we fail to do any one of those, our sales could fail to grow or could even decline, and our ability to grow our business could be adversely affected. The expansion of our sales force and distribution
network is also likely to require a significant investment of financial resources and management efforts, and the benefits, if any, which we gain from such expansion may not be sufficient to generate an adequate return on our investment.

If we fail to effectively manage our distribution network, our business, prospects and brand may be materially and affected by actions taken by
our distributors.

We have a limited ability to manage the activities of our third-party distributors, who are independent from us.
Our distributors could take one or more of the following actions, any of which could have a material adverse effect on our business, prospects and brand:



| |  |  | sell products that compete with our products in breach of their non-competition agreements with us;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | fail to adequately promote our products;
| | - |  | ----------------------------------------



13



---

##### Table of Contents

| |  |  | fail to provide proper service to our end-users; or
| | - |  | ---------------------------------------------------



| |  |  | violate the anti-corruption laws of China.
| | - |  | ------------------------------------------

Failure to adequately manage our distribution network or the non-compliance of our distributors with their obligations under distribution agreements with us could harm our corporate image among end users of our products and disrupt our
sales, resulting in a failure to meet our sales goals. The PRC government has increased its anti-bribery efforts in the healthcare sector to reduce improper payments received by hospital administrators and doctors in connection with the purchase of
pharmaceutical products and medical devices. To our knowledge, none of our distributors engages in corrupt practices. However, our distributors may violate these laws or otherwise engage in illegal practices with respect to their sales or marketing
of our products.

A significant interruption in supply could prevent or limit our ability to accept and fulfill orders for our
products.

We purchase all our materials and major components from third-party suppliers and assemble our products in-house.
Currently, we do not have any material long-term supply contracts with our suppliers, however we have not experienced any significant interruption of supplies in the past. Our purchases are made on a purchase order basis. If the supply of certain
materials, components or services were interrupted, our own manufacturing process would be delayed. We may be unable to secure alternative sources of supply in a timely and cost-effective manner. We purchase the components of our ECLIA analyzer and
HIFU therapy system from various domestic and international suppliers, some of which are our sole supplier for certain components. The raw materials for our ECLIA reagent and FISH probes are also supplied by various domestic and international
vendors. The failure of any of these suppliers to provide materials to us, particularly if we are unable to obtain materials and major components from alternative sources on a timely basis or on commercially reasonable terms, could impair our
ability to manufacture our products or increase our costs. We also plan to further increase the production and sales of our products in the future. If we are unable to obtain required materials and components that meet our production standards in
sufficient quantities or at acceptable cost, we will be unable to increase our production and sales as planned. Failure to obtain adequate supplies of materials, components or services in a timely and cost-effective manner could delay our delivery
to our customers. This could harm our reputation, cause us to lose sales, and force us to use more expensive sources of supply, which could significantly increase our production costs and harm our operating results. Any of these occurrences could
have a material adverse effect on our business, financial condition and results of operations.

International expansion may be
costly, time consuming and difficult. If we do not successfully expand internationally, our profitability and prospects would be materially and adversely affected.

Our long-term success also depends upon our ability to enter into international markets. In expanding our business internationally, we intend to enter markets in which we have no experience and in which our brand has
low or no recognition. This expansion requires capital and management resources to promote our brand and generate demand for our products in targeted oversea markets. We may be unable to successfully execute our expansion plan. In new markets we may
fail to anticipate competitive conditions that are different from those in China. These competitive conditions may make it difficult or impossible for us to effectively sell and distribute our products in these markets. If our expansion efforts in
new markets are unsuccessful, our profitability and prospects would be materially and adversely affected.

We are exposed to other risks
associated with international operations, including:



| |  |  | economic instability and recessions;
| | - |  | ------------------------------------



| |  |  | changes in tariffs;
| | - |  | -------------------



| |  |  | difficulties of administering foreign operations;
| | - |  | -------------------------------------------------



14



---

##### Table of Contents

| |  |  | financial condition, expertise and performance of our international distributors; or
| | - |  | ------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

Our costs could substantially increase if we experience a significant number of warranty claims.

We generally
provide 12-month product warranties against technical defects of our HIFU therapy system, ECLIA analyzer and FISH imaging analysis system. Our product warranty requires us to repair defects arising from product design and production process and if
necessary, replace defective components. Historically, we have received a limited number of warranty claims for our HIFU therapy system and ECLIA analyzer. The costs associated with our warranty claims have historically been relatively low. Thus, we
generally do not accrue any liability for potential warranty claims at the time of sales, but rather at the time claims are actually made. As we only began selling our FISH imaging analysis system in June 2007, we currently only have a short period
of historical data on the warranty claims for our FISH system. The fluorescent microscope, CCD camera and imaging analysis software that are integrated into our FISH imaging analysis system are warranted by our component suppliers.

If we experience an increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, we will
begin to incur liabilities for potential warranty claims at the time of sale of our products. An increase in the frequency of warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our
financial condition and results of operations.

Our operations might be interrupted by the occurrence of a natural disaster or other
catastrophic events.

Almost all of our manufacturing and research and development facilities are located in a single location in
Beijing, China. We do not maintain back-up facilities, so we depend on our manufacturing and other facilities for the continued operation of our business. Natural disasters or other catastrophic events, including power interruptions, water
shortages, storms, fires, earthquakes, terrorist attacks and wars could disrupt our operations. We might suffer losses as a result of business interruptions and our operations and financial results might be materially and adversely affected.
Moreover, any such event could delay our research and development programs.

If we are unable to successfully operate and manage our
manufacturing operations, we may experience a decrease in revenues.

As we ramp up our manufacturing operations to accommodate our
planned growth, we may encounter difficulties associated with increasing production scale, including shortages of qualified personnel to operate our equipment, assemble our products or manage manufacturing operations, as well as shortages of key raw
materials or components for our products. In addition, we may also experience difficulties in producing sufficient quantities of products or in achieving desired product quality. If we are unable to successfully operate and manage our manufacturing
operations to meet our needs, we may not be able to provide our customers with the quantity or quality of products they require in a timely manner. This could cause us to lose customers and result in reduced revenues.

Our business may suffer if we are unable to collect payments from customers of our HIFU therapy system on a timely basis.

Our distributors and other customers must make a significant commitment of capital to purchase our HIFU therapy system. Any downturn in the businesses of
our distributors and other customers of our HIFU therapy system could reduce their willingness or ability to pay us. We have historically been able to collect all of our receivable balances. Consequently, we have not found it necessary to provide an
allowance for doubtful accounts historically. The failure of any of our distributors and other customers of our HIFU therapy system to make timely payments could require us to recognize an allowance for doubtful accounts, which could have a material
adverse effect on our results of operations and financial condition.



15



---

##### Table of Contents

Fluctuations in our quarterly operating results could cause our ADS price to decline.

Our revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter
depending upon numerous factors. Our third and fourth fiscal quarters, ending December 31 and March 31, respectively, have historically been our strongest. We believe that the relatively stronger performance of our third and fourth fiscal
quarters has been largely due to the budget cycles of hospitals in China. Hospitals in China typically make their capital expenditure decisions, such as decisions on whether to purchase our HIFU therapy system, between June and December. Based on
orders during that period, our HIFU therapy systems are usually shipped to customers between September and March, which are our third and fourth fiscal quarters. Other factors that may affect the fluctuation of our quarterly operating results
include changes in pricing policies by us or our competitors, the length of our sales cycle, the timing and market acceptance of new product introductions and product enhancements by us or our competitors, customer order deferrals in anticipation of
new or enhanced products offered by us or our competitors, the loss of key sales personnel or distributors, changes in government policies or regulations and a downturn in general economic conditions in China. Furthermore, because we have
historically sold a relatively small number of our HIFU therapy system at a relatively high unit price, the size and timing of each individual order have a particularly significant effect on our results of operations in any given quarter. Many of
these factors are beyond our control, and you should not rely on our results of operations for prior quarters as an indication of our results in any future period. As our revenues vary significantly from quarter to quarter, our business is difficult
to predict and manage, and our quarterly results could fall below investor expectations, which could cause our ADS price to decline.

We are subject to product liability exposure and have limited insurance coverage.

Our HIFU therapy system is a
medical device for the treatment of patients and we are exposed to potential product liability claims in the event that the use of our HIFU therapy system causes or is alleged to have caused personal injuries or other adverse effects. A successful
product liability claim against us could require us to pay substantial damages. Product liability claims against us, whether or not successful, are costly and time-consuming to defend. Also, in the event that our products prove to be defective, we
may be required to recall or redesign such products. We have a product liability insurance policy with an annual aggregate insured amount of RMB4.0 million (US$0.6 million) to cover potential product liability arising from the use of our HIFU
therapy system. However, as the insurance industry in China is still in an early stage of development, product liability insurance available in China offers limited coverage compared to coverage offered in many other countries. As a result, future
liability claims could be excluded from our policies or exceed the coverage limits of our policies. We also cannot assure you that product liability insurance will continue to be available on commercially reasonable terms, if at all. To date, we
have not been subject to any product liability claim, but we cannot assure you that such claim will not be brought against us in the future. A product liability claim, with or without merit, could result in significant adverse publicity against us,
and could have a material adverse effect on the marketability of our products and our reputation, which in turn, could have a material adverse effect on our business, financial condition and results of operations. In addition, we do not have any
business interruption insurance coverage for our operations. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

Our future capital needs are uncertain and we may need to raise additional funds in the future.

We may require additional cash resources in the future due to:



| |  |  | changed business conditions or other future developments;
| | - |  | ---------------------------------------------------------



| |  |  | the receipt of, and the time and expenses required to obtain and maintain, regulatory clearances and approvals;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the resources we devote to developing, marketing and producing our products;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to identify and our desire or need to pursue acquisitions or other investments; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the extent to which our products generate market acceptance and demand.
| | - |  | -----------------------------------------------------------------------



16



---

##### Table of Contents

We cannot assure you that our revenues will be sufficient to meet our operational needs and capital
requirements in the future. In addition, we cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Our future capital needs and other business reasons could require us to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could
result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders. In the past, we have not encountered difficulties in obtaining financing.

If a poll is not demanded at our shareholder meeting, voting will be by show of hands and shares will not be proportionately represented.
Shareholder resolutions may be passed without the presence of the majority of our shareholders in person or by proxy.

Voting at any
of our shareholder meetings is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of our board of directors or by any shareholder present in person or by proxy. If a poll is demanded, each shareholder present in
person or by proxy will have one vote for each ordinary share registered in his name. If a poll is not demanded, voting will be by show of hands and each shareholder present in person or by proxy will have one vote regardless of the number of shares
registered in his name. In the absence of a poll, shares will therefore not be proportionately represented. In addition, the quorum required for our shareholder meetings consists of shareholders who hold at least one-third of our ordinary shares
being present at a meeting in person or by proxy. Therefore, subject to the requisite majorities, shareholder resolutions may be passed at our shareholder meetings without the presence of the majority of our shareholders in person or by proxy.

Our earnings could be adversely impacted if we recognize impairment losses on goodwill and other intangible assets relating to our
acquisitions of the enhanced chemiluminescence immunoassay, FISH and MAIA technologies.

As a result of our acquisition of the
enhanced chemiluminescence immunoassay, FISH and MAIA technologies in August 2004, March 2007 and January 2008, respectively, we have recorded goodwill and other intangible assets. Our intangible assets, other than goodwill, are amortized over
their respective estimated useful lives, and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Goodwill is tested for impairment by us annually or
more frequently if an event or a circumstance indicates that goodwill might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory
action or unanticipated competition. See Item 5. Operating and Financial Review and ProspectsCritical Accounting Policies. In the future, we could recognize impairment losses on goodwill and other intangible assets and that
impairment could result in a charge to our reported results of operations.

Risks Related to Our Industry

New product development in the medical device and supply industry is both costly and labor-intensive and has a very low rate of successful
commercialization.

Our success will depend in part on our ability to enhance our existing products and
technologies and to develop and acquire new products or technologies. The development process for medical technology is complex and uncertain, as well as time-consuming and costly. Product development requires the accurate assessment of
technological and market trends as well as precise technological execution. We cannot assure you that:



| |  |  | our product or technology development will be successfully completed;
| | - |  | ---------------------------------------------------------------------



| |  |  | necessary regulatory clearances or approvals will be granted by the State Food and Drug Administration of China, or the SFDA, or other regulatory bodies as required
on a timely basis, or at all; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any product or technology we develop can be commercialized or will achieve market acceptance.
| | - |  | ---------------------------------------------------------------------------------------------



17



---

##### Table of Contents

Also, we may be unable to locate suitable products or technologies to acquire or acquire such products or
technologies on commercially reasonable terms. Failure to develop or acquire, obtain necessary regulatory clearances or approvals for, or successfully commercialize or market potential new products or technologies could have a material adverse
effect on our financial condition and results of operations.

In order to manufacture and market our products, we are required to
obtain various authorizations from governmental regulatory authorities in China and other countries. If we fail to obtain clearances or approvals in a timely fashion, our business may be significantly affected.

The sale and marketing of our medical device products are subject to regulation in China and other countries where we plan to expand our product
distribution. We are required to obtain registrations with the SFDA and the regulators administrating the approval in countries where we plan to export. The process for obtaining regulatory clearances or approvals can be lengthy and expensive, and
the results are unpredictable. In addition, the relevant regulatory authorities may introduce additional requirements or procedures that have the effect of delaying or prolonging the regulatory clearance or approval for our existing or new products.
If we are unable to obtain clearances or approvals needed to market existing or new products, or obtain such clearances or approvals in a timely fashion, our business could be significantly disrupted, and sales and profitability could be materially
and adversely affected.

We are required to obtain a registration certificate from the SFDA in order to sell our HIFU therapy system. The
registration certificate for our second generation HIFU therapy system expired in January 2007 and we were granted an extension until the completion of the assessment of our renewal application by the SFDA. We also need the SFDA approval for our
ECLIA analyzer before we may sell this product. The SFDA approval we have obtained for our ECLIA analyzer will expire in March 2009, and we will need to renew this approval once it expires. We are also required to obtain a production permit from the
provincial level food and drug administration before commencing the manufacture of our products. Our production permit for the manufacture of our HIFU therapy system, ECLIA system and FISH products will expire in July 2010 and we will need to renew
the production permit once it expires. Renewing our registration certificates and production permit entails submission of various information and the review of that submission by the applicable regulatory authorities. We do not foresee any
significant difficulties in obtaining such renewal. But if we fail to obtain such renewal in a timely fashion, our business may be adversely affected. See Item 4. Information on the CompanyB. Business OverviewRegulation.

In April 2007, the SFDA announced a new regulation that became effective on June 1, 2007. Reagents used for IVD testing are divided
into three different categories, Class I, Class II and Class III, depending on the degree of risk associated with each reagent. Our ECLIA reagents and FISH probes are classified as Class III reagents and they therefore are subject to all regulatory
control governing Class III reagents. We are required to obtain a registration certificate for each IVD reagent prior to selling that reagent for clinical use. However, a regent that is used for research purpose only is exempt from registration
and/or approval. A reagent kit intended for research use only must comply with the labeling requirements that present the statement: For research use only. Not for use in diagnostic procedures on the package. Of the 74 ECLIA reagents and
35 FISH probes that we market as of March 31, 2008, 59 ECLIA reagents are covered by registration certificates. Of the 15 reagents and 35 FISH probes we currently sell for research use only, we have submitted registration applications for all
of them. We intend to apply for registration certificates for all of our ECLIA reagents and FISH probes, but we may not succeed in obtaining registration certificates for all these ECLIA reagents and FISH probes or for any ECLIA reagents or FISH
probes that we develop in the future. Before receiving the necessary registration certificate, these ECLIA reagents and FISH probes can be sold for research only. Thus, this may delay the surge of sales in these ECLIA reagents and FISH probes. See
Item 4. Information on the CompanyB. Business OverviewRegulation.



18



---

##### Table of Contents

Competition in the markets in which we operate is expected to increase in the future.

Our ECLIA system competes with IVD systems and reagents offered in the China market by many established international companies,
including Abbott Diagnostics, Bayer AG, Beckman Coulter, Diagnostic Products Corporation, PerkinElmer, Inc., Johnson & Johnson and Roche Group. There are also a number of China-based manufacturers who also offer luminescence immunoassay
systems but their market shares are relatively small.

Our HIFU therapy system competes with both existing and emerging alternative
treatment methods for tumors, including other tumor therapy devices that use similar technologies. Competition in the markets in which we operate is expected to increase in the future. For our HIFU therapy system, we believe that competition comes
from new and existing manufacturers of HIFU tumor therapy devices, as well as traditional cancer treatment methods such as surgery, radiotherapy and chemotherapy. In addition, we also compete with other minimally invasive treatments, including radio
frequency ablation, microwave thermo-coagulation and cryosurgery, and targeted therapeutics. We believe that other companies offer HIFU technology for the treatment of tumors including EDAP TMS S.A., or EDAP, Focus Surgery, Inc., or Focus Surgery,
and InSightec. According to Focus Surgerys website, its HIFU product is being used in China; and although no other overseas-based company currently offers or sells its products in China, they may choose to enter the China market in the future,
either independently or in cooperation with our existing competitors in China. In China, competitors for our HIFU therapy system include Chongqing Haifu Technology Co., Ltd., or Chongqing Haifu, and Shanghai A&S Science Technology Development
Co., Ltd., or Shanghai A&S.

Our FISH imaging analysis system competes with products offered by Nikon and Leica. Our FISH probes
compete with probes offered by Abbott Diagnostics, Ventana, Cancer Genetics and Cytocell. We are not aware of any China-based manufacturers who offer a FISH imaging analysis system and probes in China.

Certain of our existing and potential competitors have significantly greater financial, research and development, sales and marketing, personnel
resources and other resources than we do. Competition will intensify as other companies enter our markets. Competing companies may succeed in developing products that are more effective or less costly than those that we may offer, and these
companies may also be more successful in marketing their products. Competing companies may also introduce competitive pricing measures that adversely affect our sales levels and margins. If we do not adequately address our competitive challenges, we
could lose sales and market share and fail to grow our business as planned, which would have a material adverse effect on our financial condition, results of operations and future growth.

In addition, we believe that corrupt practices in the healthcare industry in China still occur. In order to increase sales, certain manufacturers or
distributors of medical devices may pay kickbacks to hospital personnel who make procurement decisions. We prohibit our employees from engaging in such practices and, to our knowledge, none of our distributors engages in such practices. However, as
competition intensifies in the medical device and supplies industry in China, we may lose sales, customers or contracts to competitors to the extent we or our distributors refuse to engage in such practices.

The tumor therapy and IVD industries are characterized by constant technological change, and if we fail to respond effectively to technological
changes, we could lose our competitive advantage.

The tumor therapy and IVD industries in which we currently compete are
characterized by:



| |  |  | changing technologies;
| | - |  | ----------------------



| |  |  | frequent new product introductions and enhancements;
| | - |  | ----------------------------------------------------



| |  |  | changing customer needs; and
| | - |  | ----------------------------



| |  |  | product obsolescence.
| | - |  | ---------------------



19



---

##### Table of Contents

To develop new products and designs, we must develop, gain access to and use leading technologies in a
cost-effective and timely manner and continue to expand our technical and design expertise. Failure to do so could cause us to lose our competitive position and may a material adverse effect on our revenues in the future.

The price and sales of our HIFU therapy system may be adversely affected by reductions in treatment fees by the Chinese government.

Treatment fees for HIFU tumor therapy, like many other medical treatments, are subject to prices set by provincial governments in
China, and these prices can be adjusted downward or upward from time to time. If the treatment fees for HIFU tumor therapy are reduced by the government, some hospitals and distributors may be discouraged from buying our HIFU therapy system, which
would reduce our sales. We may need to decrease the price of our HIFU therapy system to provide hospitals acceptable returns on their purchases. We cannot assure you that our business or results of operations will not be adversely affected by a
reduction in treatment fees for HIFU tumor therapy in the future.

Governmental and private health insurers may not provide
sufficient, or any, coverage for the use of our HIFU therapy system.

Our ability to market and sell our HIFU therapy system to
hospitals will depend in part on the availability of governmental and private health insurance in China for treatments using our HIFU therapy system. The insurance coverage for treatments using new medical devices, such as our HIFU therapy system,
is subject to significant uncertainty and varies from region to region, as local government approvals for such coverage must be obtained in each geographic region in China. In addition, provincial governments may change, reduce or eliminate the
government insurance coverage currently available for HIFU tumor therapy. We cannot assure you that adequate third-party insurance coverage will be generally available for patients who elect to use our HIFU therapy system for the treatment of
tumors. In the absence of sufficient medical insurance coverage for the use of our HIFU therapy system, patients may choose alternative treatment methods that are covered by insurance, and hospitals may use their limited funds to buy products for
these alternative treatments, which would reduce demand for our products and, consequently, our sales. If this occurs, our business, results of operations and financial condition could be materially and adversely affected.

Any product recall could have a material adverse effect on our business, results of operations and financial condition.

Complex medical devices, such as our HIFU therapy system, can experience performance problems that require review and possible corrective action by the
manufacturer. From time to time, we receive reports from users of our products relating to performance problems they have encountered. Those problems arose in the past were rectified in a timely fashion and related spending was insignificant. We
expect that we will continue to receive customer reports from time to time regarding performance problems they encounter through the use of our products. Furthermore, component failures, manufacturing errors or design defects that could result in an
unsafe condition or injury to the patient might occur. Any serious failures or defects could cause us to withdraw or recall products, which could result in significant costs such as repair and product replacement costs. We cannot assure you that
market withdrawals or product recalls will not occur in the future, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Doing Business in China

Adverse changes in political, economic and other
policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

Substantially all of our business operations are conducted in China, and all of our sales are made in China. Accordingly, our business, financial
condition, results of operations and prospects are affected significantly by



20



---

##### Table of Contents

economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:



| |  |  | the extent of government involvement;
| | - |  | -------------------------------------



| |  |  | the level of development;
| | - |  | -------------------------



| |  |  | the growth rate;
| | - |  | ----------------



| |  |  | the control of foreign exchange;
| | - |  | --------------------------------



| |  |  | the allocation of resources;
| | - |  | ----------------------------



| |  |  | an evolving regulatory system; and
| | - |  | ----------------------------------



| |  |  | lack of sufficient transparency in the regulatory process.
| | - |  | ----------------------------------------------------------

While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various
measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be
adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The Chinese
economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of
state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets
and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy
could result in decreased capital expenditure by hospitals, which in turn could reduce demand for our products.

Moreover, the political
relationship between the United States, Europe, or other Asian nations and China is subject to sudden fluctuation and periodic tension. Changes in political conditions in China and changes in the state of foreign relations are difficult to predict
and could adversely affect our operations or cause our services to become less attractive. This could lead to a decline in our profitability.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse effect on our businesses.

Future changes in laws,
regulations or enforcement policies in China could adversely affect our business.

Laws, regulations or enforcement policies in
China, including those regulating medical devices and supplies, are evolving and subject to future change. For example, under a regulation enacted by the SFDA in September 2002 and was renewed in April 2007, reagents are required to be registered
with the SFDA and are subject to regulatory controls. As of March 31, 2008, we have obtained the SFDA registrations and/or approvals for 59 of the 74 ECLIA reagents we sell and are in the process of obtaining the required registrations and/or
approvals for the 15 reagents that are currently sold with research labels. Moreover, in October 2004, the SFDA imposed certain good manufacturing practice, or GMP, requirements for ECLIA reagents. As a result, all



21



---

##### Table of Contents

manufacturers of ECLIA reagents were obligated to meet GMP standards by January 1, 2006. We obtained GMP certification for the production of our ECLIA
reagents in November 2005 and are currently in compliance with GMP requirements. This GMP certification is valid until October 2010. We have also submitted an application for the new GMP that we added recently to enlarge our production capacity of
our ECLIA reagents.

Future changes in laws, regulations or administrative interpretations, or stricter enforcement policies by the Chinese
government, could impose more stringent requirements on us, including fines or other penalties. Changes in applicable laws and regulations may also increase our operating costs. Compliance with such requirements could impose substantial additional
costs or otherwise have a material adverse effect on our business, financial condition and results of operations. These changes may relax some requirements, which could be beneficial to our competitors or could lower market entry barriers and
increase competition. Further, regulatory agencies in China may periodically, and sometimes abruptly, change their enforcement practice. Therefore, prior enforcement activity, or lack of enforcement activity, is not necessarily predictive of future
actions. Any enforcement actions against us could have a material and adverse effect on us and the market price of our ADSs. In addition, any litigation or governmental investigation or enforcement proceedings in China may be protracted and may
result in substantial cost and diversion of resources and management attention, negative publicity, damage to our reputation and decline in the price of our ADSs.

We may not be able to cause our subsidiaries to distribute sufficient amount of dividends to us to satisfy our cash needs.

We are a holding company and have historically relied on proceeds from equity and debt financings as well as dividends paid by our wholly owned operating subsidiaries, YDME Beijing, Beijing GP and BBE, for our cash
needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. In the event equity and debt financings are not available in amounts or on terms
acceptable to us, we may need to cause our wholly owned subsidiaries to pay dividends to us for our cash needs. The payment of dividends in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and regulations in China. YDME Beijing, Beijing GP and BBE are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to
its general reserves until the reserves reach 50% of the subsidiaries own registered capital . These reserves are not distributable as cash dividends. In addition, if these two PRC operating subsidiaries incur debt on their own behalf in the
future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Therefore, we may not be able to receive sufficient amount of dividends from our subsidiaries to satisfy our cash needs, and if
such situation arises, we will not have the funds necessary to pay dividends and other cash distributions to our shareholders, to service our debt or pay our operating expenses.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

We receive all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of our revenues may be converted into other
currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under Chinas existing foreign exchange regulations, YDME Beijing, Beijing GP and BBE are
able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC government will not take
future measures to restrict access to foreign currencies for current account transactions.

All our PRC subsidiaries ability to
obtain foreign exchange is subject to significant foreign exchange controls and, in the case of amounts under the capital account, requires the approval of and/or registration with PRC government authorities, including the SAFE. In particular, if
any of these subsidiaries borrow foreign currency loans from us or other foreign lenders, they must do so within approved limits that satisfy their approval documentation and PRC debt to equity ratio requirements. Further, such loans must be
registered with the SAFE.



22



---

##### Table of Contents

If we finance any of these subsidiaries by means of additional capital contributions, the amount of these capital contributions must first be approved by the
relevant government approval authority. These limitations could affect the ability of these subsidiaries to obtain foreign exchange through debt or equity financing.

Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions. The conversion of Renminbi into foreign currencies,
including U.S. dollars, has historically been set by the Peoples Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a band against a basket of certain foreign currencies, determined by the Bank of China, against which it can rise or fall by as much as 0.3% each day. This change in policy resulted in an approximately 20.6%
appreciation in the value of the Renminbi against the U.S. dollar between July 21, 2005 and June 25, 2008. Since the adoption of this new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow
ranges, but overall has further strengthened against the U.S. dollar. There remains significant international pressure on the PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation
in the value of the Renminbi against the U.S. dollar. As we import certain materials and supplies for reagent kits from the United States, Finland and Sweden, fluctuations in the value of the Renminbi against the currencies of those countries may
increase the cost of our reagent kits. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our
financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

A newly enacted PRC tax law could increase the enterprise income tax rate applicable to our principal subsidiaries in China, which could have a material adverse effect on our results of operations.

The newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council,
became effective as of January 1, 2008. The EIT Law adopts a uniform income tax rate of 25% for most domestic enterprises and foreign investment enterprises. It provides a five-year transition period from its effective date for enterprises
established before the promulgation date of the EIT Law which were entitled to a preferential lower tax rate under the then effective tax laws or regulations. The State Council issued the Notice on Implementation of the Transition Period for
Preferential Enterprise Income Tax, or the Transition Implementation Notice, on December 26, 2007, which provides detailed rules on how preferential tax rate under previous income tax laws or regulations would transition to the uniform 25% EIT
rate. Furthermore, under the EIT Law, entities that qualify as high and new technology enterprises will enjoy a preferential EIT rate of 15%. The Ministry of Science and Technology, the Ministry of Finance and the State Administration of
Taxation issued the Measures on Qualification of High and New Technology Enterprises, or Circular 172, on April 14, 2008, which provides detailed standards for high and new technology enterprises. In addition, according to the
Notice on Prepayment of Enterprise Income Tax issued by the State Administration of Taxation, enterprises that have previously been certified as a high and new technology enterprise shall pre-pay its EIT in the rate of 25% temporarily
until it is re-certified as a high and new technology enterprise under Circular 172.

YDME Beijing and Beijing GP, our two
principal subsidiaries in China, had been entitled to various tax holidays and preferential EIT rates before the EIT Law became effective. YDME Beijing was exempted from paying the EIT for the three calendar years ended December 31, 1999, 2000
and 2001. YDME Beijings EIT rate was reduced to 7.5% for the three calendar years ended December 31, 2002, 2003 and 2004, and was reduced to



23



---

##### Table of Contents

10% for the three calendar years ending December 31, 2005, 2006 and 2007. After the EIT Law became effective, the EIT rates applicable to YDME Beijing
have been increased significantly. Because YDME Beijing has not applied for or received certification as a high and new technology enterprise under Circular 172, it is not able to enjoy the preferential EIT rate of 15% granted to high
and new technology enterprises by the EIT Law. Under the EIT Law and the Transition Implementation Notice, YDME Beijings EIT rates are 18%, 20%, 22% and 24% for the calendar years from 2008 to 2011 and 25% thereafter, which are significantly
higher than the preferential EIT rates that YDME Beijing enjoyed in previous years. Before the EIT Law came into effect, Beijing GP was also entitled to an EIT rate of 15% and was entitled to an exemption from EIT from January 1, 2008 to
December 31, 2009 and a 50% income tax reduction from January 1, 2010 to December 31, 2013. While Beijing GP will be able to enjoy the tax holiday under the EIT Law and the Transition Implementation Notice, its 50% income tax
reduction from January 1, 2010 to December 31, 2013 will be partially eliminated. Under the EIT Law and the Transition Implementation Notice, Beijing GPs EIT rates are 0%, 0%, 11%, 12% and 12.5% for the calendar years from 2008 to
2012. As a result of the above changes in EIT rates applicable to our subsidiaries in China, we expect our income tax expense to increase significantly in the coming years. While we may apply for qualification of our subsidiaries in China as
high and new technology enterprises under Circular 172 to reduce our income tax expense, we cannot guarantee that our application will be successful. In addition, the application process could be time-consuming and we will continue to be
subject to the higher EIT rate before the application is granted. Such an increase in income tax expense could have a material adverse effect on our results of operations.

If we receive dividends from our operating subsidiaries located in the PRC, such dividends may be subject to PRC withholding tax.

The newly enacted EIT Law and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as
of January 1, 2008. The EIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are non-resident enterprises, to the extent such dividends are derived from sources
within the PRC, the State Council has reduced such rate to 10% through the implementation regulations. We are a Cayman Islands holding company and may receive dividends from our operating subsidiaries located in the PRC. Thus, dividends paid to us
by our subsidiaries in China may be subject to the 10% income tax if we are considered as a non-resident enterprise under the EIT Law. If we are required under the EIT Law to pay income tax for any dividends we receive from our
subsidiaries, our income tax expenses will be increased and the amount of dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected.

We may be deemed a PRC resident enterprise under the EIT Law and be subject to the PRC taxation on our worldwide income.

The EIT Law also provides that enterprises established outside of China whose de facto management bodies are located in China are considered
resident enterprises and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, de facto management
body is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets
of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. If we are treated as a
resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations,
although dividends distributed from our PRC subsidiaries to us could be exempt from Chinese dividend withholding tax, since such income is exempted under the new EIT Law to a PRC resident recipient.



24



---

##### Table of Contents

Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary
shares may become subject to taxes under PRC tax laws.

Under the EIT Law and implementation regulations issued by the State
Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place
of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such
investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC resident enterprise, it is unclear whether dividends we pay with respect to our ordinary
shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the EIT Law to withhold PRC income tax
on dividends payable to our non-PRC investors that are non-resident enterprises, or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may
be materially and adversely affected.

We face risks related to health epidemics and outbreaks of contagious diseases, including
avian influenza and Severe Acute Respiratory Syndrome, or SARS.

Our business could be adversely affected by the effects of avian
influenza, SARS or other epidemics or outbreaks of contagious diseases. There have been recent reports of outbreaks of a highly pathogenic avian influenza, or avian flu, caused by the H5N1 virus in certain regions of Asia and Europe. In 2005 and
2006, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect
the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore,
Vietnam and certain other countries, would also have similar adverse effects. The 2003 SARS outbreak significantly and adversely affected our revenues and, consequently, our profitability. Since all of our operations and substantially all of our
customers and suppliers are based in Asia, an outbreak of avian flu, SARS or other contagious diseases in China, other places in Asia or elsewhere, or the perception that such outbreak could occur, and the measures taken by the governments of
countries affected, would adversely affect our business, financial condition or results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreaks of avian flu, SARS or any other epidemics.

Risks Related to Our Ordinary Shares and ADSs

The market price for our ADSs may be volatile.

The market price for our ADSs has been and may continue to be subject
to significant fluctuations. Since August 10, 2005, the intraday sales prices of our ADSs on the Nasdaq National Market have ranged from US$14.95 to US$57.50 per ADS, and the last reported sale price on June 25, 2008 was US$44.84 per ADS.
The price of our ADSs may fluctuate in response to factors including the following:



| |  |  | announcements of technological or competitive developments;
| | - |  | -----------------------------------------------------------



| |  |  | announcements regarding patent litigation or the issuance of patents to us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | governmental developments in China, such as changes in fiscal policies or developments relating to the regulatory or health care reimbursement environment,
affecting us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements of studies and reports relating to the effectiveness or safety of our products or those of our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents

| |  |  | changes in financial estimates by securities research analysts;
| | - |  | ---------------------------------------------------------------



| |  |  | changes in the economic performance or market valuations of other medical technology companies;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | addition or departure of our senior management and key research and development personnel;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | any litigation, governmental investigation or enforcement proceedings brought against us by authorities and industry regulators in China or elsewhere;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | sales of additional ordinary shares or ADSs, or the perception that such sales might occur.
| | - |  | -------------------------------------------------------------------------------------------

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.

Our articles of association contain provisions that could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect
of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our
board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights
and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary
shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors issues preferred
shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be adversely affected.

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights as holders of our ordinary shares and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the
deposit agreement, if the vote is by show of hands, the depositary will vote the deposited securities in accordance with the voting instructions received from a majority of holders of ADSs that provided timely voting instructions. If the vote is by
poll, the depositary will vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the event of poll voting, deposited securities for which no instructions are received will not be voted. Under
our articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders meeting to permit you to withdraw your
ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make
all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares.
Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your
right to vote and you may lack recourse if your ordinary shares are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.



26



---

##### Table of Contents

You may be subject to limitations on transfers of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it
deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or
the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash
dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the
registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the
Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared
effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary
shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is
inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may
be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property, in which event you would not receive such distribution.

We are a Cayman Islands company, and because the rights of shareholders under Cayman Islands law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.

We are an exempted company with limited liability incorporated under Cayman Islands law, and substantially all of our assets are located outside the
United States. In addition, a majority of our directors and executive officers reside outside the United States, and a substantial portion of their assets is located outside of the United States. As a result, it may be difficult for you to effect
service of process within the United States upon our directors or executive officers, or enforce judgments obtained in the United States courts against our directors or executive officers.

Our corporate affairs are governed by our articles of association, the Companies Law (2004 Revision) and the common law of the Cayman Islands. The rights
of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman
Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the
Cayman Islands has a less developed body of securities laws as compared to the United States and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, shareholders in Cayman Islands
companies may not have standing to initiate a shareholder derivative



27



---

##### Table of Contents

action before the federal courts of the United States and will have no general right under Cayman Islands law to inspect or obtain copies of our list of
shareholders or our corporate records.

There is uncertainty regarding whether Cayman Islands courts would:



| |  |  | recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | impose liability against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts
of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction of a fixed sum that is not contrary to natural justice or the public policy of the Cayman Islands without retrial on the
merit.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests with respect to
actions taken by our management, directors or major shareholders than they would as public shareholders of a U.S. company.

We may be
considered a passive foreign investment company, which could result in adverse U.S. federal income tax consequences for U.S. investors.

We do not believe that we are, for United States federal income tax purposes, a passive foreign investment company (a PFIC), and we expect to operate in such a manner so as not to become a PFIC. We must make a separate
determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, our PFIC status may be determined in large part based on the market price of our ADSs and the underlying ordinary shares, which is likely to
fluctuate (and may fluctuate considerably given that market prices of technology companies have been especially volatile). Accordingly, fluctuations in the market price of the ADSs and the underlying ordinary shares may result in our being a PFIC
for any year. Thus, there can be no assurance that we will not be considered a PFIC for our current taxable year or any future taxable year. If we are or become a PFIC, U.S. investors could be subject to additional U.S. federal income taxes on gain
recognized with respect to the ADSs or ordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate U.S. investors will not be eligible for reduced rates
of taxation on any dividends received from us prior to January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. See TaxationUnited States Federal Income
TaxationPassive Foreign Investment Company.

Risks Related to Our 3.5% Convertible Senior Subordinated Notes Due 2011

The notes are subordinated to our future senior indebtedness.

The notes are unsecured and contractually subordinated in right of payment to our future senior indebtedness. In the event of bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event
of default and in specific other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid in full in cash or other payment satisfactory to the holders of senior indebtedness has been made.
There may not be sufficient assets remaining to pay amounts due on any or all of the notes then outstanding. As a result of these payments, our general creditors may recover less, ratably, than the holders of our senior indebtedness and such general
creditors may recover more, ratably, than the holders of our notes or our other subordinated indebtedness. The indenture does not limit the creation of additional senior indebtedness (or any other indebtedness). Any significant additional senior
indebtedness incurred may also materially adversely impact our ability to service our debt, including the notes. In addition, the holders of our senior indebtedness may, under certain circumstances, restrict or prohibit us from making payments on
the notes. As of June 25, 2008, we had no senior indebtedness outstanding. We anticipate that from time to time we may incur additional indebtedness, including senior indebtedness.



28



---

##### Table of Contents

The notes are effectively subordinated to the liabilities of our existing subsidiaries and any of
our future subsidiaries.

The notes are not guaranteed by our existing subsidiaries or any future subsidiaries and, accordingly, the
notes are effectively subordinated to any existing and future indebtedness and other liabilities of our subsidiaries, including those of YDME Beijing, Beijing GP and BBE, through which we conduct substantially all of our operations. These
liabilities may include indebtedness, trade payables, guarantees, lease obligations and letter of credit obligations. Therefore, our rights and the rights of our creditors, including the holders of the notes, to participate in the assets of any
subsidiary upon that subsidiarys liquidation or reorganization will be subject to the prior claims of the subsidiarys creditors, except to the extent that we may ourselves be a creditor with recognized claims against the subsidiaries.
However, even if we are a creditor of one of our subsidiaries, our claims would still be effectively subordinated to any security interests in, or mortgages or other liens on, the assets of that subsidiary and would be subordinate to any
indebtedness of the subsidiary senior to that held by us. As of June 25, 2008, our subsidiaries had no indebtedness outstanding (excluding inter-company liabilities and contingent liabilities).

There are no restrictive covenants in the indenture for the notes relating to our ability to incur future indebtedness or complete other
transactions.

The indenture governing the notes does not contain any financial or operating covenants that would protect you from
several kinds of transactions that may adversely affect you. In particular, the indenture does not contain restrictions on the payment of dividends, the incurrence of indebtedness, transactions with affiliates, incurrence of liens or the issuance or
repurchase of securities by us or any of our subsidiaries. We therefore may incur additional debt, including secured indebtedness or indebtedness at the subsidiary level to which the notes would be structurally subordinated. We may not be able to
generate sufficient cash flow to pay the interest on our debt, including the notes offered hereby and indebtedness that is senior in right of payment to the notes offered hereby, or that future working capital, borrowings or equity financing will be
available to pay or refinance any such debt.

Fluctuations in the price of our ADSs may impact the price of the notes and make them
more difficult to resell.

Because the notes are convertible into our ADSs, volatility or reduced prices for our ADSs could have a
negative effect on the trading price of the notes. Holders who receive ADSs upon conversion of the notes will also be subject to the risk of volatility and reduced prices of our ADSs.

The make whole premium that may be payable upon conversion in connection with a fundamental change may not adequately compensate you for the lost
option time value of your notes as a result of such fundamental change.

If you convert notes in connection with a fundamental
change, we may be required to pay a make whole premium by increasing the conversion rate. The make whole payment is described in our registration statement on Form F-3 (File No. 333-139777), as amended, initially filed with the Commission on
January 3, 2007, under the section titled Description of the NotesMake Whole Premium Upon a Fundamental Change. While the make whole premium is designed to compensate you for the lost option time value of your notes as a
result of a fundamental change, the make whole amount is only an approximation of such lost value and may not adequately compensate you for such loss.

Because your right to require repurchase of the notes is limited, the market price of the notes may decline if we enter into a transaction that is not a fundamental change under the Indenture.

The term fundamental change is limited and may not include every event that might cause the market price of the notes
to decline or result in a downgrade of the credit rating of the notes. The term fundamental



29



---

##### Table of Contents

change does not apply to transactions in which 100% of the consideration paid for our ordinary shares in a merger or similar transaction is publicly
traded ordinary shares. Our obligation to repurchase the notes upon a fundamental change may not preserve the value of the notes in the event of a highly leveraged transaction, reorganization, merger or similar transaction. See the section titled
Description of the NotesFundamental Change Permits Purchase of Notes By Us at the Option of the Holder in our registration statement on Form F-3 (File No. 333-139777), as amended, initially filed with the Commission on
January 3, 2007.

If you hold notes, you are not entitled to any rights with respect to our ADSs, but you are subject to all
changes made with respect to our ADSs.

If you hold notes, you are not entitled to any rights with respect to our ADSs (including,
without limitation, voting rights and rights to receive any dividends or other distributions on our ADSs), but you are subject to all changes affecting the ADSs. You will only be entitled to rights on the ADSs if and when we deliver ADSs to you in
exchange for your notes. For example, in the event that an amendment is proposed to our certificate of incorporation or articles of association requiring shareholder approval and the record date for determining the shareholders of record entitled to
vote on the amendment occurs prior to delivery of the ADSs, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of our ADSs.

Provisions of the notes could discourage an acquisition of us by a third party.

Certain provisions of the notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount of such notes in integral multiples of $1,000. We may
also be required to issue additional shares upon conversion or provide for conversion into the acquirers capital stock in the event of certain fundamental changes.

ITEM4.     INFORMATION ON THE COMPANY

A.    History and Development of the Company

Our predecessor company, Beijing Yuande Bio-Medical Engineering Co. Ltd., or YDME Beijing, was incorporated in China and commenced business operations in July 1999. In anticipation of our initial public offering, we
incorporated China Medical Technologies, Inc., or China Medical, in the Cayman Islands as a listing vehicle in July 2004. China Medical is an exempted company with limited liability incorporated under Cayman Islands law. China Medical became our
ultimate holding company when it issued shares to the existing shareholders of YDME Beijing in January 2005 in exchange for all of the shares that these shareholders held in YDME Beijing. Prior to our acquisition of the FISH business in March 2007,
we conducted substantially all of our operations through YDME Beijing. In June 2007, we completed the full integration of the FISH business and launched our FISH imaging analysis system and FISH probes to the market through Beijing GP Medical
Technologies, Ltd., or Beijing GP. In January 2007, we closed down a wholly owned subsidiary Yuande (USA) Corp. in California, which was principally engaged in assisting research and development projects and clinical studies on using the HIFU
therapy system in the United States. In March 2007, CMED HIFU Development Corporation was set up in Seattle to assume the principal activities of the Yuande (USA) Corp. that we closed down in California. In March 2007, we established a wholly owned
subsidiary, CMED ECLIA Diagnostics Ltd. (formerly known as CMED Molecular Diagnostics Ltd.), for investment holding purposes. CMED ECLIA Diagnostics Ltd. acquired Beijing Bio-Ekon Biotechnology Co., Ltd., or BBE, in January 2008. CMED (HK) Limited
was set up in April 2007 to provide administrative services to our group companies. We currently conduct substantially all of our operations through YDME Beijing, Beijing GP and BBE.

Our principal executive offices are located at No. 24 Yong Chang North Road, Beijing Economic-Technological Development Area, Beijing 100176,
Peoples Republic of China. Our telephone number at this address is (8610) 6787-1166 and our fax number is (8610) 6788-9588.



30



---

##### Table of Contents

Investor inquiries should be directed to us at the address and telephone number of our principal
executive offices set forth above. Our website is http://www.chinameditech.com.The information contained on our website is not part of this annual report on Form 20-F. Our agent for service of process in the United States is Corporation
Service Company located at 1133 Avenue of the Americas, Suite 3100, New York, New York 10036.

We made capital expenditures of RMB134.1
million, RMB884.5 million and RMB664.9 million (US$94.8 million) in the fiscal years ended March 31, 2006, 2007 and 2008, respectively. Such capital expenditures principally consisted of purchases of a building, acquisition of enhanced
chemiluminescence immunoassay technology, enlargement of ECLIA reagent production facility and payments in relation to our acquisition of the FISH business and our acquisition of BBE. We expect to spend approximately RMB105.2 million (US$15.0
million) in the year ending March 31, 2009, consisting of the purchase of new manufacturing equipment to enlarge production capacity, the renovation of existing facilities and the final payment in relation to our acquisition of the FISH
business.

B. Business Overview

Overview

We are a leading China-based medical device company that develops, manufactures and markets advanced IVD products
using enhanced chemiluminescence immunoassay technology, MAIA technology and FISH technology, to detect and monitor various diseases and disorders through laboratory evaluation and analysis of blood, urine or other body fluids, and system using high
intensity focused ultrasound, or HIFU, for the treatment of solid cancers and benign tumors.

Our ECLIA system is a luminescence
immunoassay IVD system based on the enhanced chemiluminescence immunoassay technology that we acquired in August 2004. Luminescence immunoassay IVD systems are advanced types of IVD systems commonly used in the United States and Western Europe, but
are relatively new in China. We began marketing and selling our ECLIA system in September 2004 and, through the acquisition of BBE in January 2008, we commenced the sales of ECLIA system utilizing MAIA technology in January 2008. We had sold over
3,000 units of our ECLIA analyzer as of March 31, 2008. We currently offer 74 types of reagent kits for use with our ECLIA analyzer, including reagent kits for use with our ECLIA analyzer utilizing MAIA technology. These reagents are used to
detect various thyroid disorders, diabetes, hepatitis, Down syndrome, liver fibrosis, disorders related to reproduction and growth and various types of tumors, as well as to assess the effect of digoxin, a widely used drug for the treatment of heart
failure. In addition, we were one of the first companies to obtain the SFDA approval in China for an ECLIA reagent kit for the early detection of SARS.

Our FISH product offering consists of FISH imaging analysis system and FISH probes. FISH technology is a molecular diagnostic technology that we acquired in March 2007. Although widely used in hospitals in the United
States and Western Europe, FISH technology is relatively new to the market in China. The technology is commonly used for prenatal and postnatal diagnosis, and early detection and prognosis of various cancers. When used together with the FISH probes,
FISH imaging analysis system enables medical practitioners to visualize and locate DNA sequences in human cells for identifying chromosomal abnormalities. In June 2007, we successfully integrated the FISH operation in our existing businesses and
began marketing and selling FISH products. We currently offer 35 types of FISH probes that are used to detect various genetic syndromes and cancers including breast cancer, bladder cancer, cervical cancer, leukemia, multiple myeloma and prostate
cancer.

Our HIFU therapy system is an ultrasound-guided ablation system that is used for the non-invasive treatment of solid tumors. Our
system is designed to destroy tumors by using HIFU waves to instantly raise the temperature of the targeted tumor tissue to between 60° C and 70° C (140° F and 158° F). Our proprietary designs enable our system to treat a wide range
of tumors, many of which cannot be treated with other HIFU tumor therapy devices currently available in the market. Our HIFU therapy system is SFDA-approved to treat liver, breast and kidney tumors, solid tumors in the pelvic cavity or on bone and
tumors in the four limbs or



31



---

##### Table of Contents

superficial tissues. Treatments using our system are performed without anesthesia and do not cause significant discomfort, skin-burn or hemorrhage. We
acquired our HIFU technology in November 1999 and had sold over 425 units of our HIFU therapy system as of March 31, 2008.

Historically, we have benefited from a strong relationship with Peking University Peoples Hospital, or PUPH, a leading medical research institution and hospital in China affiliated with Peking University. PUPH was the initial
developer of our HIFU and ECLIA technologies. We believe that our acquisition of the HIFU and ECLIA technologies and the development and marketing of products using such technologies demonstrate our ability to successfully identify and commercialize
medical technologies with significant market potential.

We sell our ECLIA system and HIFU therapy system solely to distributors. Our FISH
products are distributed solely by our own sales force to hospitals.

Our Competitive Strengths

We believe that our principal competitive strengths include the following:

Innovative ECLIA system and FISH imaging analysis system and probes for in-vitro diagnostics

We believe that we were the first China-based company to offer an integrated luminescence immunoassay IVD system that does not require devices or reagents provided by outside sources. Our ECLIA system is a simple-to-use IVD platform and is
sensitive, accurate and safe. Our ECLIA analyzer incorporates proprietary technologies that give our system several advantages over radioimmunoassay and enzymatic immunoassay IVD systems, the two most widely used IVD systems in China. Additionally,
compared with the imported automatic luminescence immunoassay systems available in China, our ECLIA system, including our reagent kits, are priced significantly lower, but can achieve test results with comparable accuracy. Our reagent menu is
growing rapidly and our broad range of reagents puts us in a competitive position in the ECLIA sector. We believe we have a significant market opportunity to market our ECLIA system to small- and medium-sized hospitals in China. Many of these
hospitals currently use less advanced IVD systems because they lack sufficient financial means to purchase the more expensive automatic and imported luminescence immunoassay systems or do not have sufficient patient volume. Our fully automatic
system, which we market to large hospitals, is undergoing the approval process with the SFDA. We intend to introduce the fully automatic model at a lower price than our overseas-based competitors can achieve.

We believe that we are the first China-based company to offer the FISH imaging analysis system and probes. Compared to some of the other more traditional
methodologies such as karyotyping for prenatal diagnosis, our FISH imaging analysis system and probes are easier to use, easier to train people to use and provides a much faster turnaround. It also delivers high sensitivity and specificity of
results required for definitive diagnosis. Our FISH probes are priced considerably lower than imported products. We believe we have a significant market opportunity to market our FISH imaging analysis system and probes to large hospitals in China.
Many of these hospitals currently use less advanced methodologies for prenatal and cancer diagnosis due to a lack of affordable alternatives. The less advanced methodologies are generally labor intensive or invasive, or yield less accurate results.

HIFU technology leader for tumor treatment

We believe that we are a leader in the design and development of HIFU tumor therapy devices in China. Our patented HIFU therapy system is SFDA-approved and has been used to treat more tumor patients in China than
other available HIFU tumor therapy devices. As of March 31, 2008, we have sold over 425 units of our HIFU therapy system. Treatments using our system are performed without anesthesia and do not cause significant discomfort, skin-burn or
hemorrhage. Our third generation HIFU therapy system launched in October 2006 features a non-invasive ultrasound technology for measuring the temperature of the tumor tissues being



32



---

##### Table of Contents

treated. We also intend to sell a non-invasive ultrasound-based heat measuring device separately as a product upgrade for existing users of our HIFU therapy
system. We believe that we are the first company to develop this technology.

Strong research and development capability and our
commitments to research and development efforts

We have strong research and development capabilities, and we plan to continue to
focus our development efforts on new applications for or enhancements to our HIFU and IVD technologies. Many of the key research and development personnel who developed the HIFU and ECLIA technologies at the PUPH are currently employed by us. The
key research and development personnel of our FISH business, which we acquired in March 2007, signed three-to-five year employment contracts.

We believe that we have a strong patent portfolio compared to other medical technology companies based in China. In China, we currently have 19 patents directed towards our HIFU therapy system and ECLIA system We have also made applications
for fourteen patents directed towards our HIFU technology in countries outside China, including the United States, the United Kingdom, Germany, South Korea and India. As of May 31, 2008, we had been granted all four of the patents we applied
for in the United Kingdom, two of the three patents we applied for in India and two of the four patents we applied for in South Korea. We have also made an application in the United States to secure a methodology patent related to the production of
FISH probes, which is currently pending approval.

We have developed multiple generations of our HIFU therapy system. The two-transducer
design, developed since our second-generation HIFU therapy system, enables the patient to be treated in the supine, side or seated positions so that more locations in the body can be targeted. In addition, our third-generation HIFU therapy system is
equipped with our non-invasive ultrasound temperature measuring technology. We have established relationships with a number of major hospitals and universities in China, as many of these hospitals and universities use our HIFU therapy system to
treat patients and to conduct research. We believe that these relationships raise our profile, enhance awareness of our products in the medical community and among patients and provide us with valuable clinical data to improve our products and keep
us abreast of industry trends and developments.

As one of our major initiatives to increase the visibility of and develop the market for
HIFU therapy system in China, we are collaborating with the MOH on a large-scale, three-year clinical study. This study aims to demonstrate the clinical benefits of HIFU therapy in combination with radiotherapy and chemotherapy through approximately
20 participating large hospitals. We are also collaborating with the Chinese Academy of Sciences Institute of Acoustics on new product development for HIFU applications. In July 2007, the U.S. Food and Drug Administration granted us conditional
approval for our Investigational Device Exemption (IDE) application on our HIFU therapy system. This approval allows us to begin a clinical trial in a limited number of patients with pancreatic cancer. The clinical trial will be performed at the
University of Washington Medical Center in Seattle after receiving approval from the Institutional Review Board of the University. Our HIFU tumor therapy system is intended in this trial to ablate targeted tumor tissue of the pancreas for the
palliation of pain associated with locally advanced or metastatic pancreatic cancer.

Our growing reagent portfolio is an important driver
of the growth in our ECLIA business. Our reagent offering increased to 74 reagents as of March 31, 2008. We expect to add another 10-20 reagents to our offering by December, 31 2008, which include reagents for infertility disorders, infectious
diseases and cardiac markers.

Low manufacturing and operating costs

We have significant cost advantages that allow us to price our products competitively and to maintain favorable margins. We believe that our facilities in
China allow us to maintain our cost of operations at a competitive level that could potentially deter other overseas-based competitors from entering the China market.



33



---

##### Table of Contents

This is primarily due to the lower wages and costs of components and raw materials in China relative to other locations. In addition, our sales and
distribution costs are low because we market and sell our products primarily to distributors. Our direct sales force, built in association with our distribution of FISH products, will increase our selling and marketing expenses; however, we expect
this increase in expenses to be largely offset by the anticipated resulting growth in sales. Also, our research and development effort mainly focuses on developing new applications and improving the product designs of our HIFU therapy system and
ECLIA system, as well enhancing the functionality of our ECLIA reagents and FISH probes, which generally requires lower research and development expense than the development of new technologies and products.

Our Products and Services

The ECLIA System

Our ECLIA system consists of an ECLIA analyzer, reagent kits and a data analysis system.

The ECLIA analyzer is a sensitive, accurate, low cost and simple-to-use IVD device capable of detecting minute levels of light triggered by combining
reagents with body fluid samples to produce diagnostic results. The key component of our ECLIA analyzer is the photon counter. We have developed several technologies that make our photon counter more sensitive and accurate. Reagents are chemically
active substances that are formulated to create different reactions with blood or other body fluid samples depending on the extent to which a disease or condition is present or absent. The data analysis system uses our proprietary integrated circuit
card, or IC Card, input technology to analyze and organize the information produced. The IC Card contains encryption codes that prevent users from conducting tests with reagents produced by other manufacturers.

To use our ECLIA system, our reagents are mixed with a sample of body fluid from the patient in a microplate provided in our reagent kit. The mixture
reacts and emits light, which is measured by the ECLIA analyzer. The light signal is analyzed by the data analysis system. The result is compared with the reference ranges for the relevant disease in order to reach a diagnosis.

In addition, through the acquisition of BBE in January 2008, we commenced the sales of ECLIA analyzer utilizing MAIA technology and related reagent kits.

Our reagent kits

We currently
offer 74 types of reagent kits for detecting and monitoring various types of diseases and disorders, including thyroid disorders, diabetes, hepatitis, and disorders related to reproduction and growth, SARS, Down syndrome, liver fibrosis and various
types of tumors. We are also developing reagents for other applications such as infertility disorders, HIV, hepatitis C and cardiac diseases.



34



---

##### Table of Contents

The following table sets out the major clinical applications of our reagent kits:



|                                        |  |                        |  |                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------- |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Types of test                           |  | Numbers ofreagent kits |  | Description                                                                                                                                                                                                                                                                                                                                  
|Anemia                                  |  | 1                      |  | Ferritin is an iron-containing protein complex that functions as the primary form of iron storage in the body. Levels of serum ferritin correlate with the amount of iron stored. Our assay test
is used for evaluating levels of serum ferritin in diagnosing iron deficiency anemia.                                                       
|                                        |  |                       
|Cardiac diseases                        |  | 1                      |  | Our assay tests for the effectiveness of digoxin, a widely used drug for treatment of heart failure.                                                                                                                                                                                                                                         
|                                        |  |                       
|Growth disorder                         |  | 1                      |  | Our assay is a test for the early diagnosis, identification and prognosis evaluation of problems relating to growth and development.                                                                                                                                                                                                         
|                                        |  |                       
|Hepatitis B                             |  | 10                     |  | The ten assays comprise the basic tests hospitals perform to test for hepatitis B.                                                                                                                                                                                                                                                           
|                                        |  |                       
|Infertility                             |  | 7                      |  | Our assays test for the sterility caused by the malfunction of immune system.                                                                                                                                                                                                                                                                
|                                        |  |                       
|Liver fibrosis                          |  | 4                      |  | The four assays comprise the main tests performed by hospitals for evaluating the presence and degree of liver fibrosis.                                                                                                                                                                                                                     
|                                        |  |                       
|Metabolic function (including diabetes) |  | 4                      |  | Diabetes is also a common endocrine disorder in China. Two of our assays tests for insulin and C-Peptide level, two common indications of diabetes. Our other two assays test for and monitor
diabetes where insulin and C-Peptide level may not be a reliable indicator.                                                                    
|                                        |  |                       
|Other virus (including TOCHR)           |  | 10                     |  | TOCHR is the abbreviation of five viruses that could cause the fetal malformation if infected during pregnancy. Our assays test for the infection.                                                                                                                                                                                           
|                                        |  |                       
|Reproductive endocrinology              |  | 18                     |  | Ten of our assays comprise the main tests performed by hospitals for evaluating the functions of the female reproductive organs, including the diagnosis of hormonal imbalance of postmenopausal
women. Four of our assays are for evaluation of the male reproductive function. Four of our assays are used for assessing the Down syndrome.
|                                        |  |                       
|SARS                                    |  | 1                      |  | SARS is an atypical pneumonia of unknown etiology, and was recognized in February 2003 in China, Taiwan, Hong Kong, Singapore and certain other regions in the world.                                                                                                                                                                        
|                                        |  |                       
|Thyroid disorders                       |  | 7                      |  | The seven assays comprise the basic tests hospitals perform to evaluate the functions of a patients thyroid gland. We believe that for many hospitals, thyroid testing is a mainstay of
their routine endocrine tests.                                                                                                                      
|                                        |  |                       
|Tumors                                  |  | 10                     |  | Our assays for tumor markers can detect the following types of tumors:                                                                                                                                                                                                                                                                     
|                                        |  |                        |  |       Breast       Colon       Intestine       Kidney       Liver       Lung       Ovary       Pancreas       Prostate       Stomach                                                                                                                                                                                               



35



---

##### Table of Contents

The FISH SYSTEM

FISH imaging analysis system and probes

Our FISH imaging analysis system is used to analyze human tissue samples
attached to microscope slides. The system consists of a fluorescent microscope, CCD camera and imaging analysis software. The key component of our FISH imaging analysis system is the fluorescent microscope. The microscope, CCD camera and imaging
analysis software are provided by our component suppliers with internal modifications. Through the use of FISH probes, the imaging analysis system enables medical practitioners to detect and localize the presence or absence of specific DNA sequences
in chromosomes.

To use our FISH imaging analysis system, a specific fluorescent labeled DNA probe is mixed with a patient fluid sample or
tissue sample placed on a microscope slide. This step allows the DNA probe to hybridize with its complementary target DNA. Once hybridized, the fluorescent fragments on the probes will show precisely where their target DNA lies along a chromosome.
Under the fluorescent microscope, the medical practitioners examine the labeled sample and check the quality of the fluorescent signals and record the areas for analysis. The software captures and saves the fluorescent images in the computer.

Three types of probes from our production can be used in clinical FISH studies:



| |  |  | Satellite repeat-sequence probes, which target the centromeres of specific chromosomes. These are particularly useful in determining chromosome numbers in cases of
possible trisomies or sex chromosome aneuploidies, such as for prenatal diagnosis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Whole chromosome paint probes, which cover the entire targeted chromosome. Paints are especially helpful in translocation cases and in marker chromosome
identification; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unique sequence probes, which target a specific locus or gene on a chromosome. Certain acquired abnormalities such as TERC amplification in cervical cancer and
HER-2 amplification in breast cancer can be detected in interphase cells with dual-color unique sequence probes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our FISH probes

We currently offer 35 types of FISH probes used for prenatal and cancer management. The following table sets out the major clinical
applications of our FISH probes:



|                |  |                  |  |                                                                                                                                            
|--------------- |  | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Applications    |  | Numbers ofprobes |  | Description                                                                                                                                
|Bladder cancer  |  | 4                |  | An advanced approach for early detection and monitoring the course of bladder cancer.                                                      
|                |  |                 
|Breast cancer   |  | 2                |  | An effective tool to guide treatment. Mostly used to determine whether a breast cancer patient is suitable for receiving Herceptin therapy.
|                |  |                 
|Cervical cancer |  | 2                |  | An effective tool for early diagnosis of cervical cancer and for prediction of the risk of developing cervical cancer.                     
|                |  |                 
|Leukemia        |  | 15               |  | For diagnosis and prognosis of various leukemias and multiple myeloma.                                                                     
|                |  |                 
|Prenatal        |  | 6                |  | For detecting Trisomy 21, Trisomy 18, Trisomy 13, Turner syndrome, Trisomy X, XYY syndrome, DiGeorge syndrome, triploidy.                  
|                |  |                 
|Prostate cancer |  | 6                |  | An effective approach for early diagnosis of prostate cancer.                                                                              

Our HIFU Solution

Treatment methods for cancer

The conventional treatment methods for cancer in China and
elsewhere are generally surgery, radiotherapy and chemotherapy. High intensity focused ultrasound, radio frequency ablation, microwave thermo-coagulation and cryosurgery are some of the major new cancer treatment methods developed and commercialized
in recent



36



---

##### Table of Contents

years. Biotherapy and gene therapy are currently still in experimental stages and are not currently available to patients generally. The selection of a
particular treatment method for a patient depends on various factors, including the tumors receptivity to the treatment method, the location of the tumor, the stage of the tumor and the patients state of health. Cancer patients are
usually treated by a combination of various treatment methods.

Surgery. Surgery is the most commonly used treatment method for most
types of cancers and other tumors. Patients who undergo surgery face risks associated with anesthesia and complications, such as hemorrhages, infections or weakening of organ functions. In addition, the recurrence of cancer tumors is common and
repeat surgery can involve high risks and significant complications.

Radiotherapy. Radiotherapy uses radiation or radioactive
implants to destroy or inhibit the growth of tumor tissues. Radiotherapy is often used together as a complementary treatment method to surgery. Although radiotherapy is used to treat a wide range of cancer types, different types of tumor tissues
have different sensitivities to radiation, and different patients have different levels of tolerance to radiation. Serious side effects, including skin ulceration or hemorrhage can result from excessive doses of radiation.

Chemotherapy. Chemotherapy uses drugs to destroy or inhibit the growth of tumor tissues and is commonly used as a supplemental treatment method
together with surgery. Chemotherapy is relatively more effective than other cancer treatment methods for lymph tumors or metastatic tumors. However, chemotherapy destroys not only tumor tissues but also normal healthy tissues, resulting in serious
side effects for the patient, including loss of appetite, nausea and vomiting, hair loss, as well as damage to the liver, bone marrow and immune functions.

Other minimally invasive treatments and targeted therapeutics. There are several relatively
new treatment methods that have shown some clinical success in treating cancer. For example, radio frequency ablation, microwave thermo-coagulation and cryosurgery are minimally invasive treatments that attempt to destroy the tumor by either heating
or freezing the targeted tissue with a needle, laser or cryogenic device that is inserted into the tumor. In addition, there is a new class of cancer therapeutics that have been developed by large pharmaceutical and biotechnology companies, such as
Avastin®, Tarceva® and ERBITUX®, that are specifically designed to
impede tumor development, while having little to no effect on healthy cells. The clinical applications of these treatments and targeted therapeutics are limited to certain types of cancers, and their long-term effectiveness is still being evaluated.

Therapeutic principles of HIFU

Heat therapy, also known as hyperthermia or thermotherapy, is a well-established method of medical treatment. It is generally accepted by the scientific community that the irreversible destruction of tissues, medically known as coagulation
necrosis, occurs when tissues are exposed to temperatures above a certain level for a certain period of time. The maximum temperature under which tumor tissues can survive is 43o C (109.4o F), while normal tissues can tolerate a
temperature of up to 45o C (113o F). The higher the temperature, the shorter the time needed to destroy tumor tissues. When the temperature reaches 60o C (140o F) or higher, coagulation necrosis will occur within one second.

In focused ultrasound ablation, a transducer directs ultrasound waves to converge on a small area of tissue inside the body, resulting in
very high ultrasound intensity at this point. The effect of this process is similar to that of using a magnifying glass to focus the suns energy into a single spot. The ultrasound energy causes the temperature of the tumor tissues at the focal
point to increase within a very short period of time to a level high enough to destroy the targeted tumor tissues. An important feature of this technology is that only a limited temperature increase occurs in the body tissue surrounding the focal
point.

HIFU therapy can be used in conjunction with other treatment methods such as surgery, radiotherapy and chemotherapy, or as a
stand-alone treatment. HIFU treatment increases the sensitivity and receptivity of body tissues to radiotherapy and chemotherapy. We believe that, because it is a relatively new procedure, HIFU



37



---

##### Table of Contents

therapy to date has typically been used for patients not eligible for one of the conventional therapies or when these other therapies have failed. When used
in combination with conventional treatment methods, HIFU treatment often enhances their effectiveness and reduces the required chemical or radiation dosage. As a result, patients generally experience less side effects associated with radiotherapy
and chemotherapy.

Our HIFU therapy system is SFDA-approved and has been used for the treatment of a wide range of tumors in China since
November 1999. In addition, other companies have also developed HIFU technologies, and a few HIFU medical devices have been approved for the treatment of limited types of tumors, mostly prostate cancer and uterine fibroids, in the European Union,
Canada, Russia, South Korea, Japan and the United States, and a larger number of HIFU tumor therapy devices have been approved for clinical studies and trials in these regions and elsewhere.

Benefits and limitations of our HIFU solution

Our HIFU therapy system can be used as a supplemental or stand-alone treatment method with surgery, radiotherapy and chemotherapy for the treatment of many types of solid tumors. We believe that the benefits of our HIFU therapy system
include:

Non-invasive procedure. Our HIFU therapy system offers patients a non-invasive treatment alternative. Treatments
performed with our HIFU therapy system do not require incisions and transfusions and as a result, minimize the risk and complications associated with invasive procedures. In addition, it is often difficult for patients who receive traditional
treatments to later undergo the same treatment in the event of a relapse due to the invasive nature of surgery and the significant side effects associated with chemotherapy and radiotherapy. Patients can undergo repeated treatments for cancer using
our system with minimal side effects.

Minimal side effects. Treatments performed with our HIFU therapy system have minimal
side effects and a relatively low level of complications. Compared to other HIFU tumor therapy systems that are commercially available in China, our HIFU therapy system produces less intense ultrasound waves at the point of skin penetration, which
significantly reduces the likelihood of skin burns and collateral damage to healthy body tissue.

High degree of
safety. Treatments using our HIFU therapy system can be performed without anesthesia and do not cause significant discomfort, skin-burn or hemorrhage. However, improper operation and use of our HIFU therapy system could cause skin burn.

Treatment for broad ranges of tumors. Our patented two-transducer system enables our HIFU therapy system to target tumors in
more body locations than the other HIFU tumor therapy systems currently commercially available in China. Our HIFU therapy system is approved by the SFDA to treat liver, breast and kidney tumors, solid tumors in the pelvic cavity or on bone and
tumors in the four limbs or superficial tissues. Based on published clinical studies conducted by researchers and practitioners of hospitals in China, we believe that hospitals have used our HIFU therapy system to treat many types of tumors,
including the following:



|                                                                                       |  |                                                                                                                                                                                         |  |                                                                                                                                                                     
|-------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      breast tumors       kidney tumors       liver tumors       pancreatic tumors |  |       solid tumors in the pelvic cavity including:       bladder tumors       uterine tumors       uterine fibroids       prostate tumors       prostate hypertrophyrectal tumors |  |       tumors in the four limbs or superficial tissues       solid tumors on bone       metastasis tumors of the abdominal lymph node       rear abdominal tumors

We believe as our HIFU therapy system gains higher acceptance from the medical community and among
patients, it could be used more frequently as a stand-alone treatment due to its low risk profile.



38



---

##### Table of Contents

Cost-effective for hospitals. We believe our HIFU therapy system is a more cost-effective
option for hospitals for the types of tumors it can treat compared to other currently commercially available cancer treatment methods in China. Chemotherapy requires expensive drugs while surgery requires the use of anesthesia and other medical
supplies. Radiotherapy requires the use of significantly more expensive equipment than our HIFU therapy system. In addition, we believe our HIFU system can treat a broader range of tumors than other HIFU tumor therapy systems available in China.

However, the use of our HIFU solution is subject to a number of limitations. The clinical use of our HIFU therapy system has been limited
mostly to patients with cancer at advanced stages or who are not eligible for conventional treatment. In addition, HIFU therapy is suitable for the treatment of a single tumor of an identifiable size or a group of tumors that are located in very
close proximity. It is not suited for the treatment of a single tumor that is too small or tumors that are widespread. It is also not suitable to treat blood-borne cancers. Furthermore, as ultrasound cannot be transmitted in a straight line through
solid bone or air, HIFU therapy is not suited for the treatment of tumors located in the head, neck, lung and tumors behind bones.

Clinical studies
of our HIFU therapy system

To our knowledge, clinical studies that have used our HIFU therapy system have been reported in various
published international and Chinese national level reports and peer-review journals. Some studies using our HIFU therapy system have been reported in multiple publications or presentations. These published studies have reported over 1,500 cases for
the treatment of rectal tumors, bladder tumors, colon tumors, gastric tumors, ampullary tumors, liver tumors, pancreatic tumors, metastasis tumors of the abdominal lymph nodes, prostate tumors, adrenal tumors, kidney tumors, smooth muscle tumors,
endometrial tumors, ovarian carcinoma, rear abdominal tumors, lymphoma tumors, cervical tumors, breast tumors, hepatocellular tumors, non-Hodgkins lymphoma, neurofibroma, osteolytic sarcoma and skin squamous tissue cancers. Currently, our HIFU
therapy system has been used in over 40,000 clinical cases.

These clinical studies have been conducted by both physicians affiliated with
us as consultants and other physicians in hospitals and universities in China, such as PUPH, Fudan University Zhongshan Hospital, Beijing University Medical School, the Second-Affiliated Hospitals of Sun Yat-Sen University, the First Hospital of
Jilin University, Taian Central Hospitals, Qilu Hospital of Shandong University, the Central Railway Hospital of Liuzhou, and the First Hospital of Jiangxi Medical University. Our collaboration with MOH in a large scale study aims to demonstrate the
clinical benefits of HIFU in combination with radiotherapy and chemotherapy. In the United States, we plan to begin our clinical trial on limited patients with advanced pancreatic cancer. These research initiatives conducted domestically and
internationally are intended to study the effectiveness of our HIFU therapy system on various types of tumors.

The HIFU therapy system

We currently offer our third-generation two-transducer HIFU therapy system. This model, which we launched in October 2006, is
equipped with our newly-developed non-invasive ultrasound temperature measuring technology. We have applied for patents directed toward this technology in China and in other countries, also see Item 4. Information on the CompanyBusiness
OverviewIntellectual Property.

Our HIFU therapy system consists of the following main components:

Integrated transducers. The integrated transducer consists of HIFU transmitting sources and drives circuits and can move in six directions
with millimeter precision. Our HIFU transmitting sources are patented, and the patent for the HIFU transmitting sources expires in March 2019. The HIFU transmitting sources generate high-frequency ultrasound waves, which converge from a wide angle
to focus on a designated focal point inside the body. We have obtained a patent for the wide convergence angle design in China, and the patent for this design expires in November 2021. Our third-generation HIFU therapy system is equipped with two
transducers, which



39



---

##### Table of Contents

enable the patient to be treated in the supine, side or seated positions so that more locations in the body can be targeted and more tumors can be treated.
This patented two-transducer design also increases the patients comfort level during treatment, and the patent for this design expires in November 2021. We have also applied for patents in other countries for these technologies.

Ultrasound imaging system.The ultrasound imaging system is an ultrasonic system that creates a computer image of the tumor that guides the
physician in monitoring and targeting the ultrasound waves. The probe that captures the image of the tumor can monitor the patient from many angles and can be controlled automatically by a computer or manually by the physician.

Patient treatment table and seat.The table and seat frames are adjustable and can be rotated to facilitate treatment of tumors located in
different parts of the body. The middle section of the patient treatment table can be removed to install a treatment seat so that the patient can sit while undergoing treatment for tumors in the pelvic cavity. The patients position depends on
the location of the tumor. We have obtained a patent for the design of the table and seat frames in China, and this patent expires in November 2021. We have also applied for patents in other countries for the treatment seat design. As of
May 31, 2008, the United Kingdom, South Korea and India had granted us such patents.

Control station.The control station
consists of our proprietary software program, which controls the targeting and duration of the treatment, a computer, a monitor and peripheral equipment. The control station allows the operator to select automatic or manual treatment, as well as the
duration of each ultrasound emission and other treatment parameters. If the operator inputs an unsafe ultrasound shot duration or treatment parameter, a built-in safety mechanism causes the HIFU therapy system to cease its operation immediately.

Conduct structure.Ultrasound energy does not transmit in a straight line through air. To introduce linear
ultrasound waves into a patients body from the upper transducer, our HIFU therapy system contains a conduct structure, which consists of a semi-sphere container filled with degassed water. We have also developed a proprietary vacuum degassing
device that converts large volumes of tap water into degassed water. We have obtained a patent for this device in China, and this patent expires in November 2021. We have also applied for patents for the semi-sphere container and the degassing
device in other countries. As of May 31, 2008, we had been granted such patents in the United Kingdom and South Korea.

The treatment
procedure

A physician and an ultrasound technician first locate the tumor tissues and define the area to be treated by using the
ultrasound imaging system. The computer uses the physicians input to plan the best way to target and ablate the tumor. Each individual high-energy focused ultrasonic shot ablates an oval-shaped targeted zone measuring up to ten millimeters in
height by five millimeters in diameter. During the treatment, the transducer and the ultrasound imaging system automatically moves and ablates the targeted zone until the entire defined area has been treated. The shooting times can be selected
between 0.1 and one second. The intervals between shots can also be selected from 0.1 to two seconds, depending on the depth of the tumor. Intervals between shots reduce the ultrasound volume passing through the skin over a period of time to avoid
skin-burn. The individual targeted zone produces almost instantaneous coagulative necrosis of tissues due to an increase in temperature to between 60o C and 70o C (140o F and 158o F).

The treatment duration and the number of treatment sessions vary according to the size of the tumor. For example, for a single four centimeter tumor,
four to five sessions are usually performed on different days, with each treatment session lasting approximately half an hour.

Manufacturing

Our manufacturing strategy combines our internal design expertise and proprietary technology with strategic sourcing. We produce our
ECLIA reagent kits and FISH probes and conduct the final product assembly, testing



40



---

##### Table of Contents

and packaging of our HIFU therapy system, ECLIA analyzer and FISH imaging analysis system at our facility in Beijing, China. We outsource the production of a
majority of our product components to, and purchase raw materials from, third-party suppliers.

We design or configure many key components
of our products and outsource their production to qualified manufacturers. Our suppliers undergo quality certification in accordance with the standards developed by us, and we conduct frequent quality inspections of each of our suppliers
manufacturing facilities. We believe we maintain components and raw materials at an adequate level to ensure a stable supply.

The major
components of our HIFU therapy system are integrated ultrasound transducers, an ultrasound imaging system, a treatment table/seat, a control station and a conduct structure. The ultrasound imaging system and the treatment bed, two of the major
components of our HIFU therapy system, are manufactured by GE and a local supplier, Beijing Tianyuan Kehui, respectively, and we purchase other components from other local suppliers. The major components of our ECLIA analyzer are the
photon-multiplier, motor drive and various types of other electrical and plastic parts that are generally readily available in sufficient quantities from our local suppliers. The raw materials of our ECLIA reagent kits are antibodies and antigens
for the production of coated microplate and conjugator, chemicals for the production of reagents, and plastics and packaging such as vacant microplate and bottles. We purchase a portion of our supplies of antibodies and antigens overseas and source
the other raw materials from local suppliers. The major component of our FISH imaging analysis system is the fluorescent microscope sourced from international suppliers. The raw materials of our FISH probes are substances from our DNA clone bank and
fluorescent dye.

We generally produce our products based on firm orders from our customers and anticipated orders that we are reasonably
confident will be obtained. Lead times for raw materials and components vary and depend on the specific supplier and the availability and demand for the raw materials or components. We currently use one or more suppliers for some of our key
components for quality control purposes. We source the ultrasound imaging system, one of the major components of our HIFU therapy system, from GE, which produces the ultrasound imaging system based on our specifications. Even if we are unable to
obtain this component from GE, it may not be difficult to find an alternate supplier on a timely basis that can provide a replacement system with comparable quality as we require. We also believe that we will be able to source most of our other key
components from other suppliers if necessary. We do not currently have any long-term supply contracts, and our purchases are made on a purchase order basis.

During the fiscal year, we had further streamlined our product assembly process to improve our responsiveness to changes in our business volume by training our employees to assemble multiple components. As our sales
fluctuate from month to month, employees with multiple skill sets and multi-tasked teams will allow us to make quicker deliveries while enabling us to more effectively manage our costs.

In November 2005, we obtained a Certificate of Good Manufacturing Practices (GMP) for Pharmaceutical Products, or the GMP certificate, for the production
of ECLIA reagents. The GMP certificate was issued by the SFDA and certifies that our ECLIA manufacturing facilities comply with the requirements of good manufacturing practices for pharmaceutical products. The GMP certificate is valid for a term of
five years. We are currently in compliance with such GMP requirements. This GMP certification is valid until October 2010. Recently, we completed the enlargement of our GMP certified facility to increase our capacity for the production of our ECLIA
reagents.

We are required to obtain production permits and to renew these permits six months prior to the expiration of the original
permit. Our production permit for medical devices, which covers our HIFU system, our FISH imaging analysis system, our ECLIA system and certain of our ECLIA reagents and FISH probes, is valid until July 2010. In addition, we are required to complete
the SFDA registration of each of our products before we may manufacture the products for commercial distribution or sell the products. See Regulation.



41



---

##### Table of Contents

Quality Control

We have our own independent quality control system and devote significant attention to quality control for the designing, manufacturing and testing of our products. We have established a quality control system in
accordance with the SFDA regulations. In May 2006, we obtained ISO9001 and ISO13485:2003 certifications for the production of our HIFU therapy system and ECLIA system, which indicates our compliance with recognized international standards for
quality control. We inspect components prior to assembly, and inspect and test internally manufactured products both during and after the manufacturing process. We also conduct frequent quality inspections of each of our suppliers
manufacturing facilities.

Our quality control team is also responsible for ensuring that we are in compliance with all applicable
regulations, standards and internal policies. Our senior management team is actively involved in setting quality policies and managing internal and external quality performance.

Markets and Customers

We believe that both our HIFU therapy system and our IVD systems have
significant market potential in China as there is a strong demand for tumor treatment devices and sensitive and reliable IVD systems. The target market for our HIFU therapy system is large-and medium-sized hospitals in China with oncology
departments. According to the MOH, there were approximately 7,700 large-and medium-sized hospitals in China as categorized by number of beds in 2006. As of March 31, 2008, we had sold over 425 units of our HIFU therapy system, mostly to
distributors who resell to large-and medium-sized hospitals in China. The target market for our ECLIA system is small-and medium-sized hospitals in China. According to the MOH, there were approximately 18,100 small-and medium-sized hospitals in
China in 2006. We began marketing and selling our ECLIA system in September 2004 and had sold over 3,000 units of ECLIA analyzers as of March 31, 2008. The target market for our FISH products is large hospitals in China.

In the fiscal years ended March 31, 2006, 2007 and 2008, substantially all of our HIFU therapy system were sold to distributors. We have sold, and
will continue to sell, our HIFU therapy system primarily to a relatively small group of distributors that change from year to year. We do not have long-term contracts with any of our distributors. Because our HIFU therapy system is sold at a
relatively high unit price, the size and timing of individual orders can have a significant effect on our quarterly results. See Item 3. Key InformationD. Risk factorsRisks Related to Our CompanyFluctuations in our quarterly
operating results could cause our ADS price to decline.

Sales and Marketing

We market and sell our ECLIA system solely to distributors. For sales of our ECLIA analyzer, we generally require a payment of 20% to 40% of the sale
price before delivery or after acceptance and the balance within six months of acceptance. For sales of reagent kits, we do not require down payments, and we collect payments three months after acceptance. We recently started to rent our ECLIA
analyzers to qualified hospitals free of charge. As our ECLIA analyzers are closed system, although it may reduce the sales of our ECLIA analyzers, we expect such practice to increase the sales of our ECLIA reagents, which are recurring in nature
and generate higher gross margin than ECLIA analyzer.

We market and sell our FISH imaging analysis system and probes directly to
hospitals. For sales of FISH imaging analysis system, we may require a payment of a portion of the sale price before delivery or after acceptance and the balance within six months of acceptance. For sales of FISH probes, we do not require down
payments, and we generally collect payments four to six months after acceptance. To promote the sales of our FISH probes, we recently started to assist hospital customers in purchasing components of FISH imaging analysis system, such as the
microscope, directly from component manufacturers so that these hospitals could reduce the cost of setting up the FISH imaging analysis system and expedite the commencement of this



42



---

##### Table of Contents

diagnostic service to patients. While it may reduce the sales of our FISH imaging analysis system, we expect such practice to increase our sales of FISH
probes, which are recurring in nature and generate higher gross margin than FISH imaging analysis system.

We market and sell our HIFU
therapy system primarily to third-party distributors. For sales of our HIFU therapy system, we require an initial payment of 30% to 40% of the sale price when customers place purchase orders or after the shipment is accepted by either our
distributors or the hospitals designated by these distributors. The balance is payable within one year of acceptance. Some of our distributors purchase our products to operate profit-sharing programs with hospitals. Under these profit-sharing
programs, these distributors install our HIFU therapy system in hospitals without any up-front charge to hospitals and in return receive a portion of the net profits generated by the system.

We recognize revenues at the time our products are accepted by either our distributors or the hospitals designated by these distributors, which typically
occurs within one to two weeks after shipment. We sign binding purchase agreements with our distributors or with our hospital customers each time we make a sale of our products. Under these purchase agreements, our distributors or hospital customers
agree to pay a non-refundable, non-adjustable fixed amount of money for our products over a period of time. Our distributors take ownership of our products when either they or the hospitals they designate accept the products, depending on the terms
of each contract. The acceptance typically occurs within one or two weeks of shipment, during the period when we help hospitals to install our products. Once the products are accepted, the one-year warranty period commences.

We select our third-party distributors based on their reputation, market coverage, sales experience and the size of their sales force. We conduct credit
assessments of each of our distributors or hospital customers before we enter into a purchase agreement. Currently, all our products are being marketed and sold in China. However, we are expanding distribution of our products to other countries,
including South Korea, Japan and European countries. We have exclusive distribution agreements with AsianStar, Inc., Century Medical, Inc., and EDAP TMS S.A. for future distribution in South Korea, Japan and the European Union, pending approval from
relevant governmental authorities.

As of May 31, 2008, we had a team of 125 marketing and sales personnel who conduct direct sales of
our FISH products and HIFU therapy system, manage distributors for both our HIFU therapy system and our ECLIA system and perform other sales related tasks. We intend to further increase the size of our sales force as our business grows.

The hospitals chief administrator and the head of the department of oncology, in the case of our HIFU therapy system, or the head of the
department of diagnostics, in the case of our ECLIA system and FISH imaging analysis system and probes, typically make the purchasing decision for our products. We believe that hospitals make purchase decisions on HIFU tumor therapy devices based on
the safety and effectiveness of the device, the types of cancer treatment methods that they already offer, their available budget and the anticipated economic return. We believe that hospitals make purchase decisions on diagnostics equipment based
on the performance and the range of ECLIA reagent kits or FISH probes available, the prices of equipment and ECLIA reagents or FISH probes, ease of use and the turnaround time of results.

We have established relationships with many hospital administrators at prominent hospitals and other leading medical institutions, many of whom we
believe are advocates for our HIFU therapy system. We believe our relationships with these major hospitals and medical institutions raise our profile, enhance awareness of our products in the medical community, medical equipment and supplies
industry and among patients, provide us with valuable clinical data to improve our products and keep us abreast of industry trends and developments, all of which in turn helps us market and sell our products. We manage our relationships with ECLIA
distributors by pricing our ECLIA system more attractively to distributors than imported alternatives. Our FISH imaging analysis system and probes address large unmet market in China, primarily the prenatal and cancer diagnosis



43



---

##### Table of Contents

market. Our direct sales force formed for FISH product distribution helps us build closer relationships with the end-users which are large hospitals. We
believe these relationships also facilitate cross-selling of our HIFU therapy system and ECLIA system.

Customer Support and Service

We maintain a dedicated team to provide customer support and service for our products. Our customer support and service team is based in Beijing and
provides on-site and off-site technical and clinical support to hospitals across China upon customer request. As of May 31, 2008, this team consisted of 106 full-time employees, including physicians, biomedical engineers, acoustics engineers,
computer science engineers, and service and repair technicians. We plan to build service centers and station service engineers in major cities in China to continue providing good customer support and service as we continue to grow. We believe that
our ability to provide good customer support and service is an important part of our business.

We provide training to hospitals that
purchase our HIFU therapy system, our ECLIA system and our FISH products. Training sessions are provided directly by us or through larger hospitals that have purchased our product. We offer a two-week training course to hospitals that purchase our
HIFU therapy system. Hospital participants typically include a physician, an ultrasound technician, a nurse and a maintenance engineer. In addition, due to the technical nature of our HIFU therapy system, it is usually necessary for members of our
customer support and service team to assist with the installation. Our ECLIA system and FISH imaging analysis system training is generally only one to five days long as our IVD systems are relatively easy and simple to operate.

Each of our HIFU therapy system, ECLIA analyzer and FISH imaging analysis system is typically sold with a 12-month warranty against technical defects. We
have experienced a very limited number of warranty claims in the past for our HIFU therapy systems and ECLIA systems. The costs associated with our warranty claims have historically been insignificant. We do not accrue any liability for potential
warranty costs at the time of sale. As we only began selling FISH imaging analysis system in June 2007, we currently only have a short period of historical data on the warranty claims for FISH imaging analysis system.

Competition

Our ECLIA system competes with IVD
systems and reagents offered in the China market by many established international companies, including Abbott Diagnostics, Bayer AG, Beckman Coulter, Diagnostic Products Corporation, PerkinElmer, Inc., Johnson & Johnson and Roche Group.
There are also a number of China-based manufacturers who also offer luminescence immunoassay systems but their market shares are relatively small.

Our HIFU therapy system competes with both existing and emerging alternative treatment methods for tumors, including other tumor therapy devices that use similar technologies. Competition in the markets in which we operate is expected to
increase in the future. For our HIFU therapy system, we believe that competition comes from new and existing manufacturers of HIFU tumor therapy devices, as well as traditional cancer treatment methods such as surgery, radiotherapy and chemotherapy.
In addition, we also compete with other minimally invasive treatments, including radio frequency ablation, microwave thermo-coagulation and cryosurgery, and targeted therapeutics. We believe that other companies offer HIFU technology for the
treatment of tumors including EDAP TMS S.A., or EDAP, Focus Surgery, Inc., or Focus Surgery, and InSightec. According to Focus Surgerys website, its HIFU product is being used in China; and although no other overseas-based company currently
offers or sells its products in China, they may choose to enter the China market in the future, either independently or in cooperation with our existing competitors in China. In China, competitors for our HIFU therapy system include Chongqing Haifu
Technology Co., Ltd., or Chongqing Haifu, and Shanghai A&S Science Technology Development Co., Ltd., or Shanghai A&S.



44



---

##### Table of Contents

Our FISH imaging analysis system competes with products offered by Nikon and Leica. Our FISH probes
compete with probes offered by Abbott Diagnostics, Ventana, Cancer Genetics and Cytocell. We are not aware of any China-based manufacturers who offer a FISH imaging analysis system and probes in China.

Rapid product development, technological advances, intense competition and a strong emphasis on proprietary products characterize the industry in which
we compete. Our products could be rendered obsolete or uneconomical by the introduction and market acceptance of competing products or by technological advances of our current or potential competitors. We face direct competition from a number of
publicly traded and privately held companies, including other manufacturers of tumor therapeutic and diagnostic products. Many of our existing and potential competitors have substantially greater financial, research and development, sales and
marketing, personnel and other resources than we do and may have more experience in developing, manufacturing, marketing and supporting new products. Competition will intensify as more players enter this field. We believe that an important
competitive advantage for a medical technology company is its ability to make continuous investments in research and development and to identify commercially viable technologies and successfully bring the technologies into the market.

Insurance

We maintain insurance coverage from PICC
Property and Casualty Company Limited, with an annual aggregate insured amount of RMB4.0 million (US$0.6 million) to cover product liability claims arising from the use of our HIFU therapy system. We also have property insurance coverage from China
Pacific Property Insurance Co., Ltd. to cover certain of our fixed assets. Our insurance coverage, however, may not be sufficient to cover any claim for product liability or damage to our fixed assets. See Item 3. Key InformationD. Risk
factorsRisks related to our companyWe are subject to product liability exposure and have limited insurance coverage.

Regulation

Our ECLIA analyzer, HIFU therapy system and FISH imaging analysis system are medical devices and are subject to regulatory controls
governing medical devices. Pursuant to the SFDA regulation effective on June 1, 2007, reagents used for IVD testing are divided into three different categories depending on the degree of risk associated with the reagent. All reagents are
subject to regulatory controls governing IVD reagents. As a manufacturer of medical equipment and supplies we are subject to regulation and oversight by different levels of the SFDA. We are also subject to other government laws and regulations which
are applicable to manufacturers in general. The SFDA requirements include obtaining production permits, compliance with clinical testing standards, manufacturing practices, quality standards, applicable industry and adverse reporting, and
advertising and packing standards.

Classification of medical devices

In China, medical devices are classified into three different categories, Class I, Class II and Class III, depending on the degree of risk associated with
each medical device and the extent of control needed to ensure safety and effectiveness. Classification of a medical device is important because the class to which a medical device is assigned determines, among other things, whether a manufacturer
needs to obtain a production permit and the level of regulatory authority involved in obtaining such permit. Classification of a device also determines the types of registration required and the level of regulatory authority involved in effecting
the registration.

Class I devices are those with low risk to the human body and are subject to general controls. Class I
devices are regulated by the city level food and drug administration where the manufacturer is located. Class II devices are those with medium risk to the human body and are subject to special controls. Class II devices require product
certification, usually through a quality system assessment, and are regulated by the provincial



45



---

##### Table of Contents

level food and drug administration where the manufacturer is located. Class III devices are those with high risk to the human body, such as life-sustaining,
life-supporting or implantable devices, and are regulated by the SFDA under the strictest regulatory control.

Our HIFU therapy system is
classified as a Class III device, and it therefore is subject to all regulatory controls governing Class III medical devices, as well as special regulations governing HIFU medical devices. Our ECLIA analyzers and FISH imaging analysis system are
classified as Class II devices.

Production permit for medical devices

A manufacturer must obtain a production permit from the provincial level food and drug administration before commencing the manufacture of Class II or
Class III medical devices. A production permit, once obtained, is valid for five years and is renewable upon expiration. Our production permit for the manufacture of our HIFU therapy system, FISH imaging analysis system and our ECLIA analyzer will
expire on July 3, 2010. We sourced our fluorescent microscope and CCD camera from third-party suppliers whose equipment is SFDA approved. To renew a production permit, a manufacturer needs to submit to the provincial level food and drug
administration an application to renew the permit, along with required information six months before the expiration date of the permit. We do not believe it will be difficult for us to renew our production permit.

Registration requirements of medical devices

Before a medical device can be manufactured for commercial distribution, a manufacturer must effect medical device registration by proving the safety and effectiveness of the medical device to the satisfaction of
respective levels of the food and drug administration. In order to conduct a clinical trial on a Class II or Class III medical device, the SFDA requires manufacturers to apply for and to obtain in advance a favorable inspection result for the device
from a third party inspection center recognized by the SFDA. The application to the inspection center must be supported by appropriate data, such as animal and laboratory testing results. If the inspection center approves the application for
clinical trial, and the respective levels of the food and drug administration approve the institutions which will conduct the clinical trials, the manufacturer may begin the clinical trial. A registration application for a Class II or Class III
device must provide certain pre-clinical and clinical trial data and information about the device and its components regarding, among other things, device design, manufacturing and labeling. The provincial level food and drug administration, within
60 days of receiving an application for the registration of a Class II device, and the SFDA, within 90 days of receiving an application for the registration of a Class III device, will notify the applicant whether the application for registration is
approved. If approved, a registration certificate will be issued within ten days of the notification. If the food and drug administration requires supplemental information, the approval process may take much longer. The registration is valid for
four years.

Clinical trials for our HIFU therapy system are also subject to the SFDA regulation governing HIFU medical devices. Under
these regulations, the minimum clinical trial period for a HIFU medical device is one year, with a minimum of 100 subjects participating and utilizing a minimum of two units of the HIFU medical device. Compliance with the SFDA regulations on
clinical investigations also includes satisfactory clinical reports from a minimum of two institutions which participated in the clinical trial, proper labeling of the device, obtaining informed consent from each subject, and compliance with
monitoring and record-keeping requirements.

The SFDA occasionally changes its policies, adopts additional regulations, revises existing
regulations or tightens enforcement, each of which could block or delay the approval process for a medical device. For example, in November 2001, the SFDA adopted regulations requiring additional clinical trials to be conducted if a manufacturer of
HIFU medical devices seeks to increase the types of tumors its device is approved to treat. A 2003 regulation further specifies that a 100-patient clinical trial is required before any medical device can be approved for commercial production.



46



---

##### Table of Contents

We received the SFDA approval for our first generation HIFU therapy system in September 1999 for the
treatment of solid tumors in the pelvic cavity and the abdominal cavity. Solid tumors in the pelvic cavity include bladder, uterine, prostate and rectal tumors, uterine fibroids and prostate hypertrophy. Solid tumors in the abdominal cavity include
pancreatic, rear abdominal, liver and kidney tumors and metastasis tumors of the abdominal lymph node. We discontinued the production of our first generation HIFU therapy system in December 2002. Although the September 1999 approval expired on
May 24, 2004, it is still valid for all units of our first generation HIFU therapy system that were sold to hospitals before our approval expired. In January 2003, we received a four-year SFDA approval for our second generation HIFU therapy
system for the treatment of liver tumors, breast tumors, kidney tumors, solid tumors in the pelvic cavity, tumors in the four limbs or superficial tissues and solid tumors on bone. The registration certificate for our second generation HIFU therapy
system expired in January 2007, however, we were granted an extension until the completion of the assessment of our renewal application by the SFDA. We do not believe it will be difficult for us to renew this approval.

Beijing Weixiao, a company controlled by Mr. Xiaodong Wu, our chairman of board of directors, our chief executive officer and a significant
shareholder of our company, received the SFDA approval for our ECLIA analyzer in February 2004. After our acquisition of enhanced chemiluminescence immunoassay technology from Beijing Weixiao, we applied for the transfer of the SFDA approval to us
and substantially completed the transfer in March 2005. The SFDA approval we have obtained will expire in March 2009 and we do not believe it will be difficult for us to renew this approval for the upgraded version of our ECLIA analyzer.

We have obtained the SFDA approval for distribution of FISH imaging analysis system.

Classification of ECLIA reagents and FISH probes

In April 2007, the SFDA announced a new regulation to be effective on June 1, 2007. Reagents used for IVD testing are divided into three different categories, Class I, Class II and Class III, depending on the
degree of risk associated with each reagent. Classification of a reagent is important because the class to which a reagent is assigned determines, among other things, the types of registration required and the level of regulatory authority involved
in effecting the registration.

Class I reagents are those with low risk and are subject to general controls. Class I reagents
are regulated by the city level food and drug administration where the manufacturer is located. Class II reagents are those with medium risk and are subject to special controls. Class II reagents are regulated by the provincial level
food and drug administration where the manufacturer is located. Class III devices are those with high risk and are regulated by the SFDA under the strictest regulatory control.

Our ECLIA reagents and FISH probes are classified as Class III reagents, and they therefore are subject to all regulatory controls governing Class III
reagents.

Production permit for ECLIA reagents and FISH probes

A manufacturer must obtain a production permit from the food and drug administration at the provincial level. A production permit, once obtained, is valid
for five years and is renewable upon expiration. Our production permit for the manufacture of ECLIA reagents and FISH probes will expire in July 2010. To renew the production permit, a manufacturer needs to submit to the provincial level food and
drug administration an application to renew the permit, along with required information six months before the expiration date of the permit. We do not believe it will be difficult for us to renew our production permit. In addition, pharmaceutical
manufacturing operations are also subject to periodic re-inspection and must comply with applicable quality regulations.



47



---

##### Table of Contents

Registration requirements of ECLIA reagents and FISH probes

Prior to selling an IVD reagent kit, a manufacturer must obtain both the SFDA registration of, and the SFDA approval for, the product it plans to sell.
The registration process starts with submitting a registration dossier to the SFDA. The registration dossier contains primarily detailed information concerning the effectiveness and quality of the reagent. It also contains details concerning the
manufacturing process and the production facilities. The registration process can last a few months and the timing depends on the nature of the pharmaceutical product under review, the quality of the data and the general efficiency of the SFDA. The
approval process involves the detailed examination of the testing, effectiveness, labeling, manufacturing and marketing of IVD reagents by the SFDA. The registration is valid for four years.

As of March 31, 2008, we offer a total of 74 ECLIA reagents and 35 FISH probes in China. Of the 74 ECLIA reagents, 59 are covered by registration
certificates. Of the 15 ECLIA reagents and 35 FISH probes we currently sell for research purpose which are exempt from registration certificates, we have submitted registration applications for all of them.

Thus, although regulations require that both the SFDA registration and approval be obtained before a reagent kit is sold, a reagent kit may be exempt
from registration and/or approval if it is used for research purposes only. A reagent kit intended for research use only may not be applied in human clinical diagnostic or prognostic uses. In addition, a reagent kit intended for research use only
must comply with the labeling requirements that require the statement: For research use only. Not for use in diagnostic procedures. We have sold many of our ECLIA reagent kits and FISH probes without required registrations and/or
approvals. In addition, we believe that many ECLIA reagent kits and FISH probes sold in China, including some manufactured by our overseas-based competitors, are also sold without required registrations and/or approvals. See Item 3. Key
InformationD. Risk factorsRisks related to our industryIn order to manufacture and market our products, we are required to obtain various authorizations from governmental regulatory authorities in China and other countries. If we
fail to obtain clearances or approvals in a timely fashion, our business may be significantly affected. and Item 3. Key InformationD. Risk factorsRisks related to doing business in ChinaFuture changes in laws,
regulations or enforcement policies in China could adversely affect our business.

In October 2004, the SFDA imposed certain good
manufacturing practice, or GMP, requirements for ECLIA reagents. As a result, all manufacturers of ECLIA reagents were obligated to meet GMP standards by January 1, 2006. We are currently in compliance with such GMP requirements and obtained
GMP certification for our ECLIA reagents in November 2005. The GMP certification is valid until October 2010.

Continuing SFDA
regulations

We are subject to continuing regulation by the SFDA. In the event of significant modification to an approved medical
device, its labeling or its manufacturing process, a new pre-market approval or pre-market approval supplement may be required. Our HIFU therapy system, our ECLIA analyzer and ECLIA reagents, and our FISH imaging analysis system and probes are
subject to, among others, the following regulations:



| |  |  | the SFDAs quality system regulations, which require manufacturers to create, implement and follow certain design, testing, control, documentation and other
quality assurance procedures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | medical device reporting regulations, which require that manufacturers report to the SFDA certain types of adverse reactions and other events involving their
products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the SFDAs general prohibition against promoting products for unapproved uses.
| | - |  | ------------------------------------------------------------------------------

Class II and III devices may also be subject to special controls applicable to them, such as supply purchase information, performance standards, quality
inspection procedures and product testing, which may not be required for Class I devices. We believe we are in compliance with the applicable SFDA guidelines, but we could be required to change our compliance activities or be subject to other
special controls if the SFDA changes or modifies its existing regulations or adopts new requirements.



48



---

##### Table of Contents

We are also subject to inspection and market surveillance by the SFDA to determine compliance with
regulatory requirements. If the SFDA decides to enforce its regulations and rules, the agency can institute a wide variety of enforcement actions, such as:



| |  |  | fines, injunctions and civil penalties;
| | - |  | ---------------------------------------



| |  |  | recall or seizure of our products;
| | - |  | ----------------------------------



| |  |  | the imposition of operating restrictions, partial suspension or complete shutdown of production; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | criminal prosecution.
| | - |  | ---------------------

Other
national and provincial level laws and regulations

We are subject to changing regulation under many other laws and regulations
administered by governmental authorities at the national, provincial and city levels, some of which are, or may be, applicable to our business. Our hospital customers are also subject to a wide variety of laws and regulations that could affect the
nature and scope of their relationships with us.

Laws regulating medical device manufacturers and hospitals cover a broad array of
subjects. For example, regulations control the confidentiality of patient medical information and the circumstances under which patient medical information may be released for inclusion in our databases, or released by us to third parties. These
laws and regulations governing both the disclosure and the use of confidential patient medical information may become more restrictive in the future.

We must also comply with numerous additional state and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection and fire hazard control. We believe we are
currently in compliance with these laws and regulations; however, we may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory requirements or adoption of new
requirements could therefore have a material adverse effect on our business, results of operations and financial condition.

Regulation of foreign currency exchange and dividend distribution

Foreign currency exchange regulation in China is
primarily governed by the following rules:



| |  |  | Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE.

Under the Administration Rules, companies in China with foreign investments, such as YDME Beijing, Beijing GP or BBE, may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the SAFE and other relevant government authorities.

The principal regulations governing distribution of dividends paid by wholly foreign owned enterprises include:



| |  |  | Wholly Foreign Owned Enterprise Law (1986), as amended; and
| | - |  | -----------------------------------------------------------



| |  |  | Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended.
| | - |  | ----------------------------------------------------------------------------



49



---

##### Table of Contents

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to set aside certain amounts out of their accumulated profits each year, if any, to
fund certain reserve funds. These reserves are not distributable as cash dividends.

Regulation of foreign exchange in certain
onshore and offshore transactions.

In January and April 2005, the SAFE issued two rules that require PRC
residents to register with and receive approvals from the SAFE in connection with their offshore investment activities. The SAFE has announced that the purpose of these regulations is to achieve the proper balance of foreign exchange and the
standardization of the cross-border flow of funds.

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice 75 replaced the two
rules issued by the SAFE in January and April 2005 mentioned above.

According to Notice 75:

(i) prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or
equity interests in an onshore enterprise in the PRC, each PRC resident who is an ultimate controller, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE
branch;

(ii) an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that
directly or indirectly holds interests in that offshore company upon either (a) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (b) the completion of any overseas fund raising by such
offshore company; and

(iii) an amendment to the registration with the local SAFE branch is also required to be filed by
such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (a) an increase or decrease in its capital, (b) a transfer or swap of shares, (c) a merger or division, (d) a
long-term equity or debt investment, or (e) the provision of a guarantee to third parties.

Moreover, Notice 75 applies retroactively
and to indirect shareholdings. As a result, PRC residents who have established or acquired direct or indirect control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange
activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties
under PRC foreign exchange administration regulations.

In order to clarify the issues arising from the implementation and application of
Notice 75, on May 29, 2007, SAFE promulgated Implementing Procedures of Notice 75, or Notice 106. However, the complex rules and requirements set forth under Notice 106 need even more interpretation and operating guidance. For example, it is
not clear under Notice 106 if our establishment of the two entities in the British Virgin Islands would be subject to the registration requirement of Notice 106.

As a result of the lack of implementing rules and other uncertainties relating to the interpretation and implementation of Notice 75 and Notice 106, we cannot predict how these regulations will affect our business
operations or strategies. For example, our present or future PRC subsidiaries ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to



50



---

##### Table of Contents

compliance with such SAFE registration requirements by relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such
PRC residents will complete the necessary approval and registration procedures required by the SAFE regulations.

On March 28, 2007,
SAFE promulgated the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals Participation in Employee Share Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules.
Under the Share Option Rules, PRC citizens who participate in employment share ownership or share option plans of an overseas listed company are required to appoint a domestic agent to deal with the relevant foreign exchange matters in China. For
participants of an employment share ownership plan, an overseas custodian bank should be retained by the domestic agent to hold on trusteeship all overseas assets held by such participants under the employment share ownership plan. In the case of a
share option plan, a financial institution with stock brokerage qualification at the place where the overseas listed company is listed or a qualified institution designated by the overseas listed company is required to be retained to handle matters
in connection with exercise or sale of stock options for the share option plan participants. For participants who had already participated in an employment share ownership plan or share option plan before the date of the Share Option Rules, the
Share Option Rules require their domestic employers or domestic agents to complete the relevant formalities within three months of the date of the Share Option Rules. The failure to comply with the Share Option Rules may subject us as the company
offering the plan to penalties under the PRC foreign exchange regime.

Company Law

On October 27, 2005, the Standing Committee of the National Peoples Congress adopted amendments to the PRC Company Law, which substantially
overhauled the PRC company law system and removed a number of legal restrictions and hurdles on the management and operations of limited liability companies and companies limited by shares. It is expected that the PRC Law of Wholly Foreign-owned
Enterprises, or the WFOE Law, and its implementing regulations will be amended accordingly in order to align the WFOE Law with the amendments to the PRC Company Law. Each of YDME Beijing, Beijing GP and BBE is governed by both the PRC Company Law
and the WFOE Law and their implementing regulations, and we believe that YDME Beijing, Beijing GP and BBE will be able to benefit from a more flexible and business friendly company law regime under the new PRC Company Law. For example, the amended
PRC Company Law eliminated a restriction which limited the amount of equity investments a company could make to a maximum of 50% of such companys net assets. With the removal of this restriction, YDME Beijing, Beijing GP and BBE may have
increased flexibility in making equity investments or planning potential acquisitions. In addition, the amended PRC Company Law now permits the establishment of single-shareholder limited liability companies. As a result, YDME Beijing, Beijing GP
and BBE may acquire 100% of the equity interest in a PRC limited liability company and become the sole shareholder of such limited liability company.



51



---

##### Table of Contents

|C. | Organizational Structure
|-- | ------------------------

The following diagram
illustrates our companys organizational structure, and the place of formation, ownership interest and affiliation of each of our significant subsidiaries as of May 31, 2008.

LOGO



|* | Formerly known as CMED Molecular Diagnostics Ltd.
|- | -------------------------------------------------



|D. | Property, Plant and Equipment
|-- | -----------------------------

Most of our
manufacturing facilities are located in the Beijing Economic-Technological Development Area, where we own two buildings with an aggregate of approximately 10,000 square meters of office, research and development and manufacturing spaces. To further
enlarge our production capacity, we have leased properties in the Beijing Economic-Technological Development Area for the production of our ECLIA analyzer and FISH probes. Through the acquisition of BBE in January 2008, we obtained an aggregate of
approximately 2,000 square meters of research and development and manufacturing spaces in Fengtai district, Beijing, which are owned by BBE. BBE also entered into a one-year lease for approximately 583 square meters of office space in Fengtai
district, Beijing.

In September 2005, we entered into a three-year lease for approximately 494 square meters of office space in a central
business district of Beijing, China. We use this office for our management and international sales and marketing purposes.



|ITEM4A. | UNRESOLVED STAFF COMMENTS
|------- | -------------------------

Not applicable.



52



---

##### Table of Contents

|ITEM5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------ | --------------------------------------------

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated
financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3. Key InformationD. Risk Factors or in other parts of this annual report on Form
20-F.



|A. | Operating Results
|-- | -----------------

Overview

We are a China-based medical device company that develops, manufactures and markets in China advanced in-vitro diagnostics products, to detect and monitor
various diseases and disorders, and HIFU tumor therapy systems for the treatment of solid cancers and benign tumors. As of March 31, 2008, our sales were generated from three products, our ECLIA system, our FISH system and our HIFU therapy
system. We started reporting our financial results in segments along product lines since our acquisition of the enhanced chemiluminescence immunoassay technology in August 2004 and added the FISH product line for the fiscal year ended March 31,
2008 as the sales and distribution of our FISH products began in June 2007.

One of our main products, the ECLIA system, is an IVD system
that can be used to diagnose and analyze a variety of diseases and conditions, including various thyroid disorders, diabetes, hepatitis, liver fibrosis, Down syndrome, disorders related to reproduction and growth, various types of tumors and SARS,
as well as to assess the effect of digoxin, a widely used drug for the treatment of heart failure. Our second in-vitro diagnostics product, FISH imaging analysis system, is an integrated system comprised of a fluorescent microscope, CCD camera and
FISH imaging analysis software that enable medical practitioners to visualize and locate DNA sequences in human cells for identifying chromosomal abnormalities using fluorescent in situ hybridization technology. Our other main product, the
HIFU therapy system, is an ultrasound-guided acoustic ablation system that is used for the non-invasive treatment of solid tumors.

In
January, 2008, we completed the acquisition of the entire equity interest in Beijing Bio-Ekon Biotechnology Co., Ltd., or BBE, for a cash consideration of US$28.8 million. BBE currently manufactures semi-automatic ECLIA analyzer using Magnetic
Antibody Immunoassay, or MAIA, separation technology and is in the process of obtaining the SFDA approval for its fully automatic ECLIA analyzer. MAIA is a technology suitable for high volume and fully automatic ECLIA analyzers and can enhance test
results. BBE holds the Chinese patents for the MAIA minute magnetic beads which are important for the production of its fully automatic ECLIA analyzer. Currently, BBE offers 18 ECLIA reagents and has over 40 reagents in the pipeline, some of which
are expected to help expand our reagent portfolio. Notable reagents developed by BBE include a reagent for testing blood fluke parasitic infection and food safety reagents for testing toxic aflatoxin in cereal products and clenbuterol in pork, which
cater to the growing demand of food safety test kits from a large number of food production entities in China. BBE has sales offices in Beijing, Guangzhou, Wuhan, Qingdao and Chengdu to conduct direct sales and manage distributors in selling its
products to over 800 hospitals in China.

Pricing

Distributors in China operate primarily on a for-profit basis, and hospitals in China are expected to use a substantial portion of their revenues to fund their operations. Treatment fees for HIFU tumor therapy are set
by provincial governments in China, a factor we consider when pricing our HIFU therapy system. To gain market penetration, we price our HIFU therapy system at levels that we believe offer attractive economic returns to distributors and hospitals,
taking into account the prices of competing products in the market. We market and sell our products to distributors at a price that is significantly lower than the price that hospitals pay for our products. We believe that our HIFU therapy system is
competitively priced compared to other HIFU tumor therapy devices available in China.



53



---

##### Table of Contents

We believe that our ECLIA system is competitively priced to offer attractive economic returns to our
distributors. The prices of our reagent kits are significantly lower than those of foreign imports.

We believe that the prices of our FISH
probes are considerably lower than those of foreign imports. We are not aware of any China-based manufacturers who offer FISH imaging analysis system and probes in China.

The provincial governments in China set the treatment fee rates for HIFU tumor therapy, and they may adjust the fee rates from time to time. If they reduce the fee rates, some hospitals and distributors may be
discouraged from purchasing our HIFU therapy system, which would reduce our sales. In that event, we may need to decrease the price of our HIFU therapy system to provide our customers acceptable returns on their purchases. We cannot assure you that
our business, financial condition and results of operations will not be adversely affected by any reduction in treatment fees for HIFU tumor therapy in the future.

Revenues

As of March 31, 2008, we derived revenues primarily from three sources, which were sales of our HIFU
therapy system, ECLIA system and our FISH system.

Our revenues, growth and results of operations depend on several factors, including the
level of acceptance of our products among doctors, hospitals and patients and our ability to maintain prices for our products at levels that provide favorable margins. The level of acceptance among doctors, hospitals and patients is influenced by
the performance and pricing of our products, our ability to educate distributors and the medical community about our products, our relationships with hospitals and major distributors, government reimbursement levels as well as other factors.

Our revenues have fluctuated significantly from quarter to quarter in the past due to the fluctuation in the sales of our HIFU therapy
system. Sales of our HIFU therapy system are seasonal, and our third and fourth fiscal quarters, which are the quarters ending December 31 and March 31, respectively, have historically been our strongest. We believe that the relatively
stronger performance in our third and fourth fiscal quarters is largely due to the budget cycles of hospitals in China. Hospitals in China typically make their capital expenditure decisions, such as decisions on whether to purchase our HIFU therapy
system, between June and December. Our HIFU therapy system is usually shipped to customers between September to March. Because our HIFU therapy system is sold at a relatively high unit price, the size and timing of individual orders can have a
significant effect on our results of operations in any given quarter. We began to sell our ECLIA system and FISH system in September 2004 and June 2007, respectively. Sales of our ECLIA system have fluctuated, and we expect that sales of our FISH
system will fluctuate, to a lesser extent from quarter to quarter compared to sales of our HIFU therapy system.

Our sales have
historically been made on the basis of unit-by-unit purchase orders rather than long-term commitments, and we do not have long-term contracts with any of our customers. In the fiscal years ended March 31, 2006, 2007 and 2008, substantially all
of our HIFU therapy systems were sold to distributors. We also market and sell our ECLIA system solely to distributors. As the target end markets for our HIFU therapy system and our ECLIA system are different, we expect our two products to be sold
to different groups of distributors. As present, we market and sell our FISH system directly to hospitals. We cannot assure you that any customer will continue to purchase our products at the same levels as in prior years or that our relationship
with any of them will continue.

We expect distributors for our products will change from year to year. Such changes are primarily due to
the fragmented nature of the medical equipment distribution industry in China. Distributors of our HIFU therapy systems are typically companies that only have the resources to target a limited number of hospitals at a given time. Once they have won
orders from targeted hospitals, it takes some time to develop relationships with new hospitals. In addition, we require our distributors to pay us in full within a year of accepting our products, but our



54



---

##### Table of Contents

distributors may give their hospital customers longer payment terms under various types of sales arrangements, including profit-sharing programs, in order to
facilitate their own sales. For example, under profit-sharing programs, distributors install our HIFU therapy system in hospitals for free and, in return, receive a portion of the net profits generated by the system. Such profit-sharing programs
require upfront capital commitments from distributors upon their purchase of the HIFU therapy system from us. As a result, these distributors may need time to recover their financial resources to purchase additional products from us.

For sales of our HIFU therapy system, we generally collect 30% to 40% of the sale price when customers place purchase orders or after the shipment is
accepted by either our distributors or the hospitals designated by these distributors, and the balance within one year of acceptance. For sales of ECLIA analyzer, we generally collect 20% to 40% of the sale price before delivery or after acceptance
and the balance within six months of acceptance. For sales of reagent kits, we do not require down payments, and collect payments within three months after product acceptance. For sales of our FISH imaging analysis system, we may require a payment
of a portion of the sale price before delivery or after acceptance and the balance within six months of acceptance. For sales of FISH probes, we do not require down payments, and we collect payments four to six months after acceptance.

To promote the sales of our ECLIA reagents, we recently started to rent our ECLIA analyzers to qualified hospitals free of charge. As our ECLIA
analyzers are closed system, although it may reduce the sales of our ECLIA analyzers, we expect such practice to increase the sales of our ECLIA reagents, which are recurring in nature and generate higher gross margin than ECLIA analyzer. To promote
the sales of our FISH probes, we recently started to assist hospital customers in purchasing components of FISH imaging analysis system, such as the microscope, directly from component manufacturers so that these hospitals could reduce the cost of
setting up the FISH imaging analysis system and expedite the commencement of this diagnostic service to patients. While it may reduce the sales of our FISH imaging analysis system, we expect such practice to increase our sales of FISH probes, which
are recurring in nature and generate higher gross margin than FISH imaging analysis system.

Costs

Cost of revenues

Our cost of revenues
primarily consists of material and component costs. Our cost of revenues also includes amortization of intangible assets and direct costs incurred in the assembly, installation and service of our products, such as salaries and related personnel
expenses and depreciation costs of plant and equipment used for production purposes. Depreciation of property, plant and equipment for the fiscal years ended March 31, 2006, 2007 and 2008 in the amount of RMB1.6 million, RMB2.6 million and
RMB7.0 million (US$1.0 million), respectively, were recorded as cost of revenue. Amortization of intangible assets in the amount of RMB14.9 million, RMB14.9 million and RMB90.2 million (US$12.9 million) were included in cost of revenue for the
fiscal years ended March 31, 2006, 2007 and 2008, respectively. Our in-house production manufactures the ECLIA reagent kits and FISH probes and conduct the final product assembly, testing and packaging of our HIFU therapy system, our ECLIA
analyzers and our FISH imaging analysis system. We also source a majority of our components from third-party suppliers.

As we source a
significant portion of our components and raw materials in China, we currently have a relatively low cost base compared to medical technology companies in more developed countries. We expect the costs of components and raw materials in China will
increase in the future as a result of further economic development in China. In addition, our focus on new generations and applications of our products may require higher cost components and raw materials. We plan to offset increases in our cost of
raw materials and components through more efficient product designs and product assembly enhancements as well as through savings due to economies of scale.



55



---

##### Table of Contents

Operating expenses

Our operating expenses primarily consist of research and development expenses, sales and marketing expenses and general and administrative expenses.



| |  |  | Research and development. Research and development expenses primarily consist of costs associated with the design, development, testing and enhancement
of our existing products and development of new ECLIA reagents and FISH probes. These costs consist of expenditures for purchases of supplies, clinical trials, salaries and related personnel expenses, and other relevant costs. Share-based
compensation of RMB2.8 million (US$0.4 million) was included in research and development expenses for the fiscal year ended March 31, 2008. Going forward, we expect to increase our research and development expenses, both on an absolute basis
and as a percentage of revenue, to develop new applications and improve the product designs of our HIFU therapy system, ECLIA system and FISH imaging analysis system and probes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales and marketing. Sales and marketing expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and
customer support functions and costs associated with advertising and other marketing activities. Similar to most China-based manufacturers of medical equipment and supplies, our sales of HIFU therapy system and ECLIA system are made primarily to
distributors. As a result, our sales and marketing expenses for HIFU therapy system and ECLIA system as a percentage of revenues are significantly lower than manufacturers of medical equipment and supplies that operate their own marketing and
distribution networks and sell directly to hospitals. At present, we market and sell our FISH system directly to hospitals. Going forward, we expect to increase our expenditures on sales and marketing, both on an absolute basis and as a percentage
of revenue, to promote our products, especially our ECLIA system and FISH products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative. General and administrative expenses consist primarily of salaries and benefits and related costs for our administrative
personnel and management, fees and expenses of our outside advisers, including legal, audit and valuation expenses, expenses associated with our administrative offices and the depreciation of equipment used for administrative purposes. We expect
that our general and administrative expenses will increase, both on an absolute basis and as a percentage of revenue, as we hire additional personnel and incur costs related to the anticipated growth of our business. Share-based compensation of
RMB13.9 million (US$2.0 million) was included in general and administrative expenses for the fiscal year ended March 31, 2008. We adopted our 2005 stock option plan in February 2005 and amended and restated the plan in November 2006. On
March 14, 2005, we granted share options to acquire 200,000 of our ordinary shares to each of two of our directors under this stock option plan and, on August 8, 2005, we granted share options to acquire 200,000 of our ordinary shares to
each of two additional directors under this stock option plan. On June 11, 2007, we granted four directors, certain officers and management personnel 1,800,000 restricted shares and share options to purchase an aggregate of 750,000 ordinary
shares. On October 1, 2007 and November 16, 2007, we granted a total of 120,000 restricted shares to two new independent directors. We account for these restricted shares and share options in accordance with Statements of Financial
Accounting Standards, or SFAS, No. 123(Revised 2004), Share-Based Payment, and its related interpretations, which require us to record a compensation charge measured at the fair value of the restricted shares and share options. We
recognize the compensation expense over the applicable service period of the grantee, which is usually the vesting period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Taxation

Under the current laws of the Cayman Islands, we are not subject to tax on our income or capital gains. In addition, no Cayman Islands
withholding tax will be imposed on payments of dividends by us to our shareholders.

The newly enacted EIT Law, and the implementation
regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provide that all enterprises in China, including



56



---

##### Table of Contents

foreign-invested companies, are subject to a uniform 25% EIT rate and all tax reduction or exemption as well as incentives currently provided to
foreign-investment enterprises are to be cancelled. However, the EIT law provides a five-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential
lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. The State Council issued the Notice on Implementation of the Transition Period for Preferential Enterprise Income Tax, or the Transition
Implementation Notice, on December 26, 2007, which provides detailed rules on how preferential tax rate under previous income tax laws or regulations would transition to the uniform 25% EIT rate. In addition, entities that qualify as high
and new technology enterprises will enjoy a 15% preferential tax rate under the EIT law. The Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation issued the Measures on Qualification of High and
New Technology Enterprises, or Circular 172, on April 14, 2008, which provides detailed standards for high and new technology enterprises. In addition, according to the Notice on Prepayment of Enterprise Income Tax issued by the
State Administration of Taxation, enterprises that have been certified as a high and new technology enterprise shall pre-pay its EIT in the rate of 25% temporarily until it is re-certified as a high and new technology
enterprise under Circular 172.

Under the current PRC laws, YDME Beijing, Beijing GP and BBE are subject to EIT and VAT.

YDME Beijing was classified as a high and new technology company and has been operating in an approved economic-technological development area. Given
this classification, it was entitled to an EIT rate of 15%, compared to a statutory rate of 30% for most companies in China. This classification also exempted YDME Beijing from paying the EIT for the three calendar years ended December 31,
1999, 2000 and 2001and a 50% reduced YDME Beijings EIT rate to 7.5% for the three calendar years ended December 31, 2002, 2003 and 2004. In addition, as a foreign-invested advanced technology enterprise certified by the
Beijing Commerce Bureau, YDME Beijing was entitled to a further reduced EIT rate of 10% for the three calendar years ending December 31, 2007. YDME Beijing obtained approval from the tax authority in February 2006 regarding this further
reduction in EIT rate. Because YDME Beijing has not yet applied for or obtained certification as a high and new technology enterprise under Circular 172, it is only able to enjoy preferential tax rate under other provisions of the EIT
law and the Transition Implementation Notice. Under the EIT Law and the Transition Implementation Notice, YDME Beijings EIT rates are 18%, 20%, 22% and 24% for the calendar years from 2008 to 2011 and 25% thereafter.

Beijing GP also operates in an approved economic-technological development area and was entitled to an EIT rate of 15%. In addition, Beijing GP was
deemed as a production-oriented foreign investment enterprise and was entitled to an exemption from EIT from January 1, 2008 to December 31, 2009 and a 50% income tax reduction from January 1, 2010 to December 31, 2013. Because
Beijing GP has not yet applied for or obtained certification as a high and new technology enterprise under Circular 172, it is only able to enjoy preferential tax rate under other provisions of the EIT law and the Transition
Implementation Notice. Under the EIT Law and the Transition Implementation Notice, Beijing GPs EIT rates are 0%, 0%, 11%, 12% and 12.5% for the calendar years from 2008 to 2012.

If YDME Beijing and Beijing GP had not had any preferential tax rate or tax holiday, our basic earnings per share for the three fiscal years ended
March 31, 2006, 2007 and 2008 would have reduced by RMB0.05, RMB0.06 and RMB0.26 (US$0.04), respectively, and our diluted earnings per share for the three fiscal years ended March 31, 2006, 2007 and 2008 would have reduced by RMB0.05,
RMB0.05 and RMB0.22 (US$0.03), respectively.

VAT is charged based on the selling price of our products at a general rate of 17%. Our
revenues are recorded net of this VAT. However, we are entitled to a refund of VAT in excess of 3% on the sales of self- developed software embedded in our HIFU therapy system and our ECLIA system. We recognize the VAT refund as part of our net
revenues under U.S. GAAP. For the fiscal years ended March 31, 2006, 2007 and 2008, VAT refunds amounted to RMB23.0 million, RMB29.6 million and RMB29.9 million (US$4.3 million), respectively which accounted for 6.2%, 5.4% and 3.3% of our
revenues for the respective year.



57



---

##### Table of Contents

The EIT Law also provides that enterprises established outside of China whose de facto management
bodies are located in China are considered resident enterprises and are generally subject to the uniform 25% EIT rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State
Council, de facto management body is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC
resident enterprise.

Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is
applicable to dividends payable to investors that are non-resident enterprises, to the extent such dividends are derived from sources within the PRC. We are a Cayman Islands holding company and may need to cause our operating
subsidiaries located in the PRC to pay dividends to us to satisfy our cash needs. Thus, if our subsidiaries in China pay any dividends to us, such dividends may be subject to the 10% income tax if we are considered as a non-resident
enterprise under the EIT Law.

Critical Accounting Policies

We prepare our financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our
contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge
and assessment of current business and other conditions, our expectations regarding the future considering available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that
are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies involve a greater use of
estimates or require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the
judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our consolidated financial statements. We
believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Depreciation and amortization of long-lived assets and intangible assets, other than goodwill

We depreciate
property, plant and equipment and amortize our intangible assets other than goodwill on a straight-line basis over the respective estimated useful lives of these assets, after taking into account their estimated residual values.

The patent we acquired as part of our ECLIA acquisition in August 2004 is amortized over its remaining protected period at time of acquisition of 17
years as allowed by the relevant regulatory authorities.

In determining the estimated useful lives of our unpatented technology in our
ECLIA and BBE acquisition, we consider the following pertinent factors:



| |  |  | the expected protective period of similarly patented technologies as allowed by the relevant regulatory authorities;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | the planning horizon of our operations taking into account the medical equipment and supply market in China as a whole; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the economic lives and history of other similar diagnostic technologies currently used by hospitals in the world.
| | - |  | -----------------------------------------------------------------------------------------------------------------



58



---

##### Table of Contents

As a result, we have estimated the useful life of the unpatented technology we acquired as part of our
ECLIA and BBE acquisition range between 15 and 20 years.

The estimated useful life of the non-compete commitment acquired as part of our
ECLIA acquisition in August 2004 is based on the period of time during which the non-compete commitment is expected to be of value to us, which we consider to be the estimated time required for Beijing Weixiao to develop a similar technology and the
length of the impact if Beijing Weixiao were to develop the technology and to compete with us. As a result, we have estimated the useful life of the non-compete commitment to be 9 years.

The customer relationships acquired during BBE acquisition is amortization over the estimated remaining life for existing customers of 15 years based on
historical customer retention rates.

The intangible assets we acquired as part of our acquisition of FISH business in March 2007 are
amortized over their respective estimated useful lives. These intangible assets are amortized over the length of time that they are expected to bring economic value to us.

In determining the estimated useful lives of FISH related technology and know-how acquired in March 2007, we consider the following pertinent factors:



| |  |  | the useful life of similar technology and technical know-how;
| | - |  | -------------------------------------------------------------



| |  |  | the planning horizon of our operations taking into account the medical equipment and supply market in China as a whole; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the economic lives and history of other similar diagnostic technologies currently used by hospitals in the world.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Our estimated useful life for the technical know-how for production for FISH imaging analysis system and FISH probes are 5 years and 20 years
respectively.

We review the estimated useful lives and estimated residual values of our assets regularly in order to determine the amount
of depreciation and amortization expenses to be recorded during any reporting period. We determine the estimated useful lives for property, plant and equipment based on our historical usage experience with similar assets and taking into account
anticipated technological changes.

We adjust depreciation and amortization expense for future periods if there are significant changes
from previous estimates. For the fiscal years ended March 31, 2006, 2007 and 2008, there were no significant changes in the estimated useful lives or residual values of these long-lived assets.

Acquisitions

As of March 31, 2008, our
intangible assets consisted of ECLIA-related patented technologies, unpatented technologies, customer relationships and non-compete agreements as well as FISH related unpatented technologies and non-compete agreement. The acquisitions in ECLIA
assets, the FISH business and ECLIA business were made during the fiscal years ended March 31, 2005, March 31, 2007 and March 31, 2008 respectively. We allocate the cost of acquisitions based on the estimated fair value of the
net assets acquired on the date of acquisition. This process is commonly referred to as the purchase price allocation. As part of the purchase price allocation, we are required to determine the fair value of any identifiable intangible assets
acquired. The determination of the fair value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future. A
change in the amount allocated to identifiable intangible assets would change the amount of amortization expense recognized related to those identifiable intangible assets. When a business combination involves an excess of fair value of the acquired
net assets over cost and a contingent consideration agreement



59



---

##### Table of Contents

that, when resolved, might result in the recognition of an additional element of cost with respect to the acquired entity, we recognize a liability for the
lesser of the maximum amount of contingent consideration or the initial amount of negative goodwill. If an amount of negative goodwill remains after we recognize this liability, we first write down the eligible acquired assets, and recognize any
remaining unallocated amount as an extraordinary gain. When a business involves an excess of cost over the fair value of net assets acquired, goodwill arises. Goodwill is not amortized, but is instead tested for impairment at least annually.

The fair values of our identifiable intangible assets were determined by management with the assistance of independent appraisers using
mainly the income approach.

For unpatented technologies of FISH probes and FISH imaging analysis system, the fair values were determined
by using the relief-from-royalty method under the income approach. Under the relief-from-royalty method, a hypothetical construct is used to represent what we would be willing to pay to continue to use the intangible asset in business operations if
we no longer had legal ownership of the intangible asset. Since ownership of the asset relieves the business from being required to make these payments, financial results are improved to the extent the upfront payment and royalty payments are
avoided. The net of tax hypothetical royalties of 25.5% for the first ten years and 20% for the next ten years are discounted at a weighted average cost of capital at 14.75% to present value and to arrive at the indication of the assets fair
value. Capital Asset Pricing Model was adopted to determine the weighted average cost of capital. For the non-compete agreement in FISH business, we have adopted an income approach that compares the perspective cash flows with and without the
subject competition in place.

For unpatented ECLIA reagent technologies and customer relationships acquired upon the BBE acquisition, the
fair values were determined by using the multi-period excess earnings method. The principal of multi-period excess earnings method implies that the value of an asset is the capitalized amount of incremental profits achieved through use of the
intangible assets as compared with the profits of the same business not using it, or the value of an asset is the capitalized amount of earnings relating to that asset less the returns on all other assets that contribute to that earning stream. For
the unpatented ECLIA core technologies, the fair values were determined by using the relief-from-royalty method under the income approach. Under the relief-from-royalty method, a hypothetical construct is used to represent what we would be willing
to pay to continue to use the intangible asset in business operations if we no longer had legal ownership of the intangible asset. Since ownership of the asset relieves the business from being required to make these payments, financial results are
improved to the extent the upfront payment and royalty payments are avoided. After considered the profit margins on comparable companies, the estimate of the reasonable royalty rates for ECLIA products are from 20% to 25% of sales revenue. They were
based on the entire operating income of the business enterprise selling and marketing the ECLIA products in the PRC with the unpatented technologies. For the non-compete agreements in ECLIA business, we have adopted an income approach that compares
the perspective cash flows with and without the subject competition in place.

Recoverability of long-lived assets

Our long-lived assets consisted of property, plant and equipment, land use rights and intangible assets. We review periodically the carrying amounts of
our long-lived assets to be held and used in order to assess whether the recoverable amounts, based on expected undiscounted net cash flows, have declined below the carrying amounts. We test these assets for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, we reduce the carrying amount to the estimated fair value and record the difference as an impairment loss, which is charged against
earnings. We determine estimated fair value using expected future cash flows generated by the assets and such future cash flows are discounted to their present value, which requires significant judgment in terms of projection of cash flows for
future years and the assumption on the pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the fiscal years ended March 31, 2006, 2007 and 2008, we did not recognize
any impairment losses in our consolidated financial statements.



60



---

##### Table of Contents

Collectibility of our accounts receivable

We evaluate the collectibility of our accounts receivable based on the aging of account balances, collection history, credit quality of the customer and
current economic conditions that may affect a customers ability to pay.

We currently do not recognize an allowance for doubtful
accounts in our consolidated financial statements because of our past collection experience. However, we have been dependent on a small number of distributors for a significant portion of our revenues. If a major customers financial condition
deteriorates, or if our customer default rates become higher than historical levels, our estimates of the recoverability of amounts due to us could change, and an allowance could be required, which could have a material adverse effect on our results
of operations.

Results of Operations

The following table sets forth a summary, for the periods indicated, our consolidated results of operations and each item expressed as a percentage of our total revenues. Our historical results presented below are not necessarily indicative
of the results that may be expected for any future period.



|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|---------------------------- |  | -------------------- | - |  | ------------ | - |  | ------------------ | - |  | ------------ | - |  | ------------------ | - |  | ------------ | -
|                             |  | Year ended March 31, |  
|                             |  | 2006                 |   |  | 2007         |   |  | 2008               |  
|                             |  | RMB (in thousands)   |   |  | % ofrevenues |   |  | RMB (in thousands) |   |  | % ofrevenues |   |  | RMB (in thousands) |   |  | % ofrevenues |  
|Revenues                     |  | 371,767              |   |  | 100.0        |   |  | 546,970            |   |  | 100.0        |   |  | 915,738            |   |  | 100.0        |  
|Cost of revenues             |  | (110,494             | ) |  | (29.7        | ) |  | (151,614           | ) |  | (27.7        | ) |  | (346,436           | ) |  | (37.8        | )
|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|Total gross profit           |  | 261,273              |   |  | 70.3         |   |  | 395,356            |   |  | 72.3         |   |  | 569,302            |   |  | 62.2         |  
|Operating expenses:          |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|Research and development     |  | (14,374              | ) |  | (3.9         | ) |  | (31,469            | ) |  | (5.8         | ) |  | (40,875            | ) |  | (4.5         | )
|Sales and marketing          |  | (15,327              | ) |  | (4.1         | ) |  | (18,264            | ) |  | (3.3         | ) |  | (29,099            | ) |  | (3.2         | )
|General and administrative   |  | (38,309              | ) |  | (10.3        | ) |  | (55,352            | ) |  | (10.1        | ) |  | (75,376            | ) |  | (8.2         | )
|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|Total operating expenses     |  | (68,010              | ) |  | (18.3        | ) |  | (105,085           | ) |  | (19.2        | ) |  | (145,350           | ) |  | (15.9        | )
|Operating income             |  | 193,263              |   |  | 52.0         |   |  | 290,271            |   |  | 53.1         |   |  | 423,952            |   |  | 46.3         |  
|Other income (expense)(1)    |  | 23,838               |   |  | 6.4          |   |  | 29,541             |   |  | 5.4          |   |  | (20,533            | ) |  | (2.2         | )
|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|Earnings before income taxes |  | 217,101              |   |  | 58.4         |   |  | 319,812            |   |  | 58.5         |   |  | 403,419            |   |  | 44.1         |  
|Income tax expense           |  | (18,088              | ) |  | (4.9         | ) |  | (30,094            | ) |  | (5.5         | ) |  | (78,197            | ) |  | (8.5         | )
|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  
|Net income                   |  | 199,013              |   |  | 53.5         |   |  | 289,718            |   |  | 53.0         |   |  | 325,222            |   |  | 35.5         |  
|                             |  |                      |   |  |              |   |  |                    |   |  |              |   |  |                    |   |  |              |  



|(1) | Other income (expense) includes interest expense, interest income, amortization of convertible notes issuance costs and other income,
net.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

Year Ended March 31, 2008 Compared to Year Ended March 31, 2007

Revenues.Our revenues were derived from three operating segmentsHIFU therapy system sales, ECLIA system sales and FISH system sales. ECLIA
system sales include the sales of ECLIA analyzer and reagent kits. FISH system sales include the sales of FISH imaging analysis system and FISH probes. HIFU therapy system sales, ECLIA system sales and FISH system sales accounted for 40.2%, 41.6%
and 18.2% of our revenues, respectively, for the fiscal year ended March 31, 2008 and 60.6%, 39.4% and nil of our revenues, respectively, for the fiscal year ended March 31, 2007. We expect ECLIA sales, principally sales of ECLIA reagent
kits, to grow at a higher rate than that of our HIFU therapy system sales. Together with sales generated from our recently launched FISH imaging analysis system and probes, we expect our combined revenue from the IVD platform will account for a
significant part of our revenue. See Revenues.



61



---

##### Table of Contents

Our revenues increased 67.4% to RMB915.7 million (US$130.6 million) for the fiscal year ended
March 31, 2008, from RMB547.0 million for the fiscal year ended March 31, 2007. This increase was primarily due to the significant increase in the ECLIA system sales and the commencement of sale of our FISH system in June 2007.

Revenues from sales of our ECLIA system increased 76.5% to RMB380.5 million (US$54.3 million) for the fiscal year ended March 31, 2008 from
RMB215.6 million for the fiscal year ended March 31, 2007. This significant increase was attributable to the increased utilization of ECLIA analyzers by hospitals and the introduction of new reagents, both of which increased the demand for our
reagent kits and our revenue from sale of reagent kits.

Revenues from sales of our FISH system were RMB166.9 million (US$23.8 million) for
the fiscal year ended March 31, 2008. We began sale of our FISH system in June 2007.

Revenues from sales of our HIFU therapy system
increased 11.1% from RMB331.4 million for the fiscal year ended March 31, 2007 to RMB368.3 million (US$52.5 million) for the fiscal year ended March 31, 2008. This increase was primarily due to increases in unit sales. Sales of our HIFU
therapy system increased to 125 units for the fiscal year ended March 31, 2008 from 114 units for the fiscal year ended March 31, 2007. This increase was attributable to the increased market penetration of our HIFU therapy system as it
gains acceptance in the medical community and with patients.

Cost of revenues and gross margin. Our cost of revenues increased to
RMB346.4 million (US$49.4 million) for the fiscal year ended March 31, 2008, from RMB151.6 million for the fiscal year ended March 31, 2007. Our overall gross margin decreased to 62.2% for the fiscal year ended March 31, 2008 as
compared to 72.3% for the fiscal year ended March 31, 2007. This decrease in our overall gross margin was primarily due to the commencement of sales of FISH system in June 2007 which currently has a much lower gross margin than that of HIFU
therapy system sales and ECLIA system sales. Gross margin for our HIFU therapy system slightly increased to 72.6% for the fiscal year ended March 31, 2008 from 71.7% for the fiscal year ended March 31, 2007. Gross margin for our ECLIA
system slightly decreased to 72.9% for the fiscal year ended March 31, 2008 from 73.2% for the fiscal year ended March 31, 2007. In comparison, gross margin for our FISH system was 14.7% for the fiscal year ended March 31, 2008. The
gross margin for FISH system was significantly lower than the gross margins for HIFU therapy system and ECLIA system primarily due to the amortization of FISH intangible assets and the sales of FISH imaging analysis system which generated lower
gross margin than sale of FISH probes. We expect future FISH probe sales to generate recurring revenue and higher gross margin for the Company.

Operating expenses. Our operating expenses increased to RMB145.4 million (US$20.7 million) for the fiscal year ended March 31, 2008, from RMB105.1 million for the fiscal year ended March 31, 2007. This increase was
primarily due to expansion of our existing business and commencement of sale of FISH products in the fiscal year ended March 31, 2008. Our operating expenses as a percentage of revenues decreased to 15.9% for the fiscal year ended
March 31, 2008 from 19.2% for the fiscal year ended March 31, 2007.

Our research and development expenses increased to RMB40.9
million (US$5.8 million) for the fiscal year ended March 31, 2008, from RMB31.5 million for the fiscal year ended March 31, 2007. The increase was primarily due to the development of new ECLIA reagents and FISH probes, the preparation for
the clinical trials of our HIFU therapy system in the United States, expenses associated with the HIFU study organized by the Ministry of Health in the PRC, and an increase in the share-based compensation expenses we incurred in 2007. Our research
and development expenses as a percentage of revenues decreased to 4.5% for the fiscal year ended March 31, 2008 from 5.8% for the fiscal year ended March 31, 2007.

Our sales and marketing expenses increased to RMB29.1 million (US$4.2 million) for the fiscal year ended March 31, 2008, from RMB18.3 million for
the fiscal year ended March 31, 2007. This increase was primarily due to the establishment and expansion of direct sales force for FISH system and promotional activities for both



62



---

##### Table of Contents

ECLIA system and FISH system. Our sales and marketing expenses as a percentage of revenues decreased to 3.2% for the fiscal year ended March 31, 2008
from 3.3% for the fiscal year ended March 31, 2007.

Our general and administrative expenses increased to RMB75.4 million (US$10.8
million) for the fiscal year ended March 31, 2008, from RMB55.4 million for the fiscal year ended March 31, 2007. This increase was primarily due to an increase in the number of employees to meet the expansion of the Companys
operations and an increase in share-based compensation expenses. Our general and administrative expenses as a percentage of revenues decreased to 8.2% for the fiscal year ended March 31, 2008 from 10.1% for the fiscal year ended March 31,
2007.

Other income (expense). We incurred net interest expense of RMB23.7 million (US$3.4 million) for the fiscal year ended
March 31, 2008, compared to net interest income of RMB23.5 million for the fiscal year ended March 31, 2007. The increase in our interest expense was primarily due to the interest of RMB39.1 million (US$5.6 million) for the convertible
notes in the fiscal year ended March 31, 2008. In comparison, we accrued less interest on the convertible notes in the fiscal year ended March 31, 2007 because we issued the notes in November 2006 and the notes were outstanding for less
than five months during the fiscal year. We also incurred other interest expense of RMB5.2 million (US$0.7 million) for the fiscal year ended March 31, 2008 due to the present value discounting of long term other payable of US$10 million for
the final payment of FISH acquisition due in March 2009. The decrease in interest income was primarily due to a decrease in cash balance from RMB1,173.6 million as of March 31, 2007 to RMB682.7 million as of March 31, 2008 as a result of
payments made for acquisition of the FISH business and BBE and a decrease in interest rate for US dollar bank deposits. Also included in the calculation of the net interest income (expense) was the amortization of convertible notes issuance costs of
RMB7.9 million (US$1.1 million) and RMB3.1 million for the fiscal years ended March 31, 2008 and 2007, respectively. Such amortization of convertible notes issuance costs were related to our convertible notes issued in November 2006. The
issuance costs are amortized over the five-year term of the convertible notes. We recognized net other income of RMB3.1 million (US$0.4 million) for the fiscal year ended March 31, 2008, which was related to non-refundable government grants
that do not have specific terms of usage. In comparison, for the fiscal year ended March 31, 2007, we had RMB5.7 million of non-refundable government grants that do not have specific terms of usage.

Income tax expense. Our effective tax rate for the fiscal year ended March 31, 2008 was 19.4%, compared to 9.4% for the fiscal year ended
March 31, 2007. The effective tax rate in the fiscal year ended March 31, 2008 increased primarily due to the increase in income tax rate from 10% to the transitional rate of 18% in connection with the EIT Law that became effective in
January 2008 as well as certain non-deductible expenses for income tax.

Net income. Net income increased to RMB325.2 million
(US$46.4 million) for the fiscal year ended March 31, 2008, from RMB289.7 million for the fiscal year ended March 31, 2007, as a result of the cumulative effect of the above factors. The basic earnings per ADS increased to RMB12.4 (US$1.8)
for the fiscal year ended March 31, 2008, from RMB10.8 for the fiscal year ended March 31, 2007. The diluted earnings per ADS increased to RMB12.0 (US$1.7) for the fiscal year ended March 31, 2008, from RMB10.7 for the fiscal year
ended March 31, 2007. The effects of the tax holiday on basic earnings per ADS are RMB0.6 and RMB2.6 (US$0.4) for the fiscal years ended March 31, 2007 and March 31, 2008, respectively. The effects of the tax holiday on diluted
earnings per ADS are RMB0.5 and RMB2.2 (US$0.3) for the fiscal years ended March 31, 2007 and March 31, 2008, respectively.

Year Ended
March 31, 2007 Compared to Year Ended March 31, 2006

Revenues. Our revenues were derived from two operating
segmentsHIFU therapy system sales and ECLIA system sales. HIFU therapy system sales and ECLIA system sales accounted for 60.6% and 39.4% of our sales, respectively, for the fiscal year ended March 31, 2007 and 66.4% and 33.6%,
respectively, for the fiscal year ended March 31, 2006. We expect ECLIA sales, principally sales of ECLIA reagent kits, to grow at a higher



63



---

##### Table of Contents

rate than that of our HIFU therapy system sales. Together with sales generated from our recently launched FISH imaging analysis system and probes, we expect
our combined revenue from the IVD platform will account for a significant part of our revenue. See Revenues.

Our
revenues increased 47.1% to RMB547.0 million for the fiscal year ended March 31, 2007, from RMB371.8 million for the fiscal year ended March 31, 2006. This increase was primarily due to the increase in sales of both our HIFU therapy system
and our ECLIA system. Sales to our largest customer for the fiscal year ended March 31, 2007, Beijing Yi Min Wei Kang Technology Co., Ltd., amounted to RMB34.6 million, or 6.3% of our revenues during that year while sales to another major
customer, Beijing Wei Jian Da Medical Technology Co. Ltd. for the fiscal year ended March 31, 2006 amounted to RMB91.8 million, or 24.7% of our revenues for that fiscal year.

Revenues from sales of our HIFU therapy system increased 34.3% from RMB246.9 million for the fiscal year ended March 31, 2006 to RMB331.4 million
for the fiscal year ended March 31, 2007. Sales of our HIFU therapy system increased to 114 units for the fiscal year ended March 31, 2007 from 89 units for the fiscal year ended March 31, 2006. This increase was attributable to the
increased market penetration of our HIFU therapy system as it gains acceptance in the medical community and with patients.

Revenues from
sales of our ECLIA system increased significantly to RMB215.6 million for the fiscal year ended March 31, 2007 from RMB124.9 million for the fiscal year ended March 31, 2006 as a result of the increasing acceptance of the ECLIA system in
the medical community in China and higher recurring revenue from reagent kit sales due to the increased installed base of ECLIA analyzers.

Our revenue increase was also due in part to a significant increase in VAT refunds, which we recognize as part of our revenues. Our VAT refunds increased to RMB29.6 million for the fiscal year ended March 31, 2007, from RMB23.0 million
for the fiscal year ended March 31, 2006, as a result of the increase in the sales of our self-developed software embedded in our HIFU therapy system and ECLIA system.

Cost of revenues and gross margin. Our cost of revenues increased 37.2% to RMB151.6 million for the fiscal year ended March 31, 2007, from
RMB110.5 million for the fiscal year ended March 31, 2006. Our overall gross margin increased to 72.3% for the fiscal year ended March 31, 2007 as compared to 70.3% for the fiscal year ended March 31, 2006. Gross margin for our HIFU
therapy system increased to 71.7% for the fiscal year ended March 31, 2007 from 70.5% for the fiscal year ended March 31, 2006 primarily due to the price increase for the Companys HIFU therapy system in October 2006. Gross margin for
our ECLIA system increased to 73.2% for the fiscal year ended March 31, 2007 from 69.9% for the fiscal year ended March 31, 2006 primarily due to the higher revenue contribution of ECLIA reagents, which generate higher gross margin than
that of ECLIA analyzers.

Operating expenses. Our operating expenses increased significantly to RMB105.1 million for the fiscal year
ended March 31, 2007, from RMB68.0 million for the fiscal year ended March 31, 2006. This increase was primarily due to significant increases in our research and development expenses, our sales and marketing expenses and our general and
administrative expenses. Our operating expenses as a percentage of revenues increased to 19.2% for the fiscal year ended March 31, 2007 from 18.3% for the fiscal year ended March 31, 2006.

Our research and development expenses increased significantly to RMB31.5 million for the fiscal year ended March 31, 2007, from RMB14.4 million for
the fiscal year ended March 31, 2006. The increase was primarily due to our HIFU-related medical study that is being conducted in partnership with the MOH, the pre-clinical trials of our HIFU therapy system that are being conducted in the
United States for FDA pre-market approval and our collaboration with the Chinese Academy of Sciences Institute of Acoustics and the Biomed-X Centre of Peking University. Our research and development expenses as a percentage of revenues increased to
5.8% for the fiscal year ended March 31, 2007 from 3.9% for the fiscal year ended March 31, 2006.



64



---

##### Table of Contents

Our sales and marketing expenses increased significantly to RMB18.3 million for the fiscal year ended
March 31, 2007, from RMB15.3 million for the fiscal year ended March 31, 2006. This increase was primarily due to our increased participation at exhibitions and organization of more promotional events. In addition, we increased expenditure
on our sales and marketing efforts during this period to further promote our ECLIA system. Our sales and marketing expenses as a percentage of revenues decreased to 3.3% for the fiscal year ended March 31, 2007 from 4.1% for the fiscal year
ended March 31, 2006.

Our general and administrative expenses increased significantly to RMB55.4 million for the fiscal year ended
March 31, 2007, from RMB38.3 million for the fiscal year ended March 31, 2006. This increase was primarily due to our increased headcount to meet the expansion of the Companys operations. Our general and administrative expenses as a
percentage of revenues decreased to 10.1% for the fiscal year ended March 31, 2007 from 10.3% for the fiscal year ended March 31, 2006.

Other income (expense). Our net interest income increased significantly to RMB23.5 million for the fiscal year ended March 31, 2007, from RMB14.0 million for the fiscal year ended March 31, 2006. This increase was primarily
due to an increase in interest income generated from the net proceeds received from our initial public offering in August 2005. Also included in the calculation of the net interest income was the amortization of convertible notes issuance costs of
RMB3.1 million for the fiscal year ended March 31, 2007, which were related to the US$150 million convertible notes issued in November 2006. The issuance costs are amortized over a five-year term of the convertible notes. We have net other
income of RMB6.0 million for the fiscal year ended March 31, 2007, which was primarily related to non-refundable government grants.

Income tax expense. Our effective tax rate for the fiscal year ended March 31, 2007 was 9.4%, compared to 8.3% for the fiscal year ended March 31, 2006. The effective tax rate in the fiscal year ended March 31, 2007
increased because the foreign tax rate differential in the fiscal year ended March 31, 2007 was substantially higher than that of fiscal year ended March 31, 2006. The retroactive change in enacted tax rate recorded in the fiscal year
ended March 31, 2006 while none was recorded for fiscal year ended March 31, 2007 was also responsible for the change in effective tax rate. In February 2006, we received a further reduction in statutory tax rates from 15% to 10% for the
three calendar years ended December 31, 2007. The reduction in tax rate applied retroactively to fiscal year ended March 31, 2005 was taken into effect in the fiscal year ended March 31, 2006. Therefore, the effective tax rate for the
fiscal year ended March 31, 2006 was lower than of fiscal year ended March 31, 2007.

Net income. Net income increased
significantly to RMB289.7 million for the fiscal year ended March 31, 2007, from RMB199.0 million for the fiscal year ended March 31, 2006, as a result of the cumulative effect of the above factors. The basic earnings per ADS increased to
RMB10.8 for the fiscal year ended March 31, 2007, from RMB8.1 for the fiscal year ended March 31, 2006. The diluted earnings per ADS increased to RMB10.7 for the fiscal year ended March 31, 2007, from RMB8.1 for the fiscal year ended
March 31, 2006. The tax holiday increased the net income by RMB13.0 million and RMB 15.6 million for the fiscal years ended March 31, 2006 and March 31, 2007, respectively. The effects of the tax holiday on basic earnings per ADS
are RMB0.5 and RMB0.6 for the fiscal years ended March 31, 2006 and 2007, respectively. The effects of the tax holiday on diluted earnings per ADS are RMB0.5 and RMB0.5 for the fiscal years ended March 31, 2006 and 2007, respectively.



65



---

##### Table of Contents

|B. | Liquidity and Capital Resources
|-- | -------------------------------

Liquidity and Capital
Resources

The following table sets forth a summary of our net cash flows for the periods indicated:



|                                                    |  |                      |   |  |           |   |  |           |   |  |          |  
|--------------------------------------------------- |  | -------------------- | - |  | --------- | - |  | --------- | - |  | -------- | -
|                                                    |  | Year ended March 31, |  
|                                                    |  | 2006                 |   |  | 2007      |   |  | 2008      |   |  | 2008     |  
|                                                    |  | RMB                  |   |  | RMB       |   |  | RMB       |   |  | US$      |  
|                                                    |  | (in thousands)       |  
|Net cash provided by operating activities           |  | 166,912              |   |  | 360,999   |   |  | 463,334   |   |  | 66,077   |  
|Net cash used in investing activities               |  | (136,778             | ) |  | (884,455  | ) |  | (831,551  | ) |  | (118,589 | )
|Net cash provided by (used in) financing activities |  | 804,438              |   |  | 871,554   |   |  | (86,149   | ) |  | (12,286  | )
|Net increase (decrease) in cash                     |  | 829,145              |   |  | 329,849   |   |  | (490,961  | ) |  | (70,017  | )
|Cash at beginning of year                           |  | 14,646               |   |  | 843,791   |   |  | 1,173,640 |   |  | 167,376  |  
|Cash at end of year                                 |  | 843,791              |   |  | 1,173,640 |   |  | 682,679   |   |  | 97,359   |  

As of March 31, 2008, we had working capital of RMB672.0 million (US$95.8 million). We
believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital, research and development expenditures and capital expenditures for the foreseeable
future. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash resources are insufficient to meet
our requirements, we may seek to sell additional equity securities, debt securities or borrow from banks. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional
equity securities, including convertible debt securities, would result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that
restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may suffer.

In the fiscal years ended March 31, 2006, 2007 and 2008, we have financed our operations primarily through cash generated by our operating
activities, our initial public offering in August 2005 and our issuance of convertible notes in November 2006. The net proceeds we received from our initial public offering in August 2005 net of underwriting discounts and commissions and other
expenses) amounted to US$99.7 million. We received net proceeds of approximately US$144.7 million from our issuance of convertible notes in November 2006.

Our principal uses of cash during the fiscal year ended March 31, 2008 were for our working capital requirements, payment of RMB439.9 million (US$62.7 million) in relation to our acquisition of the FISH business,
payment of RMB195.6 million (US$27.9 million) in relation to our acquisition of BBE, payment of RMB166.7 million (US$23.8 million) as refundable deposit for a potential acquisition, payment of cash dividends in the aggregate amount of RMB83.3
million (US$11.9 million) to our shareholders, payment of RMB29.3 million (US$4.2 million) in relation to the expansion of our ECLIA reagent production facility and purchase of other property, plant and equipment.

As of March 31, 2008, we had RMB682.7 million (US$97.4 million) in cash. Our cash primarily consist of cash on hand and bank balances which are
mainly held in RMB denominated accounts with banks in China and U.S. dollar denominated accounts with banks in Hong Kong, Singapore and the United States.



66



---

##### Table of Contents

Operating Activities

Net cash provided by operating activities increased to RMB463.3 million (US$66.1 million) for the fiscal year ended March 31, 2008, from RMB361.0 million for the fiscal year ended March 31, 2007. This
increase was mainly attributable to the increase in cash received from customers for higher unit sales which outpaced the cash paid to suppliers and employees which was partially offset by the increase in income taxes that we paid in the fiscal year
ended March 31, 2008 because of an increase in taxable income and an increase in our income tax rate due to effectiveness of the EIT Law as of January 1, 2008 and the commencement of interest payments on our convertible notes in the fiscal
year ended March 31, 2008.

Net cash provided by operating activities increased to RMB361.0 million for the fiscal year ended
March 31, 2007, from RMB166.9 million for the fiscal year ended March 31, 2006. This increase was mainly attributable to the increase in cash received from customers for higher unit sales which outpaced the cash paid to suppliers and
employees.

Investing Activities

Net
cash used in investing activities decreased to RMB831.6 million (US$118.6 million) for the fiscal year ended March 31, 2008, from RMB884.5 million for the fiscal year ended March 31, 2007. Net cash used in investing activities for the
fiscal year ended March 31, 2008 consisted primarily of payment of RMB439.9 million in relation to our acquisition of FISH business, payment of RMB195.6 million in relation to our acquisition of BBE, and a refundable deposit of RMB166.7 million
paid in July 2007 for a potential acquisition.

Net cash used in investing activities increased to RMB884.5 million for the fiscal year
ended March 31, 2007, from RMB136.8 million for the fiscal year ended March 31, 2006. Net cash used in investing activities for the fiscal year ended March 31, 2007 consisted primarily of our payment of RMB848.2 million in relation to
our acquisition of FISH operation.

Financing Activities

Net cash used in financing activities was RMB86.1 million (US$12.3 million) for the fiscal year ended March 31, 2008, compared to net cash provided by financing activities of RMB871.6 million for the fiscal year
ended March 31, 2007. Net cash used in financing activities for the fiscal year ended March 31, 2008 consisted primarily of cash dividends in the aggregate amount of RMB83.3 million paid to our shareholders in August 2007 and principal
payments on bank loan in the amount of RMB 8.0 million.

Net cash provided by financing activities was RMB871.6 million for the fiscal year
ended March 31, 2007, compared to net cash used in financing activities of RMB804.4 million for the fiscal year ended March 31, 2006. Net cash provided by financing activities for the fiscal year ended March 31, 2007 consisted
primarily of proceeds of RMB1,117.3 million raised from our issuance of convertible bonds in November 2006, partially offset by a US$30 million prepaid forward purchase contract. Concurrently with the sales of convertible notes, we entered into a
prepaid forward repurchase contract with an affiliate of Merrill Lynch & Co. Pursuant to the forward repurchase contract, the company repurchased contemporaneously with the sales of the convertible notes, an aggregate of US$30 million of
ADSs, equivalent to 1,163,692 ADS at US$25.78 per ADS. Merrill Lynchs affiliate may deliver the shares at its discretion, in full or in part, over a period of five years from the date of the contract. As of March 31, 2008, Merrill
Lynchs affiliate had not delivered any shares.

We are a holding company and have historically relied on proceeds from our equity and
debt financings as well as dividends paid by our wholly owned subsidiaries, YDME Beijing, Beijing GP and BBE, for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we
may incur and pay our operating expenses. In the event equity and debt financings are not available in amounts or on terms acceptable to us, we may need to cause our wholly owned subsidiaries to pay dividends to us for our cash needs. The payment of
dividends in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with



67



---

##### Table of Contents

accounting standards and regulations in China. YDME Beijing, Beijing GP and BBE are also required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year to fund certain reserve funds. These reserves can be used to recoup previous years losses, if any, and, subject to the approval of the relevant government authority, may be converted into share capital in
proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them. Such reserves, however, are not distributable as cash dividends. In addition, if YDME Beijing, Beijing GP and BBE incur debt on their
own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

The ability of our subsidiaries, YDME Beijing, Beijing GP and BBE to convert Renminbi into U.S. dollars and make payments to us is subject to PRC foreign exchange regulations. Under these regulations, the Renminbi is convertible for current
account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and
repatriation of investment, however, is still subject to the approval of the SAFE.

Our working capital requirements vary from period to
period depending on manufacturing volumes, the timing of deliveries, our payment cycles to our suppliers and the payment cycles of our customers.

Capital Expenditures

We made capital expenditures of RMB134.1 million, RMB884.5 million and RMB664.9 million (US$94.8
million) in the fiscal years ended March 31, 2006, 2007 and 2008, respectively. We expect to spend approximately RMB105.2 million (US$15.0 million) in the year ending March 31, 2009, consisting of the purchase of new manufacturing
equipment to enlarge production capacity, the renovation of existing facilities and the final payment in relation to our acquisition of the FISH business. We expect to finance such capital expenditures primarily through cash generated by our
operating activities. Our past capital expenditures principally consisted of purchases of a building, acquisition of enhanced chemiluminescence immunoassay technology, enlargement of ECLIA reagent production facility and payments in relation to our
acquisitions of the FISH business and BBE.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measurement of fair value, and expands disclosures required for fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fair
value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB Staff position No. 157-2, Effective date of FASB Statement
No. 157 which defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis. Management does not expect the initial adoption of SFAS No. 157 will have a material impact on the consolidated financial statements.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The entity shall report unrealized gains
and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. Management has elected not to adopt the fair
value option, as permitted under SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141R (Revised), Business
Combinations (SFAS No. 141R). SFAS No. 141R establishes requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests (formerly minority interests). SFAS
No. 141R also provides disclosure requirements related to business combinations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. SFAS No. 141R will be applied prospectively to business combinations
with an acquisition date on or after December 15, 2008.



68



---

##### Table of Contents

In December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes new standards for the accounting for and reporting of non-controlling interests and for the loss of control of partially
owned and consolidated subsidiaries. SFAS No. 160 does not change the criteria for consolidating a partially owned entity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of SFAS
No. 160 will be applied prospectively upon adoption except for the presentation and disclosure requirements, which will be applied retrospectively. SFAS No. 160 states that accounting and reporting for minority interests will be
recharacterized as non-controlling interests and classified as a component of equity. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more. Management does not expect the initial adoption of SFAS No. 160 will
have a material impact on the consolidated financial statements.

In May 2008, FASB issued Staff Position No. APB 14-1, Accounting
for Convertible Debt Instruments that May be Settled in Cash Upon Conversion (FSP APB 14-1). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in a manner that reflects an issuers nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be
outstanding as additional non-cash interest expense. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all
periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. FSP APB 14-1
will change the accounting treatment for the Companys convertible notes (Note 7). The impact of this new accounting treatment may be significant and will result in an increase to non-cash interest expense beginning in the year ended
March 31, 2010 for financial statements covering past and future periods.



|C. | Research and Development, Patents and Licenses, etc.
|-- | ----------------------------------------------------

Research
and Development

As of May 31, 2008, our research and development team consisted of 106, research personnel and medical
professionals, which accounted for 15.3% of our employees. Many of the key research and development personnel who developed the HIFU and ECLIA technologies at the PUPH are currently employed by us. The key research and development personnel of the
FISH business we acquired in March 2007 were also transferred to our company and are employed by us. Our research and development staff consists of medical professionals, biomedical engineers, acoustics engineers, electrical engineers and computer
science engineers, many of whom have experience in the healthcare and medical device research fields, including experience working with hospitals who are customers of our products.

Our research and development focuses primarily on developing new applications and improving the product designs of our HIFU therapy system, ECLIA system
and FISH imaging analysis system and probes.



| |  |  | HIFU therapy system research and development. We have expertise in the core research and development of all of the components of our HIFU therapy system. We
have developed an ultrasound-based temperature measuring technology that can collect real time temperature data through acoustic signals that are generated by the ultrasound waves used for treatment. As the amount of ultrasound energy required to
achieve the destruction of tumor tissues can vary with the location of the tumor and the specific characteristics of the tumor tissues to be treated, real time temperature data allows the physician to adjust and more precisely achieve target
temperature. This device is non-invasive and provides the physician with more control over the treatment process and the outcome. We incorporated this new technology into our third-generation HIFU therapy system, which launched in October 2006, and
sell the non-invasive ultrasound temperature detecting device separately as a product upgrade to existing users of our system. Our HIFU therapy system has been recognized as one of the Chinese
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



69



---

##### Table of Contents

| | National Promotion Projects of High Technology Industrialization. Our research projects include increasing the types of tumors our HIFU therapy system can
treat and increasing patients comfort level during treatment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ECLIA system research and development. Our ECLIA system research and development focuses on expanding the range of reagent kits for applications that are
commonly used in China. For example, we recently launched reagents that are used to monitor stages of liver fibrosis and test Down syndrome. We plan to continue to add new reagents to increase the competitiveness of our ECLIA system. The reagents
under development include tests for infectious diseases, infertility disorders and cardiac diseases. Our fully automatic system for large hospitals is currently pending approval from the SFDA. We are also working on improving the response time and
efficiency of our ECLIA analyzer.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH probe research and development. Our FISH probe research and development focuses on expanding the range of probes for applications that address large
unmet demand in China. The probes we currently offer are used in these applications: prenatal diagnosis, diagnosis and prognosis of cervical cancer, bladder cancer, breast cancer, leukemia, multiple myeloma and prostate cancer. We are also working
on enhancing the sensitivity and specificity of our probes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We actively involve scientists and physicians during our
research and development process to produce products that provide clinical and economic benefits to hospitals and their patients. In recent years, we have increased our investment in research and development to accelerate the commercialization of
new technologies. Over the past year, we initiated various long term collaborations with leading institutions such as Chinese Academy of Sciences Institute of Acoustics and Biomed-X Center of Peking University to strengthen our research
capabilities, further enhance the functionality of existing products and expedite the development of new products. We expect to continue devoting significant resources to research and development.

Our research and development expenditures were RMB14.4 million, RMB31.5 million and RMB40.9 million (US$5.8 million) in the fiscal years ended
March 31, 2006, 2007 and 2008, respectively.

Intellectual Property

We are committed to developing and protecting our intellectual property portfolio. We own and have applied for patents to protect the technologies,
inventions and improvements that we believe are significant to our business. As of May 31, 2008, we have obtained 19 patents in China, including two utility patents and eight invention patents directed towards different aspects of our HIFU
therapy system and six utility patents and three invention patents directed towards our ECLIA system. The validity periods for our eight utility patents and eleven invention patents are 10 years and 20 years, respectively, from the date the
application was filed. See Our HIFU SolutionThe HIFU therapy system for a detailed description of our most important patents. Generally, invention patents are viewed as offering more commercial protection than utility
patents. As with patent rights in most other jurisdictions, a patent holder in the PRC enjoys the exclusive right to exclude others from using, licensing and otherwise exploiting the patent within the PRC. To protect some of the most important
proprietary technologies internationally, we have submitted fourteen patent applications relating to HIFU technology in other countries including the United States, the United Kingdom, Germany, South Korea and India. As of May 31, 2008, we had
been granted all four of the patents we applied for in the United Kingdom, two of the three patents we applied for in India and two of the four patents we applied for in South Korea. We have also submitted three patent applications relating to
enhanced chemiluminescence immunoassay technology in the United States of which we have been granted one patent. We have also filed a patent application directed towards our FISH methodology in the United States.

We have developed, among others, the following key technologies for our HIFU tumor therapy system, ECLIA system and FISH probes:



| |  |  | a wide convergence angle range for ultrasound wavesOur HIFU therapy system is capable of producing ultrasound waves from a wide convergence angle range in
order to reduce the intensity of
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



70



---

##### Table of Contents

| | ultrasound waves when they penetrate the surface of the skin. This technology significantly reduces the likelihood of skin burns and collateral damage to
surrounding body tissues. We have obtained a patent for this technology in China and have applied for patents in other countries.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | non-invasive ultrasound temperature detectingThis technology is designed to collect real time temperature data during treatment by generating acoustic
signals while the focused ultrasound shots occur. The feedback data from these acoustic signals allow the physician to adjust the parameters of the HIFU therapy system so that the target temperature can be more precisely achieved at each focal
point throughout the patients treatment, thus giving the physician more control over the treatment process and outcome. We have applied for a patent directed toward this technology in China and in other countries.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | two-transducer designThis design enables the patient to be treated in the supine, side or seated positions so that more locations in the body can be targeted.
This patented design also increases the patients comfort level during treatment. We have obtained a patent directed toward this technology in China and have applied for patents in other countries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enhanced chemiluminescence substrate technologyThis technology improves the chemical reaction of reagents with the patients body fluid sample to produce
a long lasting and linear signal and enables our reagent kits to be more sensitive and accurate. We have a pending patent application directed toward this technology in China.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substance storage technologyThis technology can improve the shelf life of our reagent kits from six months to two years, thus reducing the risk of inventory
obsolescence. We have obtained a patent directed toward this technology in China.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FISH methodologyThis methodology discloses an innovative method to deplete repetitive sequences from human DNA. The approach has consistently demonstrated
that our present subtraction method is efficient in removing DNA hybridized complexes, thus leading to a significant depletion of repetitive sequences from a source DNA. We have filed a patent application directed toward this methodology in the
United States.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We require our employees, consultants and advisors to execute confidentiality agreements in connection
with their employment, consulting and advisory relationships with us. We also require our employees, consultants and advisors who are privy to confidential information to agree to disclose and assign to us all inventions conceived during their terms
of employment or contract. Despite any measures we take to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or our proprietary technology or to obtain and use information that we regard as
proprietary.

We, like other medical device manufacturers in China and elsewhere, are subject to a number of uncertainties regarding the
commercial value of our patent portfolio. See Item 3. Key InformationD. Risk FactorsRisks Related to Our CompanyIf we fail to protect our intellectual property rights, our competitors may take advantage of our proprietary
technology and know-how and compete directly against us.



|D. | Trend Information
|-- | -----------------

Other than as disclosed
elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from April 1, 2006 to March 31, 2008 that are reasonably likely to have a material adverse effect on our
revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.



|E. | Off-Balance Sheet Arrangements
|-- | ------------------------------

We do not, and did
not, have any interest in variable interest entities or any other off-balance sheet arrangements that require disclosure.



71



---

##### Table of Contents

|F. | Tabular Disclosure of Contractual Obligations
|-- | ---------------------------------------------

The
following table sets forth our contractual obligations as of March 31, 2008:



|                            |  |                       |  |          |  |           |  |                  |  |          
|--------------------------- |  | --------------------- |  | -------- |  | --------- |  | ---------------- |  | ---------
|                            |  | Payment due by period
|Contractual obligations     |  | Less than1 year       |  | 1-3years |  | 3-5years  |  | More than5 years |  | Total    
|                            |  | (RMB in thousands)   
|Convertible notesprincipal |  |                      |  |         |  | 1,051,800 |  |                 |  | 1,051,800
|Convertible notesinterest  |  | 36,813                |  | 73,626   |  | 36,813    |  |                 |  | 147,252  
|Operating lease obligations |  | 5,987                 |  | 1,992    |  |          |  |                 |  | 7,979    
|Purchase obligations        |  | 13,200                |  |         |  |          |  |                 |  | 13,200   
|                            |  |                       |  |          |  |           |  |                  |  |          
|Total                       |  | 56,000                |  | 75,618   |  | 1,088,613 |  |                 |  | 1,220,231
|                            |  |                       |  |          |  |           |  |                  |  |          

Other than the contractual obligations and commercial commitments set forth above, we do not have
any other long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities.

Inflation

Inflation in China has not had a material impact on our results of operations in recent years. According to the National Bureau of
Statistics of China, the change in the Consumer Price Index in China was 1.8%, 1.5% and 4.8% in 2005, 2006 and 2007, respectively.



|G. | Safe Harbor
|-- | -----------

This annual report on Form 20-F
contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition. The forward-looking statements are contained principally in
the sections entitled Item 3. Key InformationD. Risk Factors, Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects. These statements involve known and unknown
risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

Forward-looking statements typically are identified by words or phrases such as may, will, expect,
anticipate, aim, estimate, intend, plan, believe, potential, continue, is/are likely to or other similar expressions or the negative of these
words or expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business
strategy and financial needs. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of
factors, including:



| |  |  | our anticipated growth strategies;
| | - |  | ----------------------------------



| |  |  | our future business development, results of operations and financial condition;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our ability to develop and market future generations of our HIFU therapy system and future applications of our ECLIA system and FISH system;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | market acceptance of FISH imaging analysis system and probes;
| | - |  | -------------------------------------------------------------



| |  |  | the expected market growth for medical devices and supplies in China;
| | - |  | ---------------------------------------------------------------------



| |  |  | market acceptance of our technology and products;
| | - |  | -------------------------------------------------



| |  |  | our expectations regarding hospital or patient demand for tumor treatment;
| | - |  | --------------------------------------------------------------------------



72



---

##### Table of Contents

| |  |  | our ability to expand our production, sales and distribution network and other aspects of our operations;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | our ability to effectively build and manage a direct sales force for the distribution of FISH products;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | our ability to diversify our product range and stay abreast of technological changes;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | competition from other HIFU tumor therapy device manufacturers and alternative methods of tumor therapy;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | competition from other companies that offer IVD systems in China;
| | - |  | -----------------------------------------------------------------



| |  |  | our ability to effectively protect our intellectual property and not infringe on the intellectual property of others;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to expand our sales and distribution of our HIFU system outside of China;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to identify and acquire new medical technologies and products;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in the healthcare industry in China, including changes in the healthcare policies and regulations of the PRC government and changes in the healthcare
insurance sector in the PRC; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in general economic and business conditions in China.
| | - |  | ------------------------------------------------------------------

This annual report contains market information related to the medical devices and supplies industry, healthcare insurance, hospitals, the cancer treatment and IVD markets in China. Unlike in the United States, there
is limited authoritative data on the healthcare industry in China, particularly on a nationwide basis. For example, there is limited data concerning health and patient trends or the medical devices and supplies industry. In addition, any data that
is available may not be current. This annual report contains projections that are based on a number of assumptions. For example, we have made assumptions regarding the growth in the number of tumor patients and the demand for tumor treatment. Our
business and marketing plan for the ECLIA system also assumes that small- and medium-sized hospitals in China will be interested in buying an ECLIA system such as ours. We have also projected a certain penetration rate for our FISH system in
large-size hospitals in China. Any or all of our assumptions may turn out to be incorrect. The tumor therapy market may not expand at the rates projected by the market information, or at all. If demand for our HIFU therapy system, ECLIA system and
FISH system does not grow at the projected rates, our business and the market price of our ADSs would suffer. In addition, the complex and changing nature of broad macroeconomic factors subject any projections or estimates relating to the growth
prospects or future conditions of our market to significant uncertainties.

The forward-looking statements made in this annual report
relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we reference in this annual report and have
filed as exhibits to the registration statement, of which this annual report is a part, completely and with the understanding that our actual future results may be materially different from what we expect.



73



---

##### Table of Contents

|ITEM6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------ | ------------------------------------------



|A. | Directors and Senior Management
|-- | -------------------------------

Directors and Executive
Officers

The following table sets forth information regarding our directors and executive officers as of May 31, 2008.



|                             |  |     |  |                                                            
|---------------------------- |  | --- |  | -----------------------------------------------------------
|Name                         |  | Age |  | Position/title                                             
|Xiaodong Wu                  |  | 52  |  | Chairman of the board of directors, chief executive officer
|Iain Ferguson Bruce(1)(2)(3) |  | 68  |  | Independent director                                       
|Lawrence A. Crum(1)(2)(3)    |  | 67  |  | Independent director                                       
|Yuedong Li(1)(3)             |  | 59  |  | Independent director                                       
|Guoming Qi                   |  | 62  |  | Independent director                                       
|Takyung (Sam) Tsang          |  | 37  |  | Director, chief financial officer                          
|Zhong Chen                   |  | 43  |  | Chief technology officer                                   
|Feng (Charles) Zhu           |  | 39  |  | Vice president                                             



|(1) | Member of the audit committee.
|--- | ------------------------------

|(2) | Member of the compensation committee.
|--- | -------------------------------------

|(3) | Member of the nomination committee.
|--- | -----------------------------------

Mr. Xiaodong Wu, our founder, currently serves as our chairman of the board of directors and chief executive officer. Mr. Wu has served on our board of directors since July 2004 and as the chairman of our board of directors
since February 2005. Mr. Wu is also a director and the chief executive officer of YDME Beijing, positions he has served since the inception of YDME Beijing in July 1999. Mr. Wu serves on the board of directors of Chengxuan, Beijing
Chengxuan, an investment holding company, Beijing Weixiao, a medical technology company, Beijing Jia Chen Hong Biological Technologies Co., Ltd., a medical technology company, and Beijing Wan De Jin Da Industry and Trade Co., Ltd., a property
management company. Mr. Wu worked in the foreign investment department of the Jiangxi provincial government from 1990 to 1996. From 1980 to 1989, Mr. Wu worked in Jiangxi Municipal Science and Technology Commission and accumulated
extensive experience in assessing and managing hi-tech projects. Mr. Wu is an advisor to Beijing Medical University for technology development projects. Mr. Wu received his bachelors degree in Physics from Jiangxi University.

Mr. Iain Ferguson Bruce has served as a member of our board of directors since February 2005. Mr. Bruce is a member of
the audit, compensation and nomination committees. Mr. Bruce joined KPMG in Hong Kong in 1964 and was elected to its partnership in 1971. He was the Senior Partner of KPMG from 1991 until his retirement in 1996 and also concurrently served as
Chairman of KPMG Asia Pacific from 1993 to 1997. Since 1964, Mr. Bruce has been a member of the Chartered Accountants of Scotland and is a fellow of the Hong Kong Institute of Certified Public Accountants with over 40 years experience in
the accounting profession. Mr. Bruce is currently an independent non-executive director of Paul Y Engineering Group Limited, a construction and engineering company, Vitasoy International Holdings Ltd., a beverage manufacturing company, Wing On
Company International Ltd., a department store operating and real property investment company, and Tencent Holdings Limited, a provider of Internet services and mobile value-added services. All of these companies are listed companies on the Hong
Kong Stock Exchange. Mr. Bruce is also a non-executive director of Noble Group Limited, a commodity trading company that is listed on the Singapore Stock Exchange, and a non-executive director of Yingli Green Energy Holding Company Limited, a
photovoltaic product manufacturing company that is listed on the New York Stock Exchange.

Dr. Lawrence A. Crum has served
as a member of our board of directors since February 2005 and serves as a member of the audit, compensation and nomination committees. Dr. Crum is the director of the Center for Industrial and Medical Ultrasound and a research professor in
electrical engineering and bioengineering at the University of Washington in Seattle in the United States. He holds a Ph.D. degree in physics from the University



74



---

##### Table of Contents

of Ohio, has served as the president of the Acoustical Society of America and the International Commission for Acoustics and holds an honorary doctorate
degree from the University of Brussels.

Dr. Yuedong Li has served as a member of our board of directors since
October 2007 and serves as a member of the audit and nomination committees. He is currently the chief secretary of the China Hospital Association and the deputy director of Center of Organ Transplant at Beijing University from October 2006. Prior to
that, he was the president of Peking University Peoples Hospital from 1986 to 2006 . Dr. Li also holds various positions in a number of medical associations in China and he obtained a bachelors degree from Beijing Medical University
in 1976.

Dr. Guoming Qihas served as a member of our board of directors since November 2007. He is also
currently the vice president of the Chinese Medical Association, the largest and long established medical association in China. From 1997 to 2006, he was the general director of the Department of Medical Science, Technology and Education of the
Ministry of Health in China. From 1992 to 1997, he was the vice president of the Chinese Center for Disease Control and Prevention (formerly known as the Chinese Academy of Preventive Medicine). Dr. Qi obtained his bachelors degree from
Beijing Medical University in 1970 and a masters degree from Chinese Academy of Medical Sciences in 1981.

Mr. Takyung
(Sam) Tsang has served as our chief financial officer since January 2005 and as a member of our board of directors since June 2007. Mr. Tsang was an advisor to the company for the areas of accounting and finance from February 2004 to
December 2004. Prior to joining us, Mr. Tsang worked as a manager of KPMG Hong Kong and Ernst & Young China. He is a Certified Public Accountant in the United States and Hong Kong. He received his bachelors degree in business
administration from the Chinese University of Hong Kong.

Dr. Zhong Chen has served as our chief technology officer since
November 2007. He is also currently the medical director of cytogenetics program at the Associated Regional and University Pathologists Laboratories in Utah and a professor of Pediatrics and Pathology at the University of Utah. Prior to that, he
served as the director of cytogenetics laboratories at Genetrix Inc. from 1993 to 1996 and of Genzyme Genetics from 1996 to 1998, two leading biotechnology companies in the United States. Dr. Chen obtained his bachelors degree in Medicine
in 1986 and a M.D. degree in 1989 from Tongji Medical University. From 1990 to 1993, he also completed a fellowship in Medical Genetics/Cancer Genetics at Southwest Biomedical Research Institute in conjunction with the University of Arizona Genetics
Program in Phoenix, Arizona, U.S. He is certificated by the American Board of Medical Genetics.

Mr. Feng (Charles) Zhu joined
our company as our vice president for business development and investor relations in January 2005. Prior to joining us, Mr. Zhu worked as a business development manager for GE Healthcare in China from February 2002 to December 2004, responsible
for merger and acquisition projects. From May 2000 to February 2002, Mr. Zhu also worked as a business analyst for a Siemens joint venture in China, advising clients on fund raising projects. Mr. Zhu received his bachelors degree in
English from Foreign Affairs College in China and his masters degree in business administration from Texas Christian University.

The
business address of our directors and executive officers is China Medical Technologies Inc. at No. 24 Yong Chang North Road, Beijing Economic-Technological Development Area, Beijing 100176, Peoples Republic of China.



|B. | Compensation
|-- | ------------

Compensation of Directors and Executive Officers

For the fiscal year ended March 31, 2008, the aggregate cash compensation to our directors and executive officers was
approximately RMB11.0 million (US$1.6 million). The aggregate amount set aside or accrued to provide retirement, pension or other similar benefits for our executive officers was approximately RMB80,000 (US$11,000) for the fiscal year ended
March 31, 2008. If we terminate an executive officer without cause, we are



75



---

##### Table of Contents

required to pay compensation equal to nine months of the executive officers salary. Except for directors who are also executive officers, none of our
directors receive benefits upon termination.

2005 Stock Option Plan

Our board of directors adopted the 2005 stock option plan on February 1, 2005 and amended and restated the 2005 stock option plan on November 12, 2006. The 2005 stock option plan, as amended and restated,
provides for the grant of share options as well as restricted stock, referred to as awards. The purpose of the plan is to attract and retain the best available personnel for positions of substantial responsibility, provide additional
incentive to employees, directors and consultants and promote the success of our business. Our board of directors believes that our companys long-term success is dependent upon our ability to attract and retain superior individuals who, by
virtue of their ability, experience and qualifications, make important contributions to our business.

We have reserved an aggregate of
30,000,000 of our ordinary shares for issuance under our 2005 stock option plan, as amended and restated. As of May 31, 2008, 1,830,000 restricted shares and share options to purchase an aggregate of 1,083,340 of our ordinary shares were issued
and outstanding.

Termination of Awards. Options and restricted shares shall have the specified termination set forth in an
award agreement. Where the option agreement permits the exercise of the options granted for a certain period of time following the recipients termination of services with us, or the recipients disability or death, the options will
terminate to the extent any is not exercised or purchased on the last day of the specified period or the last day of the original term of the options, whichever occurs first.

Administration.Our stock option plan is administered by an administrative committee designated by our board of directors. The
administrative committee will determine the provisions, terms and conditions of each award grant, including, but not limited to, the option vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment upon
settlement of the award, payment contingencies and satisfaction of any performance criteria.

Vesting Schedule.Options and
restricted shares granted under our stock option plan vest over a period of two to three years after vesting commencement date. The vesting schedule is subject to the optionee continuing to be a service provider of our company over the vesting
period.

Option Agreement.Options granted under our stock option plan are evidenced by an option agreement that
contains, among other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangements by reason of death, disability or otherwise, as determined by our board. In addition, the option agreement
also provides that options granted under each plan are subject to a 180-day lock-up period following the effective date of a registration statement filed by us under the Securities Act, if so requested by us or any representative of the underwriters
in connection with any registration of the offering of any of our securities.

Option Exercise. The term of options
granted under the 2005 stock option plan, as amended and restated, may not exceed five years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of shares underlying the option will be
determined by the administrative committee and may include cash, check, ordinary shares, a promissory note, consideration received by us under a cashless exercise program implemented by us in connection with our stock option plan, or any combination
of the foregoing methods of payment.

Third-party Acquisition. If a third-party acquires us through the purchase of
all or substantially all of our assets, a merger or other business combination, all outstanding share options or share purchase rights will be assumed or equivalent share options or share purchase rights will be substituted by the successor
corporation or



76



---

##### Table of Contents

parent or subsidiary of successor corporation. In the event that the successor corporation refuses to assume or substitute for the stock options or share
purchase rights, all share options or share purchase rights will become fully vested and exercisable immediately prior to such transaction and all unexercised options will terminate unless, in either case, the options are assumed by the successor
corporation or its parent.

Termination of Plan. Unless terminated earlier, the 2005 stock option plan, as amended and
restated, will expire in 2010. Our board of directors has the authority to amend or terminate our stock option plan subject to shareholder approval to the extent necessary to comply with applicable law and regulations. However, no such action may
(i) impair the rights of any optionee unless agreed by the optionee and the stock option plan administrative committee, or (ii) affect the stock option plan administrative committees ability to exercise the powers granted to it under
our stock option plan.

The following table summarizes the share options and restricted shares that we granted to our directors and
management personnel under our 2005 stock option plan, as amended and restated, as of May 31, 2008:



|                                      |  |                                                                                      |  |                                                                                             |  |                                                           |  |                               |  |                                
|------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- |  | ----------------------------- |  | -------------------------------
|Name                                  |  | Type of awards                                                                       |  | Number of sharesto be issued uponexercise
ofoptions and/ornumber ofrestrictedshares granted |  | Per share exerciseprice / per sharepurchase
price(in US$) |  | Date of grant                 |  | Date of expiration             
|Iain Ferguson Bruce                   |  | Share option/ restricted
shares                                                      |  | *                                                                                           |  | US$1.36US$0.10                                            |  | March 14, 2005 /Jun 11,2007   |  | December 31, 2009 /May 31, 2012
|Lawrence A. Crum                      |  | Share option /  restricted shares                                                    |  | *                                                                                           |  | US$1.36 /US$0.10                                          |  | March 14, 2005 /June 11, 2007 |  | December 31, 2009 /May 31, 2012
|Takyung (Sam) Tsang                   |  | Restricted shares                                                                    |  | *                                                                                           |  | US$0.10                                                   |  | June 11, 2007                 |  | May 31, 2012                   
|Yuedong Li                            |  | Restricted shares                                                                    |  | *                                                                                           |  | US$0.10                                                   |  | October 1, 2007               |  | September 30, 2012             
|Guoming Qi                            |  | Restricted shares                                                                    |  | *                                                                                           |  | US$0.10                                                   |  | November 16, 2007             |  | November 15, 2012              
|Other management personnel as a group |  | Share option /   restricted shares                                                   |  | *                                                                                           |  | US$2.53 /US$0.10                                          |  | June 11, 2007 /June 11, 2007  |  | May 31, 2012 /May 31, 2012     
|                                      |  |                                                                                      |  |                                                                                             | 
|                                      |  |                                                                                      |  |                                                                                             |  |                                                           |  |                              
|Total                                 |  | Options to purchase 1,550,000 ordinary shares** and 1,920,000   restricted shares*** |  |                                                                                             |  |                                                           |  |                              
|                                      |  |                                                                                      |  |                                                                                             |  |                                                           |  |                              



|* | Upon exercise of all options and vesting of all restricted shares granted, would beneficially own less than 1% of our outstanding ordinary shares.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

|** | Including options that have been exercised.
|-- | -------------------------------------------

|*** | Including 90,000 restricted shares that were subsequently forfeited after they were granted.
|--- | --------------------------------------------------------------------------------------------

These options and restricted shares vest over a period of two to three years after the grant date.



77



---

##### Table of Contents

|C. | Board Practices
|-- | ---------------

Committees of the Board of Directors

We believe that our corporate governance practices comply with those required by domestic companies under Nasdaq Marketplace Rules and
do not differ in any significant ways.

Audit Committee

Our audit committee consists of Mr. Iain Ferguson Bruce, Dr. Yuedong Li and Dr. Lawrence A. Crum, and is chaired by Mr. Bruce.
All of the three directors satisfy the independence requirements of the Nasdaq corporate governance rules. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our
company. The audit committee is responsible for, among other things:



| |  |  | selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing with our independent auditors any audit problems or difficulties and managements response;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | discussing our annual audited consolidated financial statements with management and our independent auditors;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | annually reviewing and reassessing the adequacy of our audit committee charter;
| | - |  | -------------------------------------------------------------------------------



| |  |  | such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | meeting separately and periodically with management and our internal and independent auditors; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | reporting regularly to the full board of directors.
| | - |  | ---------------------------------------------------

Compensation Committee

Our compensation committee consists of Mr. Iain Ferguson Bruce
and Dr. Lawrence A. Crum, both of whom satisfy the independent requirements of the Nasdaq corporate governance rules. The committee is chaired by Mr. Bruce. Our compensation committee assists the board in reviewing and
approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are not prohibited from direct
involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:



| |  |  | approving and overseeing the compensation package for our executive officers;
| | - |  | -----------------------------------------------------------------------------



| |  |  | reviewing and making recommendations to the board with respect to the compensation of our directors;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief
executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78



---

##### Table of Contents

Nomination Committee

We established a nomination committee in November 2005. Our nomination committee consists of Mr. Iain Ferguson Bruce, Dr. Lawrence A. Crum
and Dr. Yuedong Li, and is chaired by Mr. Bruce. All of the three directors satisfy the independence requirements of the Nasdaq corporate governance rules. The nomination committee assists the board of directors in identifying
individuals qualified to become our directors and in determining the composition of the board and its committees. The nomination committee is responsible for, among other things:



| |  |  | identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing annually with the board the current composition of the board in light of the characteristics of independence, qualification, experience and availability
of service to us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Duties of Directors

Under Cayman Islands law, our directors have a duty of loyalty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such
care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and re-stated
from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of
our board of directors include, among others:



| |  |  | convening shareholders annual general meetings and reporting its work to shareholders at such meetings;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | declaring dividends and distributions;
| | - |  | --------------------------------------



| |  |  | appointing officers and determining the term of office of officers;
| | - |  | -------------------------------------------------------------------



| |  |  | exercising the borrowing powers of our company and mortgaging the property of our company; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | approving the transfer of shares of our company, including the registering of such shares in our share register.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Terms of Directors and Executive Officers

All
directors hold office until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors. Currently, directors are not subject to a term of office and hold office until such
time as they are removed from office by special resolution or the unanimous written resolution of all shareholders. If a director has been appointed by Chengxuan, upon written notice to us, such director may be removed and replaced by its respective
nominator, at any time for any reason.

A director will be removed from office automatically if, among other things, the director
(i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.



79



---

##### Table of Contents

|D. | Employees
|-- | ---------

Employees

We had 265, 334 and 708, employees as of March 31, 2006, 2007 and 2008 respectively. As of May 31, 2008, we had 693 employees. The following
table sets forth the number of our employees categorized by function as of May 31, 2008.



|                             |  |                   |  |                       
|---------------------------- |  | ----------------- |  | ----------------------
|                             |  | As of May 31,2008 |  | Percentage of Total(%)
|Manufacturing and services   |  | 266               |  | 38.4                  
|Research and development     |  | 106               |  | 15.3                  
|General and administration   |  | 90                |  | 13.0                  
|Marketing and sales          |  | 125               |  | 18.0                  
|Customer support and service |  | 106               |  | 15.3                  
|                             |  |                   |  |                       
|Total                        |  | 693               |  | 100.0                 
|                             |  |                   |  |                       

From time to time, we also employ independent contractors to support our marketing and sales and
clinical support and research. We plan to hire additional employees for marketing and sales, customer service and manufacturing and assembly as we grow our business. None of our employees is represented by a labor union. We consider our relationship
with our employees to be good.

In accordance with applicable regulations in the PRC, we participate in a pension contribution plan, a
medical insurance plan, an unemployment insurance plan and a personal injury insurance plan for our employees. We have made adequate provisions in accordance with applicable regulations, which require us to contribute amounts equal to 20%, 10%, 1.5%
and 0.8%, respectively, of our employees aggregate base salaries to these statutory plans.

Also, in accordance with PRC regulations,
we contribute amounts equal to 8%, 4% and 0.8% of our employees aggregate base salaries towards a housing fund, a supplemental medical insurance fund and a maternity fund, respectively.



|E. | Share Ownership
|-- | ---------------

The following table sets forth
information with respect to the beneficial ownership of our ordinary shares as of May 31, 2008, the latest practicable date, by:



| |  |  | each of our directors and executive officers; and
| | - |  | -------------------------------------------------



| |  |  | each person known to us to own beneficially more than 5.0% of our ordinary shares.
| | - |  | ----------------------------------------------------------------------------------



|                                                   |  |                                      |  |     
|-------------------------------------------------- |  | ------------------------------------ |  | ----
|                                                   |  | Ordinary sharesbeneficially owned(1)
|                                                   |  | Number                               |  | %   
|Directors and executive officers:                  |  |                                      |  |     
|Xiaodong Wu(2)(4)                                  |  | 71,420,001                           |  | 26.1
|Iain Ferguson Bruce                                |  | *                                    |  | *   
|Lawrence A. Crum                                   |  | *                                    |  | *   
|Takyung (Sam) Tsang                                |  | *                                    |  | *   
|Guoming Qi                                         |  | *                                    |  | *   
|Yuedong Li                                         |  | *                                    |  | *   
|All directors and executive officers as a group(3) |  | 73,583,341                           |  | 26.8
|                                                   |  |                                     
|Principal shareholders:                            |  |                                      |  |     
|Chengxuan International Ltd.(4)                    |  | 71,420,001                           |  | 26.1



|* | Indicates less than 1%.
|- | -----------------------



80



---

##### Table of Contents

|(1) | Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and includes shares
as to which the indicated person holds voting or investment power with respect to the securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Wu holds his shares through Chengxuan International Ltd.
|--- | ------------------------------------------------------------

|(3) | Includes ordinary shares issuable upon exercise of options beneficially held by all of our directors and executive officers as a group.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(4) | Chengxuan International Ltd., a British Virgin Islands company, is owned by Mr. Xiaodong Wu. The address for Chengxuan is The Mill Mall, PO Box 92, Road Town, Tortola,
British Virgin Islands.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 20, 2008, other than the 73.9% of our outstanding ordinary shares underlying the
outstanding ADSs which were held by our custodian, Citibank Hong Kong Branch, on behalf of Citibank, N.A., the depositary, none of our ordinary shares were held in the United States. Our ordinary shares underlying the ADSs quoted on the Nasdaq
National Market are held in Hong Kong by the custodian, Citibank, N.A., Hong Kong Branch, on behalf of Citibank, N.A., the depositary.

None of our shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.



|ITEM7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------ | -------------------------------------------------



|A. | Major Shareholders
|-- | ------------------

Please refer to Item 6.
Directors, Senior Management and EmployeesShare Ownership.



|B. | Related Party Transactions
|-- | --------------------------

After the completion of
our initial public offering on August 15, 2005, we adopted an audit committee charter, which requires that the audit committee review all related party transactions on an ongoing basis and all such transactions be approved by the committee. Set
forth below is a description of all of our related party transactions for the fiscal years ended March 31, 2006, 2007 and 2008.

Transactions with
GE

GE has been a distributor of our HIFU therapy system in April 2003 and our shareholder from April 2003 to July 2006. GE was no
longer considered a related party when they ceased to be our shareholder on July 31, 2006.

For the fiscal year ended March 31,
2006, sales of our HIFU therapy system to GE amounted to RMB3.9 million, which accounted for 1.1% of our revenues. No sales of HIFU therapy system to GE were recorded for the fiscal years ended March 31, 2007 and 2008. Sales of our HIFU therapy
system to GE were generally at prices lower than those charged to third parties.

In addition, we purchased the ultrasound imaging system,
one of the major components of our HIFU therapy system, from GE. Under the exclusive supply agreement between GE and us, as long as GE holds 5% or more of our ordinary shares, GE is entitled to be the sole supplier of the ultrasound imaging system.
On June 21, 2006, GEs ownership interest in our company fell below 5% of our outstanding shares and ceased to be a party to the shareholders agreement. We purchased GEs ultrasound imaging system through an import company for
the fiscal years ended March 31, 2006, 2007 and 2008.

In April 2004, we entered into a service agreement with GE under which we
agreed to provide repair services for medical equipment GE sold to its customers in China. Under the service agreement, GE agreed to reimburse all expenses we incur in connection with our repair services. In addition, we also charge GE a service fee
equal to 10% of expenses we incurred in connection with our repair services. We generated repair service income in the amount of RMB145,000 under the service agreement for the fiscal year ended March 31, 2006. The service agreement expired, and
we discontinued providing these services on December 31, 2005.



81



---

##### Table of Contents

Transactions with Beijing Weixiao

Beijing Weixiao Biological Technology Development Co., Ltd., or Beijing Weixiao, is a company controlled by Mr. Xiaodong Wu, our chairman of board of directors, our chief executive officer and a significant
shareholder of our company. In August 2004, we acquired the enhanced chemiluminescence immunoassay technology from Beijing Weixiao. Under the acquisition agreement, we agreed to pay Beijing Weixiao a total purchase price of RMB250.0 million before
September 30, 2005 for the enhanced chemiluminescence immunoassay technology, related inventories and a noncompete commitment. We made payments of RMB80.0 million, RMB12.0 million, RMB8.0 million, RMB50.0 million and RMB100.0 million in
September 2004, December 2004, February 2005, March 2005 and September 2005, respectively.

Transactions with Chengxuan

Chengxuan International Ltd., or Chengxuan, is one of our shareholders and controlled by Mr. Xiaodong Wu. Chengxuan paid RMB2.3 million in cash on
our behalf during the fiscal year ended March 31, 2005 to settle expenses we incurred in connection with the preparation of our initial public offering and our operating activities. These amounts were unsecured, non-interest bearing and have no
fixed terms of repayment and was repaid during the fiscal year ended March 31, 2006.

Secondary Offering

On March 22, 2006, we completed a secondary public offering of 57,500,000 shares held by certain existing shareholders. In this
offering, the selling shareholders received all net proceeds from the sale of shares and all of the expenses, including underwriting discounts and commissions, related to this offering were shared by the selling shareholders. During the year ended
March 31, 2006, we received RMB10.4 million from the selling shareholders to pay the expenses on behalf of them and the amount was recorded in other payables. In March 2006, RMB802,000 was paid and the outstanding balance of RMB9.6 million was
fully paid during the fiscal year ended March 31, 2007. Upon the completion of the secondary offering, we received RMB5.9 million from certain selling shareholders for our arrangement of the secondary offering.

Shareholders Agreement

In June 2005, we and
Chengxuan, Golden Meditech and GE entered into a shareholders agreement. If any of Chengxuans, Golden Meditechs or GEs ownership interest in our company falls below 5% of our outstanding shares, calculated on a fully diluted
basis, such shareholder will cease to be a party to the June 2005 shareholders agreement and will no longer have any rights or obligations under that agreement. In 2006, both GE and Golden Meditechs ownership interest in our company fell
below 5% of our outstanding shares and ceased to be parties to the shareholders agreement. In July and October 2006, GE and Golden Meditech ceased to be our shareholders.

Certain provisions of the June 2005 shareholders agreement is still applicable to Chengxuan. Under these provisions, if Chengxuan is offered a
business opportunity that is primarily based in China and that competes with our HIFU business, it will provide us with notice of its intention to pursue such business opportunity and use reasonable efforts to enable us to participate in such
project if we express an interest in doing so.

Equity Incentive Plan

See Item 6.B., 2005 Stock Option Plan

C.    Interests of Experts and Counsel

Not applicable.



82



---

##### Table of Contents

ITEM8.    FINANCIAL
INFORMATION

A.    Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal and Administrative Proceedings

Neither we nor any of our directors and executive officers are
a party to any material legal or administrative proceedings, and we are not aware of threatened material legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising
in the ordinary course of our business.

Dividend Policy

Dividends of RMB28.2 million in respect of the calendar year 2003 were approved by our shareholders in March 2004, and were subsequently paid. Our board of directors declared a cash dividend on its ordinary shares of
US$0.04 per share, equivalent to US$0.40 per ADS based on our net income for the fiscal year ended March 31, 2007 and the dividend was paid in August 2007. Our board of directors has declared a cash dividend on its ordinary shares of US$0.05
per share, equivalent to US$0.50 per ADS based on our net income for the fiscal year ended March 31, 2008. The cash dividend will be paid on or around August 28, 2008 to shareholders of record as of July 25, 2008. Cash dividends, if
any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial conditions, shareholder interests, contractual restrictions and other factors
as our board of directors may deem relevant. We can pay dividends only out of profits or other distributable reserves.

We have
historically relied on proceeds from equity and debt offerings as well as dividends paid to us by our operating subsidiaries in China, for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our
shareholders, service any debt we may incur and pay our operating expenses. In the event equity and debt financings are not available in amounts or on terms acceptable to us, we may need to cause our subsidiaries in China to pay dividends to us for
our cash needs. In China, the payment of dividends is subject to limitations. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Under
current PRC laws, regulations and accounting standards, our PRC operating subsidiaries are required to allocate at least 10% of their after-tax profits to their general reserves. Allocation to these reserves is not required after these reserves have
reached 50% of the registered capital of these subsidiaries. In addition, at the discretion of its board of directors, these operating subsidiaries may allocate a portion of their after-tax profits to their enterprise expansion funds and staff
welfare and bonus funds. The general reserves, the enterprise expansion funds and staff welfare and bonus funds may not be distributed to equity owners.

Our board of directors has complete discretion as to whether we will distribute dividends in the future. Even if our board of directors decides to distribute dividends, the form, frequency and amount of our dividends
will depend upon our future operations and earnings, capital requirements and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. Any dividend we declare will be paid to the holders
of ADSs, subject to the terms of the deposit agreement and applicable laws, to the same extent as holders of our ordinary shares, less the fees and expenses payable under the deposit agreement. Any dividend we declare will be distributed by the
depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

B.    Significant Changes

We have not experienced any significant changes since the date of our
audited consolidated financial statements included in this annual report.



83



---

##### Table of Contents

ITEM9.    THE OFFER
AND LISTING

A.    Offering and Listing Details

Our ADSs, each representing ten of our ordinary shares, have been listed on the Nasdaq National Market since August 10, 2005 under the symbol
CMED. The following table provides, for the periods indicated, the high and low market prices for our ADSs.



|                            |  |             |  |         
|--------------------------- |  | ----------- |  | --------
|                            |  | Sales Price
|                            |  | High        |  | Low     
|                            |  |            
|Annual High and Low         |  |             |  |         
|                            |  |            
|2005 (from August 10)       |  | US$42.60    |  | US$14.95
|                            |  |            
|2006                        |  | US$44.93    |  | US$18.30
|                            |  |            
|2007                        |  | US$48.25    |  | US$21.65
|                            |  |            
|Quarterly High and Low      |  |             |  |         
|                            |  |            
|First Quarter 2006          |  | US$44.93    |  | US$25.56
|                            |  |            
|Second Quarter 2006         |  | US$30.92    |  | US$18.30
|                            |  |            
|Third Quarter 2006          |  | US$24.73    |  | US$18.30
|                            |  |            
|Fourth Quarter 2006         |  | US$29.00    |  | US$22.21
|                            |  |            
|First Quarter 2007          |  | US$27.40    |  | US$21.65
|                            |  |            
|Second Quarter 2007         |  | US$33.78    |  | US$22.81
|                            |  |            
|Third Quarter 2007          |  | US$42.94    |  | US$27.35
|                            |  |            
|Fourth Quarter 2007         |  | US$48.25    |  | US$34.59
|                            |  |            
|First Quarter 2008          |  | US$57.50    |  | US$35.61
|                            |  |            
|Monthly Highs and Lows      |  |             |  |         
|                            |  |            
|December 2007               |  | US$45.50    |  | US$39.78
|                            |  |            
|January 2008                |  | US$54.30    |  | US$40.99
|                            |  |            
|February 2008               |  | US$57.50    |  | US$42.85
|                            |  |            
|March 2008                  |  | US$46.12    |  | US$35.61
|                            |  |            
|April 2008                  |  | US$45.92    |  | US$36.28
|                            |  |            
|May 2008                    |  | US$41.48    |  | US$35.34
|                            |  |            
|June 2008 (through June 25) |  | US$44.99    |  | US$32.52

B.    Plan of Distribution

Not applicable.

C.    Markets

Our ADSs, each representing ten of our ordinary shares, have been listed on the Nasdaq National Market since August 10, 2005 under the
symbol CMED.

D.    Selling Shareholders

Not applicable.



84



---

##### Table of Contents

E.    Dilution

Not applicable.

F.    Expenses of the Issue

Not applicable.

ITEM10.    ADDITIONAL INFORMATION

A.    Share Capital

Not applicable.

B.    Memorandum and Articles of Association

We incorporate by reference into this annual report the description of our amended and restated memorandum of association contained in our F-1
registration statement (File No. 333-132214), as amended, initially filed with the Commission on July 15, 2005. Our shareholders adopted our amended and restated memorandum and articles of association by unanimous resolutions in June 2004.

C.    Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4. Information
on the Company or elsewhere in this annual report on Form 20-F.

D.    Exchange Controls

Foreign Currency Exchange

Foreign
currency exchange regulation in China is primarily governed by the following rules:



| |  |  | Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules;
| | - |  | -----------------------------------------------------------------------------------------------------------------

Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE.

Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct
foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to
limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.

E.    Taxation

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no
other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which



85



---

##### Table of Contents

may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax
treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

Peoples Republic of China Taxation

The newly enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation rules for the EIT Law issued by the PRC State
Council, became effective as of January 1, 2008. The EIT Law provides that enterprises established outside of China whose de facto management bodies are located in China are considered resident enterprises and are
generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation rules for the EIT Law issued by the PRC State Council, de facto management body is defined as a body that has material
and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of
our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise.

Under the EIT Law and implementation rules issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors
that are non-resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or
place of business, to the extent such dividends driven from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived
from sources within the PRC. If we are considered a PRC resident enterprise, it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or
ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. It is also unclear whether, if we are considered a PRC resident enterprise, holders of our ordinary shares or ADSs might be able to claim the
benefit of income tax treaties entered into between China and other countries.

United States Federal Income Taxation

The following discussion describes certain U.S. federal income tax consequences to U.S. Holders (defined below) under present law of an investment in the
ADSs or ordinary shares. This summary applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional currency. This discussion is based on the Internal Revenue Code of 1986, as
amended (the Code) as in effect on the date of this annual report on Form 20-F and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report on Form 20-F, as well as judicial and
administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

The following discussion does not address the tax consequences to any particular investor or to persons in special tax situations such as:



| |  |  | banks;
| | - |  | ------



| |  |  | certain financial institutions;
| | - |  | -------------------------------



| |  |  | insurance companies;
| | - |  | --------------------



| |  |  | broker dealers;
| | - |  | ---------------



| |  |  | U.S. expatriates;
| | - |  | -----------------



| |  |  | traders that elect to mark to market;
| | - |  | -------------------------------------



| |  |  | tax-exempt entities;
| | - |  | --------------------



86



---

##### Table of Contents

| |  |  | persons liable for alternative minimum tax;
| | - |  | -------------------------------------------



| |  |  | persons holding an ADS or ordinary share as part of a constructive sale, straddle, hedging, conversion or integrated transaction;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | persons that actually or constructively own 10.0% or more of our voting stock;
| | - |  | ------------------------------------------------------------------------------



| |  |  | persons holding ADSs or ordinary shares through partnerships or other pass-through entities;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | regulated investment companies; or
| | - |  | ----------------------------------



| |  |  | real estate investment trusts.
| | - |  | ------------------------------

The
discussion below of the U.S. federal income tax consequences to U.S. Holders will apply if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes,



| |  |  | an individual citizen or resident of the U.S.;
| | - |  | ----------------------------------------------



| |  |  | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any State thereof or the
District of Columbia;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an estate whose income is subject to U.S. federal income taxation regardless of its source; or
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a trust that (1) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial
decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If you are a partner in a partnership or other entity taxable as a partnership that holds ADSs or ordinary shares, your tax treatment generally will depend on your status and the activities of the partnership, and you
should consult your tax advisors.

The discussion below assumes that the representations contained in the deposit agreement are true and
that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S.
federal income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs should not be subject to U.S. federal income tax.

The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming, by U.S.
Holders of ADSs, of foreign tax credits for U.S. federal income tax purposes. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, as described
below. Accordingly, the analysis of the credibility of PRC taxes, if any, and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders could be affected by future actions that may be taken by the U.S.
Treasury or intermediaries in the chain of ownership between the holder of an ADS and our company.

The discussion below does not contain a
detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S. tax laws. If you are considering the purchase, ownership or
disposition of our ordinary shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any
other taxing jurisdiction.



87



---

##### Table of Contents

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed below, the gross amount of all our distributions to you with respect to the ADSs or
ordinary shares generally will be included in your gross income as foreign source dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent
that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect
of dividends received from other U.S. corporations under the Code.

With respect to non-corporate U.S. Holders, certain dividends received
in taxable years beginning before January 1, 2011 from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by it on
shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the U.S. Under Internal Revenue Service authority, ordinary shares, or ADSs representing such shares, are considered to be readily tradable on an
established securities market in the U.S. if they are listed on the Nasdaq National Market, as our ADSs are. We do not believe, however, that dividends that we pay on ordinary shares that are not backed by ADSs currently meet the conditions to be
taxed as qualified dividend income. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in the U.S. in later years. A qualified foreign corporation also includes a foreign corporation that
is eligible for the benefits of certain income tax treaties with the U.S. In the event that we are deemed to be a PRC resident company under PRC tax law (see discussion underTaxationPeoples Republic of China
Taxation), we may be eligible for the benefits of the income tax treaty between the U.S. and the PRC, and if we are eligible for such benefits, dividends we pay on our shares, regardless of whether such shares are represented by ADSs, would be
subject to the reduced rates of taxation. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as investment
income pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the
recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your tax advisors
regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.

In the event that we are
deemed to be a PRC resident company under PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. In that case, however, you may be able to obtain a reduced rate of
PRC withholding taxes under the treaty between the U.S. and the PRC if certain requirements are met. In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends, if any, may be treated as foreign taxes eligible for
credit against your U.S. federal income tax liability. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year as
determined under U.S. federal income tax principles, it will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed
as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will generally be treated as a dividend (as discussed above).



88



---

##### Table of Contents

Taxation of Disposition of Shares

Subject to the passive foreign investment company rules discussed below, for U.S. federal income tax purposes, you will recognize taxable gain or loss on
any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized for the ADS or ordinary share and your tax basis in the ADS or ordinary share. The gain or loss generally will be capital
gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to
limitations. Any such gain or loss that you recognize will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, in the event that we are deemed to be a Chinese resident company under PRC
tax law (see discussion under TaxationPeoples Republic of China Taxation), we may be eligible for the benefits of the income tax treaty between the U.S. and the PRC. Under that treaty, if any PRC tax were to be imposed on any
gain from the disposition of the ADSs or ordinary shares, the gain would be treated as PRC-source income. You are urged to consult your tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of ADSs or
ordinary shares, including the availability of the foreign tax credit under your particular circumstances.

Passive Foreign Investment Company

A non-U.S. corporation is considered a passive foreign investment company (PFIC) for any taxable year in which,



| |  |  | at least 75% of its gross income is passive income, or
| | - |  | ------------------------------------------------------



| |  |  | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or
are held for the production of passive income.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For this purpose, cash is a passive asset and passive income generally
includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). We will be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.

Based upon the past and projected composition of our income and valuation of our assets, including goodwill, we believe that we were not a PFIC for our taxable year ended March 31, 2008, and we do not expect to
be a PFIC for our current taxable year for U.S. federal income tax purposes. We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, our PFIC status may be determined in
large part based on the market price of our ADSs and ordinary shares, which is likely to fluctuate (and may fluctuate considerably given that market prices of technology companies have been especially volatile). Accordingly, fluctuations in the
market price of the ADSs and ordinary shares may result in our being a PFIC for any year. Thus, there can be no assurance that we will not be considered a PFIC for our current taxable year or any future taxable year. If we are a PFIC for any year
during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which you hold ADSs or ordinary shares.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be subject to special tax rules with respect to any excess distribution that you receive and any gain you
realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a mark-to-market election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules: the excess distribution
or gain will be allocated ratably over your holding period for the ADSs or ordinary shares, the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary
income, and the amount allocated to each other year will be subject to



89



---

##### Table of Contents

the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year. In addition, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning prior to January 1, 2011, if we are a PFIC in the taxable
year in which such dividends are paid or in the preceding taxable year.

The tax liability for amounts allocated to years prior to the year
of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or
ordinary shares as capital assets.

Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the two preceding paragraphs. The mark-to-market election is available only for marketable stock, which is stock that is traded in other than
de minimus quantities on at least 15 days during each calendar quarter on a qualified exchange, including the Nasdaq National Market, or other market, as defined in applicable U.S. Treasury regulations. The ADSs are listed on the Nasdaq National
Market and, consequently, if you are a holder of ADSs the mark-to-market election would be available to you were we to be or become a PFIC, provided the ADSs were traded in sufficient quantities. It should be noted that only the ADSs, and not the
ordinary shares, are listed on the Nasdaq Global Market. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election. If you make a mark-to-market
election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs no longer qualify as marketable stock or the Internal Revenue Service consents to the revocation of the
election. If you make a mark-to-market election, you will include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs as of the close of your taxable year over your adjusted basis in such ADSs. You are
allowed a deduction for the excess, if any, of the adjusted basis of the ADSs over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the ADSs included
in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs, are treated as ordinary income. Ordinary loss treatment also applies to the
deductible portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or disposition of the ADSs, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for
such ADSs. Your basis in the ADSs will be adjusted to reflect any such income or loss amounts.

Alternatively, you can sometimes avoid the
rules described above by electing to treat us as a qualified electing fund under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you
to make this election.

If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file Internal
Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or ordinary shares. You are urged to consult your tax advisor regarding the application of the PFIC rules
to your investment in ADSs or ordinary shares.

Information Reporting and Backup Withholding

Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares that are paid to
you within the U.S. (and in certain cases, outside the U.S.) may be subject to information reporting to the Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S.
Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such
certification on Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.



90



---

##### Table of Contents

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited
against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required
information.



|F. | Dividends and Paying Agents
|-- | ---------------------------

Not applicable.



|G. | Statement by Experts
|-- | --------------------

Not applicable.



|H. | Documents on Display
|-- | --------------------

We have filed this annual
report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the
SECs regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing
information on the operation of the SECs Public Reference Room.

The SEC also maintains a website at www.sec.gov that contains
reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this web site.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

Our financial statements have been prepared in accordance with U.S. GAAP.

We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP.



|I. | Subsidiary Information
|-- | ----------------------

Not applicable.

ITEM11.     QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign
Exchange Risk

Our revenues, costs and expenses are currently denominated mainly in Renminbi, but the Renminbi prices of some of the
materials and supplies for reagent kits that are imported from companies in the United States, Finland and Sweden may be affected by fluctuations in the value of Renminbi against the currencies of those countries. We do not believe that we currently
have any significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments.



91



---

##### Table of Contents

Although our revenues and cost of revenues are denominated in Renminbi, fluctuations in the value of the Renminbi may affect the price competitiveness of our
products once we commence international sales of our products. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate
within a band against a basket of certain foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar. Since the adoption of this new policy, the value of
Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges but overall has further strengthened against the U.S. dollar. There remains significant international pressure on the PRC government to further liberalize its
currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. Furthermore, a decline in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent
amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADSs.

Net assets of China Medical Technologies Inc. and another non-PRC group entity, whose functional currency is the U.S. dollar accounted for 24.1% of our
consolidated assets as of March 31, 2008, which results in our exposure to foreign currency exchange risk. Primarily as a result of the appreciation of the Renminbi against the U.S. dollar, the translation of the net assets of China Medical
Technologies Inc. and another non-PRC group entity to Renminbi during consolidation resulted in translation loss of RMB26.7million (US$3.8million) which were recognized as a component of comprehensive loss as of March 31, 2008. If the Renminbi
against U.S. dollar as of March 31, 2008 had further appreciated by 10% from 7.012 to 6.311 as of March 31, 2008, the translation loss would have increased by RMB36.8million (US$5.2million).

Interest Rate Risk

Our risk
exposure from changes in interest rates relates primarily to the interest expenses associated with our historical bank borrowings, as well as the interest income generated by excess cash invested in demand and time deposits. We recognized interest
income of RMB28.6 million (US$4.1 million) for the fiscal year ended March 31, 2008. A one percent decrease in the average applicable interest rate would have decreased our interest income by RMB9.9 million (US$1.4 million) for the fiscal year.
On November 21, 2006, we completed an offering of US$150 million principal amount of 3.5% Convertible Senior Subordinated Notes due 2011. As the convertible notes carry a fix rate of interest, historical changes in market interest rates have
not exposed us to material interest rate risks.

As of March 31, 2008, the book value and fair value of our convertible notes were
US$150 million and US$222 million, respectively. We believe the fair value of our convertible notes is subject to changes, primarily based on the trading price of our ADSs and our credit risk, and to a lesser extent changes in market interest rates.
Changes in the fair value of our convertible notes do not have any impact our financial position or results of operations. To the extent that we may need to raise debt financing in the future, increases in market interest rates will increase
the cost of new debt.

We have not historically used, and do not expect to use in the future, any derivative financial instruments to
manage our interest risk exposure. Such interest-earning instruments and borrowings carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.



|ITEM12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|------- | ------------------------------------------------------

Not applicable.



92



---

##### Table of Contents

PART II



|ITEM13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|------- | -----------------------------------------------

None of these events occurred in any of the years ended March 31, 2006, 2007 and 2008.



|ITEM14. | MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITY HOLDERS
AND USE OF PROCEEDS
|------- | ----------------------------------------------------------------------------

There are no material modification to, or
qualifications of, the rights of securities holders that are required to be disclosed.

We completed our initial public offering of
64,000,000 ordinary shares, in the form of ADSs, at US$15.00 per ADS on August 15, 2005, after our ordinary shares and American Depositary Receipts were registered under the Securities Act. The aggregate price of the offering amount sold was
US$110.4 million, of which we received net proceeds of US$99.5 million. The effective date of our registration statement on Form F-1 (File number: 333-132214) was August 9, 2005. UBS Investment Bank was the sole underwriter/book runner for the
global offering of our ADSs.

As of March 31, 2008, we used the net proceeds received from our initial public offering as follows:



| |  |  | approximately US$12 million has been used for the remaining payments relating to our acquisition of the enhanced chemiluminescence immunoassay technology to Beijing
Weixiao;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately US$8 million has been used to fund our research and development of new applications and product design improvements for our HIFU therapy system and
our ECLIA system;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately US$8 million has been used to purchase additional production equipment and renovate and expand our ECLIA reagent production facility; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately US$5 million has been used to increase our sales and marketing efforts.
| | - |  | -------------------------------------------------------------------------------------

On November 21, 2006, we closed an offering of US$150 million principal amount of 3.5% Convertible Senior Subordinated Notes due 2011 to qualified
institutional buyers pursuant to Rule 144A under the Securities Act. The aggregate principal amount of notes sold reflects the exercise in full by the initial purchaser of its option to purchase up to an additional US$25 million aggregate principal
amount of the notes to cover over-allotments. We received net proceeds of approximately US$144.7 million from our issuance of the convertible notes. We filed a registration statement on Form F-3 to register the resale of the convertible notes and
the ADSs isssuable upon conversion of the convertible notes in January 2007 and the registration statement was declared effective by the SEC on January 26, 2007. Concurrently with the offering of convertible notes, we entered into a prepaid
forward repurchase contract with an affiliate of Merrill Lynch & Co. pursuant to which we repurchased contemporaneously with the sales of the convertible notes, an aggregate of US$30 million of ADSs, equivalent to 1,163,692 ADS at US$25.78
per ADS.

As of March 31, 2008, we used the net proceeds received from the convertible note offering as follows:



| |  |  | approximately US$30 million has been used to repurchase our ADSs concurrently with the sale of convertible note in November 2006; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately US$114.7 million has been used to pay the acquisition of the FISH business.
| | - |  | -----------------------------------------------------------------------------------------

As of March 31, 2008, our cash resources amounted to RMB682.7 million (US$97.4 million), comprising of cash on hand and demand deposits.



93



---

##### Table of Contents

ITEM15.     CONTROLS
AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this annual report, an evaluation has been carried out under the supervision and with the participation of our
management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that material information
required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of the Securities and Exchange Commission.

Managements Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Securities Exchange Act of 1934, as amended, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of a companys assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted
accounting principles, and that a companys receipts and expenditures are being made only in accordance with authorizations of a companys management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of a companys assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated
by the Securities and Exchange Commission, management assessed the effectiveness of the our internal control over financial reporting as of March 31, 2008 using criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, management concluded that the our internal
control over financial reporting was effective as of March 31, 2008 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We acquired BBE
during the fiscal year ended March 31, 2008 and management excluded from its assessment of the effectiveness of our internal control over financial reporting as of March 31, 2008, BBEs internal control over financial reporting
associated with total assets of RMB233.4 million and total revenues of RMB4.8 million included in our consolidated financial statements as of and for the year ended March 31, 2008.

KPMG, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of
March 31, 2008, as stated in their report which is included below. KPMGs audit of our internal control over financial reporting also excluded an evaluation of the internal control over financial reporting of BBE.



94



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

China Medical Technologies, Inc.:

We have audited the internal control over financial reporting of China Medical Technologies, Inc. and its subsidiaries (the
Company) as of March 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company acquired Beijing Bio-Ekon Biotechnology Co., Ltd. during the year ended March 31, 2008 and management excluded from its assessment of
the effectiveness of the Companys internal control over financial reporting as of March 31, 2008, Beijing Bio-Ekon Biotechnology Co., Ltd.s internal control over financial reporting associated with total assets of RMB233,408,000 and
total revenues of RMB4,765,000 included in the consolidated financial statements of the Company as of and for the year ended March 31, 2008. Our audit of internal control over financial reporting of the Company also excluded an evaluation of
the internal control over financial reporting of Beijing Bio-Ekon Biotechnology Co., Ltd..

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Medical Technologies, Inc. and its subsidiaries as of March 31, 2007 and 2008, and the related consolidated statements of
income, shareholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008, and our report dated June 27, 2008 expressed an unqualified opinion on those consolidated
financial statements.

/s/ KPMG

Hong Kong, China

June 27, 2008



95



---

##### Table of Contents

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the year ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM16A.    AUDIT
COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Iain
Ferguson Bruce qualifies as an audit committee financial expert as defined in Item 16A of Form 20-F. Each of the members of the Audit Committee is an independent director as defined in the Nasdaq Marketplace Rules.

ITEM16B.    CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and advisors, including certain
provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, vice presidents and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as
an exhibit to this annual report on Form 20-F. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such persons written request.

ITEM16C.    PRINCIPAL ACCOUNTANT FEES
AND SERVICES

The following table sets forth the aggregate fees by categories specified below in
connection with certain professional services rendered by KPMG, an independent registered public accounting firm, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.



|                      |  |                              |  |      |  |     
|--------------------- |  | ---------------------------- |  | ---- |  | ----
|                      |  | For the Year Ended March 31,
|                      |  | 2006                         |  | 2007 |  | 2008
|                      |  | US$                          |  | US$  |  | US$ 
|                      |  | (In thousands)              
|Audit fees(1)         |  | 167                          |  | 235  |  | 799 
|Audit-related fees(2) |  | 200                          |  | 178  |  |    
|Tax fees(3)           |  |                             |  |     |  |    



|(1) | Audit fees represent the aggregate fees billed for professional services rendered by our principal auditors for the audit of our annual financial statements for each
of the three years ended March 31, 2006, 2007 and 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related fees represent the aggregate fees billed by our principal auditors for services rendered that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under Audit Fees. The fees for the fiscal year ended March 31, 2007 related primarily to providing review of the interim financial statements in connection with our offering of
convertible notes in November 2006. The fees for the fiscal year ended March 31, 2006 related primarily to providing review of the comparative interim financial statements for the nine months ended December 31, 2005 in connection with our
secondary offering of shares held by certain existing shareholders in March 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax fees represent the aggregate fees billed for professional services rendered by our principal auditors for tax compliance, tax advice, and tax planning.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG, including audit
services, audit-related services, tax services and other services as described above, other than those for de minimus services which are approved by the audit committee prior to the completion of the audit.



96



---

##### Table of Contents

ITEM16D.    EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM16E.    PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.



97



---

##### Table of Contents

PART III

ITEM17.    FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM18.    FINANCIAL STATEMENTS

The following financial statements are filed as part of this Annual Report on Form 20-F, together with the report of the independent registered public accounting firm:

INDEX TO THE FINANCIAL STATEMENTS



|                                                                                                                            |  |     
|--------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                            |  | Page
|Report of Independent Registered Public Accounting Firm                                                                     |  | F-1 
|Consolidated Balance Sheets as of March 31, 2007 and 2008                                                                   |  | F-2 
|Consolidated Statements of Income for the years ended March 31, 2006, 2007 and 2008                                         |  | F-3 
|Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended March 
31, 2006, 2007 and 2008 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2007 and 2008                                     |  | F-5 
|Notes to the Consolidated Financial Statements                                                                              |  | F-6 



|ITEM19. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                                                                                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                
|1.1          |  | Second Amended and Restated Memorandum and Articles of Association of the Registrant                                                                                                                                                                                                   
|              | 
|2.1          |  | Specimen Certificate for Ordinary Shares of the Registrant                                                                                                                                                                                                                             
|              | 
|2.2           |  | Specimen American Depositary Receipt of the Registrant (included in Exhibit 2.3)                                                                                                                                                                                                       
|              | 
|2.3          |  | Deposit Agreement, dated as of August 9, 2005, among the Registrant, the depositary and holders and beneficial owners of the American Depositary Shares issued thereunder, as amended by
the letter agreement, dated as of November 21, 2006, between the Registrant and the depositary
|              | 
|2.4       |  | Indenture, dated as of November 21, 2006, among the Registrant, Wilmington Trust Company, as the trustee, and Citibank, N.A., as the initial agent.                                                                                                                                    
|              | 
|2.5       |  | Form of China Medical Technologies, Inc. 3.5% Convertible Senior Subordinated Notes due 2011 (included in Exhibit 2.4).                                                                                                                                                                
|              | 
|2.6       |  | Registration Rights Agreement, dated as of November 21, 2006, between the Registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated.                                                                                                                                           
|              | 
|4.1        |  | Business Acquisition Agreement, dated as of February 6, 2007, among the Registrant, CMED Technologies Ltd., Supreme Well Investments Limited and Molecular Diagnostic Technologies Limited                                                                                             
|              | 
|8.1*          |  | List of Subsidiaries                                                                                                                                                                                                                                                                   
|              | 
|11.1        |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                                                    
|              | 
|12.1*         |  | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            
|              | 
|12.2*         |  | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            
|              | 
|13.1*         |  | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            



98



---

##### Table of Contents

|              |   |  |                                                                            
|------------- | - |  | ---------------------------------------------------------------------------
|ExhibitNumber |   |  | Description of Document                                                    
|13.2          | * |  | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|              |  
|15.1          | * |  | Consent of KPMG, Independent Registered Public Accounting Firm             



| | Previously filed with the Registrants registration statement on Form F-1 (File No. 333-126630), as amended, initially filed with the Commission on July 15, 2005,
and incorporated herein by reference.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Previously filed with the Registrants annual report on Form 20-F on September 29, 2006, and incorporated herein by reference.
|-- | ------------------------------------------------------------------------------------------------------------------------------

| | Previously filed with the Registrants annual report on Form 20-F on September 28, 2007, and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------

| | Previous filed with the Registrants registration statement on Form F-3 (File No. 333-139777), as amended, initially filed with the Commission on January 3, 2007,
and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Filed with this Annual Report on Form 20-F.
|- | -------------------------------------------



99



---

##### Table of Contents

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



CHINA MEDICAL TECHNOLOGIES, INC.By

/s/    XIAODONG
WUName:

Mr. Xiaodong WuTitle:

Chief Executive Officer


Date: June 27, 2008



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

China Medical Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of China
Medical Technologies, Inc. and its subsidiaries (the Company) as of March 31, 2007 and 2008, and the related consolidated statements of income, shareholders equity and comprehensive income and cash flows for each of the years
in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China Medical Technologies, Inc. and its subsidiaries as of March 31, 2007 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended
March 31, 2008, in conformity with U.S. generally accepted accounting principles.

As described in Notes 2(m) and 16 to the
consolidated financial statements, effective April 1, 2006, the Company changed its method of accounting for employee share-based arrangements as required by Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment.

The accompanying consolidated financial statements as of and for the year ended March 31,
2008 have been translated into United States dollar solely for the convenience of the reader. We have audited the translation and, in our opinion, such financial statements expressed in Renminbi have been translated into United States dollar on the
basis set forth in Note 2(p) to the consolidated financial statements.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of March 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 27, 2008 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

/s/    KPMG

Hong Kong, China

June 27, 2008



F-1



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Consolidated Balance Sheets

(RMB and
US$ expressed in thousands, except share data)



|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | --------- | - |  | --------- | - |  | ------- | -
|                                                                                                                                                         |  |      |  | March 31, |  
|                                                                                                                                                         |  | Note |  | 2007      |   |  | 2008      |   |  | 2008    |  
|                                                                                                                                                         |  |      |  | RMB       |   |  | RMB       |   |  | US$     |  
|Assets                                                                                                                                                   |  |      |  |           |   |  |           |   |  |         |  
|Current assets:                                                                                                                                          |  |      |  |           |   |  |           |   |  |         |  
|Cash                                                                                                                                                     |  |      |  | 1,173,640 |   |  | 682,679   |   |  | 97,359  |  
|Accounts receivable                                                                                                                                      |  |      |  | 201,778   |   |  | 289,751   |   |  | 41,322  |  
|Prepayments and other assets                                                                                                                             |  |      |  | 41,484    |   |  | 27,845    |   |  | 3,971   |  
|Inventories                                                                                                                                              |  | 4    |  | 27,991    |   |  | 27,834    |   |  | 3,969   |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total current assets                                                                                                                                     |  |      |  | 1,444,893 |   |  | 1,028,109 |   |  | 146,621 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Property, plant and equipment, net                                                                                                                       |  | 5    |  | 135,792   |   |  | 164,499   |   |  | 23,460  |  
|Land use rights                                                                                                                                          |  |      |  | 7,619     |   |  | 7,430     |   |  | 1,060   |  
|Deposit                                                                                                                                                  |  | 3    |  |          |   |  | 154,264   |   |  | 22,000  |  
|Intangible assets, net                                                                                                                                   |  | 6    |  | 1,565,362 |   |  | 1,541,793 |   |  | 219,879 |  
|Goodwill                                                                                                                                                 |  | 3    |  |          |   |  | 8,654     |   |  | 1,234   |  
|Convertible notes issuance costs                                                                                                                         |  |      |  | 38,020    |   |  | 27,055    |   |  | 3,858   |  
|Deferred income taxes                                                                                                                                    |  | 11   |  | 542       |   |  |          |   |  |        |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total assets                                                                                                                                             |  |      |  | 3,192,228 |   |  | 2,931,804 |   |  | 418,112 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Liabilities and Shareholders Equity                                                                                                                     |  |      |  |           |   |  |           |   |  |         |  
|Current liabilities:                                                                                                                                     |  |      |  |           |   |  |           |   |  |         |  
|Accounts payable                                                                                                                                         |  |      |  | 47,847    |   |  | 48,040    |   |  | 6,851   |  
|Accrued expenses and other liabilities                                                                                                                   |  | 7    |  | 131,097   |   |  | 172,787   |   |  | 24,642  |  
|Payables related to FISH acquisition                                                                                                                     |  | 3    |  | 154,464   |   |  | 65,793    |   |  | 9,383   |  
|Deferred credit related to FISH acquisition                                                                                                              |  | 3    |  | 308,928   |   |  |          |   |  |        |  
|Income taxes payable                                                                                                                                     |  |      |  | 38,467    |   |  | 69,499    |   |  | 9,911   |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total current liabilities                                                                                                                                |  |      |  | 680,803   |   |  | 356,119   |   |  | 50,787  |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Convertible notes                                                                                                                                        |  | 8    |  | 1,158,480 |   |  | 1,051,800 |   |  | 150,000 |  
|Deferred income taxes                                                                                                                                    |  | 11   |  |          |   |  | 1,124     |   |  | 160     |  
|Payable related to FISH acquisition                                                                                                                      |  | 3    |  | 67,206    |   |  |          |   |  |        |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total liabilities                                                                                                                                        |  |      |  | 1,906,489 |   |  | 1,409,043 |   |  | 200,947 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Shareholders equity:                                                                                                                                    |  |      |  |           |   |  |           |   |  |         |  
|Ordinary shares:                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Par value: US$0.10 Authorized: 500,000,000 shares Issued and outstanding: 273,600,001 and 274,066,661 shares as of March 31, 2007 and 2008, respectively |  |      |  | 225,125   |   |  | 225,473   |   |  | 32,155  |  
|                                                                                                                                                         |  |      | 
|                                                                                                                                                         |  |      | 
|Additional paid-in capital                                                                                                                               |  |      |  | 504,795   |   |  | 526,264   |   |  | 75,052  |  
|Accumulated other comprehensive loss                                                                                                                     |  |      |  | (21,335   | ) |  | (48,046   | ) |  | (6,852  | )
|Retained earnings                                                                                                                                        |  |      |  | 577,154   |   |  | 819,070   |   |  | 116,810 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total shareholders equity                                                                                                                               |  |      |  | 1,285,739 |   |  | 1,522,761 |   |  | 217,165 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Commitments and contingencies                                                                                                                            |  | 17   |  |          |   |  |          |   |  |        |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  
|Total liabilities and shareholders equity                                                                                                               |  |      |  | 3,192,228 |   |  | 2,931,804 |   |  | 418,112 |  
|                                                                                                                                                         |  |      |  |           |   |  |           |   |  |         |  

See accompanying notes to these consolidated financial statements.



F-2



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Consolidated Statements of Income

(RMB and US$ expressed in thousands, except share data)



|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|------------------------------------------------ |  | ------ |  | -------------------- | - |  | -------- | - |  | -------- | - |  | ------- | -
|                                                 |  |        |  | Year ended March 31, |  
|                                                 |  | Note   |  | 2006                 |   |  | 2007     |   |  | 2008     |   |  | 2008    |  
|                                                 |  |        |  | RMB                  |   |  | RMB      |   |  | RMB      |   |  | US$     |  
|                                                 |  |        |  |                      |  
|Revenues                                         |  |        |  | 371,767              |   |  | 546,970  |   |  | 915,738  |   |  | 130,596 |  
|Cost of revenues                                 |  |        |  | (110,494             | ) |  | (151,614 | ) |  | (346,436 | ) |  | (49,406 | )
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Gross profit                                     |  |        |  | 261,273              |   |  | 395,356  |   |  | 569,302  |   |  | 81,190  |  
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Operating expenses:                              |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Research and development                         |  |        |  | (14,374              | ) |  | (31,469  | ) |  | (40,875  | ) |  | (5,829  | )
|Sales and marketing                              |  |        |  | (15,327              | ) |  | (18,264  | ) |  | (29,099  | ) |  | (4,150  | )
|General and administrative                       |  |        |  | (38,309              | ) |  | (55,352  | ) |  | (75,376  | ) |  | (10,750 | )
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Total operating expenses                         |  |        |  | (68,010              | ) |  | (105,085 | ) |  | (145,350 | ) |  | (20,729 | )
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Operating income                                 |  |        |  | 193,263              |   |  | 290,271  |   |  | 423,952  |   |  | 60,461  |  
|Other income (expense):                          |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Interest income                                  |  |        |  | 14,048               |   |  | 41,970   |   |  | 28,649   |   |  | 4,086   |  
|Interest expense                                 |  |        |  |                     |   |  | (15,342  | ) |  | (44,378  | ) |  | (6,329  | )
|Amortization of convertible notes issuance costs |  |        |  |                     |   |  | (3,111   | ) |  | (7,937   | ) |  | (1,132  | )
|Other income, net                                |  |        |  | 9,790                |   |  | 6,024    |   |  | 3,133    |   |  | 447     |  
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Earnings before income taxes                     |  |        |  | 217,101              |   |  | 319,812  |   |  | 403,419  |   |  | 57,533  |  
|Income tax expense                               |  | 11     |  | (18,088              | ) |  | (30,094  | ) |  | (78,197  | ) |  | (11,152 | )
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Net income                                       |  |        |  | 199,013              |   |  | 289,718  |   |  | 325,222  |   |  | 46,381  |  
|                                                 |  |        |  |                      |   |  |          |   |  |          |   |  |         |  
|Basic earnings per share                         |  | 10, 11 |  | 0.81                 |   |  | 1.08     |   |  | 1.24     |   |  | 0.18    |  
|Diluted earnings per share                       |  | 10, 11 |  | 0.81                 |   |  | 1.07     |   |  | 1.20     |   |  | 0.17    |  

See accompanying notes to these consolidated financial statements.



F-3



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Consolidated Statements of Shareholders Equity and Comprehensive Income

(RMB and US$ expressed in thousands, except share data)



|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|------------------------------------------------------- |  | ---- |  | --------------- |  | ------------------------ |  | -------- | --------------------------------- |  | ------- | ---------------- |  | ------- | ------------------------ |  | --------- | ------------------- |  | ------- | -
|                                                        |  | Note |  | Ordinary Shares |  | AdditionalPaid-inCapital |  |          | AccumulatedOtherComprehensiveLoss |  |         | RetainedEarnings |  |         | TotalShareholdersEquity |  |           | Comprehensiveincome | 
|                                                        |  |      |  | Number          |  | RMB                      |  | RMB      |                                   |  | RMB     |                  |  | RMB     |                          |  | RMB       |                     |  | RMB     |  
|Balance as of April 1, 2005                             |  |      |  | 200,000,001     |  | 165,530                  |  |         |                                   |  |        |                  |  | 88,423  |                          |  | 253,953   |                     |  |         |  
|Net income                                              |  |      |  |                |  |                         |  |         |                                   |  |        |                  |  | 199,013 |                          |  | 199,013   |                     |  | 199,013 |  
|Foreign currency translation adjustment, net of nil tax |  |      |  |                |  |                         |  |         |                                   |  | (5,737  | )                |  |        |                          |  | (5,737    | )                   |  | (5,737  | )
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Comprehensive income                                    |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  | 193,276 |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Issuance of ordinary shares, net of expenses            |  |      |  | 73,600,000      |  | 59,595                   |  | 739,472  |                                   |  |        |                  |  |        |                          |  | 799,067   |                     |  |         |  
|Amortization of share-based compensation                |  | 16   |  |                |  |                         |  | 238      |                                   |  |        |                  |  |        |                          |  | 238       |                     |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Balance as of March 31, 2006                            |  |      |  | 273,600,001     |  | 225,125                  |  | 739,710  |                                   |  | (5,737  | )                |  | 287,436 |                          |  | 1,246,534 |                     |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Net income                                              |  |      |  |                |  |                         |  |         |                                   |  |        |                  |  | 289,718 |                          |  | 289,718   |                     |  | 289,718 |  
|Foreign currency translation adjustment, net of nil tax |  |      |  |                |  |                         |  |         |                                   |  | (15,598 | )                |  |        |                          |  | (15,598   | )                   |  | (15,598 | )
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Comprehensive income                                    |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  | 274,120 |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Share-based compensation                                |  | 16   |  |                |  |                         |  | 1,260    |                                   |  |        |                  |  |        |                          |  | 1,260     |                     |  |         |  
|Prepaid forward repurchase of ordinary shares           |  | 9(b) |  |                |  |                         |  | (236,175 | )                                 |  |        |                  |  |        |                          |  | (236,175  | )                   |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Balance as of March 31, 2007                            |  |      |  | 273,600,001     |  | 225,125                  |  | 504,795  |                                   |  | (21,335 | )                |  | 577,154 |                          |  | 1,285,739 |                     |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Net income                                              |  |      |  |                |  |                         |  |         |                                   |  |        |                  |  | 325,222 |                          |  | 325,222   |                     |  | 325,222 |  
|Foreign currency translation adjustment, net of nil tax |  |      |  |                |  |                         |  |         |                                   |  | (26,711 | )                |  |        |                          |  | (26,711   | )                   |  | (26,711 | )
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Comprehensive income                                    |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  | 298,511 |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Issuance of ordinary shares upon exercise of options    |  | 16   |  | 466,660         |  | 348                      |  | 4,809    |                                   |  |        |                  |  |        |                          |  | 5,157     |                     |  |         |  
|Share-based compensation                                |  | 16   |  |                |  |                         |  | 16,660   |                                   |  |        |                  |  |        |                          |  | 16,660    |                     |  |         |  
|Dividends declared and paid                             |  | 9(c) |  |                |  |                         |  |         |                                   |  |        |                  |  | (83,306 | )                        |  | (83,306   | )                   |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Balance as of March 31, 2008                            |  |      |  | 274,066,661     |  | 225,473                  |  | 526,264  |                                   |  | (48,046 | )                |  | 819,070 |                          |  | 1,522,761 |                     |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  
|Balance as of March 31, 2008 (US$)                      |  |      |  |                 |  | 32,155                   |  | 75,052   |                                   |  | (6,852  | )                |  | 116,810 |                          |  | 217,165   |                     |  |         |  
|                                                        |  |      |  |                 |  |                          |  |          |                                   |  |         |                  |  |         |                          |  |           |                     |  |         |  

See accompanying notes to these consolidated financial statements.



F-4



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

(RMB and US$ expressed in thousands)



|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------------------- | - |  | --------- | - |  | --------- | - |  | -------- | -
|                                                                                                                      |  |      |  | Year ended March 31, |  
|                                                                                                                      |  | Note |  | 2006                 |   |  | 2007      |   |  | 2008      |   |  | 2008     |  
|                                                                                                                      |  |      |  | RMB                  |   |  | RMB       |   |  | RMB       |   |  | US$      |  
|Cash flow from operating activities:                                                                                  |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Net income                                                                                                            |  |      |  | 199,013              |   |  | 289,718   |   |  | 325,222   |   |  | 46,381   |  
|                                                                                                                      |  |      |  |                      |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Depreciation and amortization of property, plant and equipment                                                        |  |      |  | 3,782                |   |  | 8,484     |   |  | 16,067    |   |  | 2,291    |  
|Amortization of intangible assets                                                                                     |  |      |  | 14,918               |   |  | 18,930    |   |  | 90,233    |   |  | 12,868   |  
|In-process research and development                                                                                   |  |      |  |                     |   |  |          |   |  | 672       |   |  | 96       |  
|Amortization of convertible notes issuance costs                                                                      |  |      |  |                     |   |  | 3,111     |   |  | 7,937     |   |  | 1,132    |  
|Accreted interest on FISH hold-back payment                                                                           |  |      |  |                     |   |  |          |   |  | 5,087     |   |  | 725      |  
|Share-based compensation                                                                                              |  |      |  | 238                  |   |  | 1,260     |   |  | 16,660    |   |  | 2,376    |  
|Land use rights expense                                                                                               |  |      |  | 190                  |   |  | 192       |   |  | 189       |   |  | 27       |  
|Loss on disposal of property, plant and equipment                                                                     |  |      |  |                     |   |  |          |   |  | 179       |   |  | 26       |  
|Deferred income taxes                                                                                                 |  |      |  | (1,534               | ) |  | 992       |   |  | 1,666     |   |  | 238      |  
|                                                                                                                      |  |      |  |                      |  
|Changes in operating assets and liabilities net of effects from FISH acquisition in 2007 and BBE acquisition in 2008: |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Accounts receivable                                                                                                   |  |      |  | (69,985              | ) |  | (46,027   | ) |  | (80,326   | ) |  | (11,456  | )
|Prepayments and other assets                                                                                          |  |      |  | (5,687               | ) |  | (10,715   | ) |  | 15,260    |   |  | 2,176    |  
|Inventories                                                                                                           |  |      |  | 3,450                |   |  | (4,447    | ) |  | 9,928     |   |  | 1,416    |  
|Accounts payable                                                                                                      |  |      |  | 11,238               |   |  | 13,884    |   |  | (3,201    | ) |  | (457     | )
|Accrued expenses and other liabilities                                                                                |  |      |  | (918                 | ) |  | 68,752    |   |  | 26,729    |   |  | 3,812    |  
|Income taxes payable                                                                                                  |  |      |  | 12,207               |   |  | 16,865    |   |  | 31,032    |   |  | 4,426    |  
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Net cash provided by operating activities                                                                             |  |      |  | 166,912              |   |  | 360,999   |   |  | 463,334   |   |  | 66,077   |  
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Cash flow from investing activities:                                                                                  |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Purchase of property, plant and equipment                                                                             |  |      |  | (34,064              | ) |  | (36,283   | ) |  | (29,323   | ) |  | (4,182   | )
|Payment to a related party for purchase of building and intangible assets                                             |  |      |  | (100,000             | ) |  |          |   |  |          |   |  |         |  
|Net repayments and advances from related parties                                                                      |  |      |  | (2,714               | ) |  |          |   |  |          |   |  |         |  
|Payments for FISH acquisition                                                                                         |  |      |  |                     |   |  | (848,172  | ) |  | (439,926  | ) |  | (62,738  | )
|Payments for BBE acquisition                                                                                          |  |      |  |                     |   |  |          |   |  | (195,637  | ) |  | (27,900  | )
|Deposit paid related to potential acquisition                                                                         |  | 3(c) |  |                     |   |  |          |   |  | (166,665  | ) |  | (23,769  | )
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Net cash used in investing activities                                                                                 |  |      |  | (136,778             | ) |  | (884,455  | ) |  | (831,551  | ) |  | (118,589 | )
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Cash flow from financing activities:                                                                                  |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Principal payments on long-term loan                                                                                  |  |      |  | (24                  | ) |  |          |   |  |          |   |  |         |  
|Dividends paid                                                                                                        |  |      |  | (4,225               | ) |  |          |   |  | (83,306   | ) |  | (11,880  | )
|Principal payments on bank loan                                                                                       |  |      |  |                     |   |  |          |   |  | (8,000    | ) |  | (1,141   | )
|Reimbursement from selling shareholders for offering expenses                                                         |  | 12   |  | 10,422               |   |  |          |   |  |          |   |  |         |  
|Payment of offering expenses                                                                                          |  | 12   |  | (802                 | ) |  | (9,620    | ) |  |          |   |  |         |  
|Net proceeds from issuance of ordinary shares                                                                         |  |      |  | 799,067              |   |  |          |   |  |          |   |  |         |  
|Proceeds from exercise of stock options                                                                               |  |      |  |                     |   |  |          |   |  | 5,157     |   |  | 735      |  
|Net proceeds from issuance of convertible notes                                                                       |  |      |  |                     |   |  | 1,117,349 |   |  |          |   |  |         |  
|Payment for Companys ordinary shares under prepaid forward contract                                                  |  | 9(b) |  |                     |   |  | (236,175  | ) |  |          |   |  |         |  
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Net cash provided by (used in) financing activities                                                                   |  |      |  | 804,438              |   |  | 871,554   |   |  | (86,149   | ) |  | (12,286  | )
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Effect of foreign currency exchange rate change on cash                                                               |  |      |  | (5,427               | ) |  | (18,249   | ) |  | (36,595   | ) |  | (5,219   | )
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Net increase (decrease) in cash                                                                                       |  |      |  | 829,145              |   |  | 329,849   |   |  | (490,961  | ) |  | (70,017  | )
|Cash at beginning of year                                                                                             |  |      |  | 14,646               |   |  | 843,791   |   |  | 1,173,640 |   |  | 167,376  |  
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Cash at end of year                                                                                                   |  |      |  | 843,791              |   |  | 1,173,640 |   |  | 682,679   |   |  | 97,359   |  
|                                                                                                                      |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Supplemental disclosures of cash flow information:                                                                    |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Cash paid during the year for:                                                                                        |  |      |  |                      |   |  |           |   |  |           |   |  |          |  
|Income taxes                                                                                                          |  |      |  | 7,415                |   |  | 12,237    |   |  | 45,499    |   |  | 6,489    |  
|Interest expenses                                                                                                     |  |      |  |                     |   |  |          |   |  | 39,104    |   |  | 5,577    |  

See accompanying notes to these consolidated financial statements.



F-5



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements

For the years ended March 31, 2006, 2007 and 2008



|1 | Principal Activities and Organization
|- | -------------------------------------

China
Medical Technologies, Inc. was incorporated in the Cayman Islands on July 6, 2004 as part of a reorganization of entities under common control and in connection with its initial public offering. China Medical Technologies, Inc. and its
subsidiaries (collectively the Company) are principally engaged in the commercialization, manufacture and sale of medical devices and supplies to customers primarily in the Peoples Republic of China (the PRC).

On August 10, 2005, the Company was listed on the Nasdaq National Market when the Company issued 6,400,000 American Depositary Shares
(ADS), representing 64,000,000 ordinary shares, at an initial public offering price of US$15.00 per ADS. On August 29, 2005, an additional 960,000 ADSs, representing 9,600,000 ordinary shares, were sold by the Company at the initial
public offering price of US$15.00 per ADS. In connection with this initial public offering, the Company received proceeds of RMB799,067,000, net of related offering expenses paid.

On March 27, 2006, the Company completed a secondary public offering of 5,750,000 ADSs, representing 57,500,000 ordinary shares held by certain
existing shareholders. The selling shareholders received the entire net proceeds from the sale of shares in this secondary offering.



|2 | Summary of Significant Accounting Policies
|- | ------------------------------------------



| | (a) | Basis of presentation
| | --- | ---------------------

The
accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).



| | (b) | Principles of consolidation
| | --- | ---------------------------

The accompanying consolidated financial statements include the financial statements of China Medical Technologies, Inc and its subsidiaries. All significant inter-company balances and transactions have been eliminated upon consolidation.



| | (c) | Accounts receivable
| | --- | -------------------

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is managements best estimate of the amount of probable credit losses in the Companys existing accounts
receivable. Management determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions. Accounts receivable balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. No allowance for doubtful accounts has been provided for any of the periods presented herein because management believes all accounts receivable are fully
collectible. The Company does not have any off-balance sheet credit exposure related to its customers.



| | (d) | Inventories
| | --- | -----------

Inventories are
stated at the lower of cost or market. Cost is determined using first-in, first-out method. Cost of work-in-progress and finished goods comprise direct materials, direct production costs and an allocation of production overheads based on normal
operating capacity.



F-6



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



| | (e) | Property, plant and equipment
| | --- | -----------------------------

Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method (after taking into consideration any estimated residual value), over the following estimated useful lives:



|                                  |  |            
|--------------------------------- |  | -----------
|Buildings                         |  | 10-30 years
|Machinery and equipment           |  | 5-10 years 
|Furniture, fixtures and equipment |  | 3-5 years  
|Motor vehicles                    |  | 5 years    

Leasehold improvements are amortized using the straight-line method over 2 to 5
years which represents the shorter of the remaining lease term or estimated useful life of the leasehold improvements.

Depreciation and amortization of property, plant and equipment attributable to manufacturing activities is capitalized as part of inventories, and recognized as cost of revenues when the inventory is sold. Cost incurred in the construction
of property, plant and equipment, including progress payments and deposits, are initially capitalized as construction-in-progress and transferred into their respective asset categories when the assets are ready for their intended use, at which time
depreciation commences.

When items are retired or otherwise disposed of, income is charged or credited for the difference
between net book value and the proceeds received thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.



| | (f) | Goodwill and other intangible assets
| | --- | ------------------------------------

Goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Goodwill is not amortized, but is instead tested for impairment at least annually.

Intangible assets are amortized on a straight-line basis over their respective estimated useful lives, which range from 5 to 20 years. The
Company has no intangible assets with indefinite useful lives.



| | (g) | Land use rights
| | --- | ---------------

Land use
rights represent the exclusive right to occupy and use a piece of land in the PRC for a specified contractual term. Land use rights are carried at cost and charged to expense on a straight-line basis over the contractual term of the rights, which
range from 44 to 47 years. The current portion of land use rights of RMB192,000 and RMB192,000 (US$27,000) as of March 31, 2007 and 2008, respectively, has been included in prepayments and other assets in the accompanying consolidated balance
sheets.



| | (h) | Impairment of long-lived assets
| | --- | -------------------------------

Long-lived assets, such as property, plant, and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated.



F-7



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



Goodwill is tested annually for impairment, and is tested for impairment more
frequently if events and circumstances indicate that goodwill might be impaired. The determination of goodwill impairment is made at the reporting unit level and is a two-step test. In the first step, management determines the fair value of the
reporting unit (determined using a discounted cash flow analysis) and compares it to its carrying value (including goodwill). Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any
excess of the carrying amount of the reporting units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase
price allocation, in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations(SFAS No. 141). The residual fair value after this allocation is the implied
fair value of the reporting unit goodwill.



| | (i) | Revenue recognition
| | --- | -------------------

The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and services performed, the sales price is fixed or determinable, and collection is reasonably assured. Written sales agreements or customers
purchase orders, which specify price, product specifications, and quantity, are used as evidence of an arrangement. The Companys sales agreements include the provision of training and installation services. These services are ancillary to the
customers purchase of medical equipment and are considered by the customers to be an integral part of the acquired equipment. The Company recognizes revenue for the entire arrangement upon customer acceptance, which occurs after delivery,
installation and training. Customer acceptance is evidenced by signed acceptance documents.

The medical equipment sold by
the Company has embedded self-developed software. In all cases, the medical equipment is marketed and sold based on the equipments performance and functionality. The embedded self-developed software is not sold on a standalone basis and is
incidental to the product as a whole.

In the PRC, value added tax (VAT) of 17% on invoiced amount is collected
on behalf of tax authorities. Revenue is recorded net of VAT. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability and included in accrued expenses and other liabilities in the consolidated balance
sheets until paid.

Pursuant to the laws and regulations of the PRC, Beijing Yuande Bio-Medical Engineering Co., Ltd.
(Beijing Yuande), a subsidiary of the Company, is entitled to a refund of VAT on sales of self-developed software embedded in the medical equipment. The VAT refund represents the amount of VAT collected from customers and paid to tax
authorities in excess of 3% of relevant sales. As the refund relates directly to sales, the Company recognizes the VAT refund at the time the corresponding product is sold. VAT refunds included in revenue for the years ended March 31, 2006,
2007 and 2008 were RMB23,009,000, RMB29,575,000 and RMB29,930,000 (US$4,268,000), respectively.



| | (j) | Government grants
| | --- | -----------------

Government grants, of RMB3,740,000, RMB5,724,000 and RMB3,133,000 (US$447,000) for the years ended March 31, 2006, 2007 and 2008, respectively, which did not have specific terms of usage and are not refundable, were recognized as other
income when received.



F-8



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



| | (k) | Convertible notes issuance costs
| | --- | --------------------------------

Costs incurred by the Company that were directly attributable to the issuance of convertible notes, were deferred and are charged to the consolidated statements of income using the straight-line method over the term of the convertible
notes, the results of which approximate the effective interest rate method.



| | (l) | Income taxes
| | --- | ------------

Income taxes
are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income 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 income tax assets and liabilities of a change in tax rates or change in tax status is recognized in income in the period the change in tax rates or the tax law is enacted. A
valuation allowance is provided to reduce the amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets will not be realized.

On April 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain tax positions. This interpretation
requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The adoption of FIN 48 on April 1,
2007 did not have any effect on the Companys consolidated financial statements. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.

The Companys accounting policy is to accrue interest and penalties related to unrecognized tax benefits, if and when required, as a
component of general and administrative expenses in the consolidated statements of income.



| | (m) | Share-based compensation
| | --- | ------------------------

Through March 31, 2006, the Company applied the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stocks Issued to Employees (APB No. 25), and
related interpretations, in accounting for stock options granted. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Companys employee stock options was equal to or greater than the market
price of the underlying stock on the date of the grant.

On April 1, 2006, the Company adopted SFAS No. 123
(Revised 2004), Share-Based Payment(SFAS No. 123(R)), which replaced SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123) and superseded APB No. 25.
SFAS No. 123(R) requires that share-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. The Company adopted SFAS No. 123(R) using the modified
prospective method, which requires the Company to recognize compensation cost for all share-based payments granted, modified or settled on or after April 1, 2006, as well as for any awards that were granted prior to the date of adoption for
which the requisite service had not been provided as of April 1, 2006. Accordingly, the Company recorded share-based compensation expense for awards granted prior to but not yet vest as of April 1, 2006 using the grant



F-9



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



date fair value amounts determined for pro forma disclosure under SFAS No. 123. Since April 1, 2006, the Company recognizes share-based
compensation based on grant date fair value of the award. The Company recognizes compensation cost for an award with only service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in-substances, multiple awards.

The following table
illustrates the effect on net income and earnings per share for the year ended March 31, 2006 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Companys stock plans. No
pro forma disclosure has been made for the years ended March 31, 2007 and 2008 due to the adoption of SFAS No. 123(R) on April 1, 2006. For purposes of this pro forma disclosure, the value of the options was estimated using a
Black-Scholes option-pricing model and amortized to expense over the options vesting period:



|                                                                                      |  |                           |  
|------------------------------------------------------------------------------------- |  | ------------------------- | -
|                                                                                      |  | Year ended March 31, 2006 |  
|                                                                                      |  | RMB000                   |  
|Net income as reported                                                                |  | 199,013                   |  
|Add: Share-based compensation as reported, net of nil tax                             |  | 238                       |  
|Less: Share-based compensation determined using the fair value method, net of nil tax |  | (1,092                    | )
|                                                                                      |  |                           |  
|Pro forma net income                                                                  |  | 198,159                   |  
|                                                                                      |  |                           |  
|Earnings per share:                                                                   |  |                           |  
|Basic and diluted, as reported                                                        |  | RMB0.81                   |  
|Basic and diluted, pro forma                                                          |  | RMB0.81                   |  



| | (n) | Research and development and advertising costs
| | --- | ----------------------------------------------

Research and development and advertising costs are expensed as incurred.

In-process
research and development costs acquired in business combinations are expensed as research and development expense upon acquisition and amounted to RMB nil, RMB nil and RMB672,000 (US$96,000) for the years ended March 31, 2006, 2007 and 2008,
respectively.

Advertising costs, which are included in sales and marketing expense, amounted to RMB1,212,000, RMB1,721,000
and RMB1,145,000 (US$163,000) for the years ended March 31, 2006, 2007 and 2008, respectively.



| | (o) | Retirement and other postretirement benefits
| | --- | --------------------------------------------

Pursuant to the relevant PRC regulations, China Medical Technologies, Inc.s PRC subsidiaries are required to make contributions at approximately 20% on a standard salary base as determined and organized by the
Beijing Social Security Bureau to a defined contribution retirement plan. Contributions to the defined contribution plans are charged to the consolidated statements of income as the related employee service is provided. For the years ended
March 31, 2006, 2007 and 2008, contributions to the defined contribution plans amounted to RMB909,000, RMB1,287,000 and RMB3,217,000 (US$459,000), respectively.

The Company has no other obligation to make payments in respect of retirement benefits of its employees.



F-10



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



| | (p) | Foreign currency transactions and translation
| | --- | ---------------------------------------------

The Companys reporting currency is the Renminbi (RMB). The functional currency of China Medical Technologies, Inc. is the U.S. dollar, whereas the functional currency of the China Medical
Technologies, Inc.s subsidiaries located in the PRC is the RMB. Since the RMB is not fully convertible into foreign currencies, all foreign exchange transactions involving RMB must take place either through the Peoples Bank of China (the
PBOC) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.

Transactions denominated in currencies other than the functional currency are converted into the functional currency at the exchange rates
prevailing at the date of transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are converted into the functional currency using the applicable exchange rates at each balance sheet date. The
resulting exchange differences are recorded as a component of other income, net in the consolidated statements of income.

Assets and liabilities of China Medical Technologies, Inc. and other non-PRC group entities with functional currencies other than the RMB, are translated into RMB using the applicable exchange rate at each balance sheet date. Revenues, if
any, and expenses are translated at average rates prevailing during the year. The gains and losses from such translations are recorded as a separate component of accumulated other comprehensive loss within shareholders equity.

For the United States dollar convenience translation amounts included in the accompanying financial statements, the Renminbi equivalents
were translated into United States dollar (US$) at the rate of US$1.00=RMB7.0120 on March 31, 2008, representing the noon buying rate in the City of New York for cable transfers of Renminbi, as certified for customs purposes by
the Federal Reserve Bank of New York. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on March 31, 2008 or at any other date.



| | (q) | Warranty costs
| | --- | --------------

The Company
provides a warranty that its products will meet certain functionality standards. The term of the product warranty is generally twelve months. Based on the limited number of actual warranty claims and the historically low cost of such repairs, the
Company has not recognized a liability for warranty claims. Warranty expenses were insignificant for the years ended March 31, 2006, 2007 and 2008.



| | (r) | Earnings per share
| | --- | ------------------

Basic
earnings per share is computed by dividing net income by the weighted average number of ordinary shares outstanding, excluding ordinary shares to be purchased under a prepaid forward repurchase contract, during the period. Diluted earnings per share
is calculated by dividing net income by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding, excluding the ordinary shares repurchased pursuant to the prepaid forward repurchase contract, during the year.
Ordinary equivalent shares consist of ordinary shares issuable upon the conversion of convertible notes (using if-converted method) and ordinary shares issuable upon the exercise of outstanding share options (using the treasury share method).
Potential dilutive securities are not included in the calculation of dilutive earnings per share if the impact is anti-dilutive.



F-11



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



| | (s) | Use of estimates
| | --- | ----------------

The
preparation of the consolidated financial statements in accordance with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include the recoverability of the
carrying amount and the estimated useful lives of long-lived assets, valuation allowances for receivables, realizable values for inventories, estimated warranty obligations and fair value of assets and liabilities acquired in business combinations.
Actual results could differ from those estimates.



| | (t) | Segment reporting
| | --- | -----------------

The
Company uses the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Companys chief operating decision maker for making operating
decisions and assessing performance as the source for determining the Companys reportable segments. The Companys chief operating decision maker is the Chief Executive Officer of the Company. Based on this assessment, management has
determined the Company had two reportable operating segmentsHIFU System and ECLIA Systemfor the year ended March 31, 2006.

Following the Companys acquisition of FISH (note 3), management has determined the Company has three reportable operating segmentsHIFU System, ECLIA System and FISH Systemfor the years ended
March 31, 2007 and 2008.

The Company generates substantially all revenues from customers in the PRC and the
Companys tangible long-lived assets are substantially located in the PRC. Consequentially, no geographic information is presented.



| | (u) | Contingencies
| | --- | -------------

In the normal
course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its businesses, that cover a wide range of matters, including among others, product liability. In accordance with SFAS No. 5,
Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Company has not
experienced any product liability claims and any other loss contingencies.



| | (v) | Recently issued accounting pronouncements
| | --- | -----------------------------------------

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measurement of fair
value, and expands disclosures required for fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fair value measures already required or permitted by other standards for
fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, Effective date of FASB Statement No. 157 which defers the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Management does not expect the adoption of SFAS No. 157 will have a material impact on the consolidated financial statements.



F-12



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



In February 2007, FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other
items at fair value. The entity shall report unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007. Management has elected not to adopt the fair value option, as permitted under SFAS No. 159.

In
December 2007, the FASB issued SFAS No. 141R (Revised), Business Combinations (SFAS No. 141R). SFAS No. 141R establishes requirements for the recognition and measurement of acquired assets, liabilities,
goodwill, and non-controlling interests (formerly minority interests). SFAS No. 141R also provides disclosure requirements related to business combinations. SFAS No. 141R is effective for fiscal years beginning after December 15,
2008. SFAS No. 141R will be applied prospectively to business combinations with an acquisition date on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160
establishes new standards for the accounting for and reporting of non-controlling interests and for the loss of control of partially owned and consolidated subsidiaries. SFAS No. 160 does not change the criteria for consolidating a partially
owned entity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of SFAS No. 160 will be applied prospectively upon adoption except for the presentation and disclosure requirements, which will
be applied retrospectively. SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as non-controlling interests and classified as a component of equity. The calculation of earnings per share will
continue to be based on income amounts attributable to the parent. FAS No. 160 applies to all entities that prepare consolidated financial statements, except for not-for-profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. Management does not expect the initial adoption of SFAS No. 160 will have a material impact on the consolidated financial statements.

In May 2008, FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be
Settled in Cash Upon Conversion (FSP APB 14-1). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an issuers nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest
expense. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required except for
instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. FSP APB 14-1 will change the accounting treatment for
the Companys convertible notes (Note 8). The impact of this new accounting treatment may be significant and will result in an increase to non-cash interest expense beginning in the year ended March 31, 2010 for financial statements
covering past and future periods.



F-13



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|3 | Acquisitions
|- | ------------



| | (a) | FISH Acquisition
| | --- | ----------------

On
March 1, 2007, the Company completed the acquisition of the fluorescent in situ hybridization (FISH) business of Supreme Well Investments Limited and its subsidiaries (the FISH acquisition). The Company has accounted for
the FISH acquisition using the purchase method. The sum of the fair values of the assets acquired less liabilities assumed exceeded the acquisition cost, excluding contingent consideration, by RMB571,517,000, resulting in negative goodwill. In
accordance with SFAS No. 141, since the contingent consideration could result in the recognition of additional purchase price in a future period, the Company recognized, as if it were a liability, an amount equal to the lesser of the maximum
amount of the contingent consideration or the total amount of the negative goodwill. Accordingly, the maximum amount of the contingent earnout payments of RMB308,928,000 (US$40,000,000) has been recognized as if it were a liability at the date of
acquisition. The remaining negative goodwill of RMB262,589,000 was allocated to reduce the amounts assigned to certain long-lived assets.

The results of FISH operation have been included in the Companys consolidated statements of income from March 1, 2007. The total purchase consideration, including the contingent earnout payments, is as
follows:



|                                                                    |  |          
|------------------------------------------------------------------- |  | ---------
|                                                                    |  | RMB000  
|Cash consideration (note (i))                                       |  | 902,204  
|Transaction costs                                                   |  | 23,200   
|Holdback payments (note (i))                                        |  | 144,438  
|                                                                    |  |          
|Total purchase consideration                                        |  | 1,069,842
|Contingent consideration (note (ii))                                |  | 308,928  
|                                                                    |  |          
|Total purchase consideration, including contingent earnout payments |  | 1,378,770
|                                                                    |  |          



Notes:



| | (i) | Cash consideration includes US$10,000,000 which was paid by the Company in June 2007. Further, pursuant to the acquisition agreement US$20,000,000 was held back by the Company to
settle any claims that arise if the FISH Sellers acted fraudulently or made misrepresentation to the Company. US$10,000,000 was due by and paid in March 2008 and the remaining US$10,000,000 is payable by March 1, 2009. The US$10,000,000
holdback payment due by March 1, 2009 was recorded at its present value as of the acquisition date of March 1, 2007 or US$8,702,000 using a discount rate of 7.2%, representing the borrowing rate for debt with similar terms.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Pursuant to acquisition agreement, the sellers are entitled to additional consideration of US$20,000,000 if the Company receives bona fide, irrevocable, binding purchase orders of
an amount equal to or in excess of US$20,000,000 during the 12-month period ending March 1, 2008. In addition, the FISH Sellers are entitled to an additional consideration of US$20,000,000, if the Company recognizes revenue of US$20,000,000 as
reported under U.S. GAAP during the 12-month period ending March 1, 2008. During the 12-month period ending March 1, 2008, the purchase order and revenue targets were achieved and the Company paid the contingent payments in cash in
February and March 2008.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-14



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



The Company has accounted for the FISH acquisition using the purchase method. The
following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed on March 1, 2007:



|                                                  |  |                    |  |          
|------------------------------------------------- |  | ------------------ |  | ---------
|                                                  |  | Amortizationperiod |  | RMB000  
|Net tangible assets acquired                      |  |                    |  | 19,222   
|Identifiable intangible assets:                   |  |                    |  |          
|Unpatented technologyFISH probes                |  | 20                 |  | 1,323,960
|Unpatented technologyFISH image analysis system |  | 5                  |  | 18,767   
|Non-compete agreement                            |  | 5                  |  | 16,821   
|                                                  |  |                    |  |          
|Purchase price allocated                          |  |                    |  | 1,378,770
|                                                  |  |                    |  |          



| | (b) | BBE Acquisition
| | --- | ---------------

On
January 8, 2008, the Company acquired 100% interest in Beijing Bio-Ekon Biotechnology Co., Ltd. (BBE) from Finnea International Limited (the BBE acquisition) for cash consideration of RMB212,230,000, including
transaction costs of RMB1,709,000. As of March 31, 2008, the unpaid consideration was RMB14,944,000, of which RMB14,024,000 was paid in April 2008.

BBE is a medical device company engaged in the commercialization, manufacture and sale of medical devices using ECLIA technology. The acquisition is expected to strengthen the Companys position in advanced
In-vitro diagnostics market in China. The Company paid a premium (i.e. goodwill) over the fair value of the net tangible and identified intangible assets mainly due to expected cost savings and synergies resulting from selling similar products to
similar customers.

The Company has accounted for BBE acquisition using the purchase method. The results of BBE have been
included in the Companys consolidated statements of income from January 8, 2008. The following table summarizes the allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed on
January 8, 2008:



|                                                  |  |                    |  |         |   |  |         |  
|------------------------------------------------- |  | ------------------ |  | ------- | - |  | ------- | -
|                                                  |  | Amortizationperiod |  | RMB000 |   |  | US$000 |  
|Cash                                              |  |                    |  | 1,650   |   |  | 235     |  
|Net current liabilities                           |  |                    |  | (1,521  | ) |  | (216    | )
|Property and equipment                            |  |                    |  | 15,630  |   |  | 2,229   |  
|Identifiable intangible assets:                   |  |                    |  |         |   |  |         |  
|Unpatented technologyECLIA core technologies    |  | 20                 |  | 174,347 |   |  | 24,864  |  
|Unpatented technologyECLIA reagent technologies |  | 15                 |  | 7,828   |   |  | 1,116   |  
|Customer relationships                           |  | 15                 |  | 2,019   |   |  | 288     |  
|Non-compete agreement                            |  | 5                  |  | 2,951   |   |  | 421     |  
|In-process research and development               |  |                    |  | 672     |   |  | 96      |  
|Goodwill                                          |  |                    |  | 8,654   |   |  | 1,234   |  
|                                                  |  |                    |  |         |   |  |         |  
|Purchase price allocated                          |  |                    |  | 212,230 |   |  | 30,267  |  
|                                                  |  |                    |  |         |   |  |         |  

The acquired identifiable intangible assets, all of which are being amortized, have
a weighted average life of approximately 20 years. RMB8,654,000 of goodwill, which has been allocated to the Companys ECLIA segment, is not deductible for tax purpose.



F-15



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



The following unaudited pro forma financial information presents the results of the
operations of the Company as if the BBE acquisition had occurred on April 1, 2006. Amortization expense of acquired identifiable intangible assets in the amount of RMB9,964,000 was included in the unaudited pro forma financial information for
the years ended March 31, 2007 and 2008, respectively. The unaudited pro forma financial information is not necessary indicative of what the Companys consolidated results of operations actually would have been had it completed the BBE
acquisition on April 1, 2006, in addition, the unaudited pro forma financial information does not attempt to project the future results of operation of the combined entity.



|                       |  |                      |  |            
|---------------------- |  | -------------------- |  | -----------
|                       |  | Year ended March 31,
|                       |  | 2007                 |  | 2008       
|                       |  | RMB000              |  | RMB000    
|                       |  | (unaudited)          |  | (unaudited)
|Revenues               |  | 579,808              |  | 935,686    
|Income from operations |  | 278,158              |  | 404,183    
|Net income             |  | 277,505              |  | 305,787    
|Earnings per share     |  |                      |  |            
|Basic                  |  | 1.03                 |  | 1.17       
|Diluted                |  | 1.03                 |  | 1.14       



| | (c) | Deposit
| | --- | -------

In accordance with
the letter of intent dated July 20, 2007, the Company paid a deposit of US$22,000,000 (RMB154,264,000) in July 2007 to Supreme Well Investments Limited for a potential acquisition. The deposit is refundable to the Company within ten working
days after the termination of the letter of intent, which may be terminated by either party.



|4 | Inventories
|- | -----------

Inventories by major class consist of
the following:



|                  |  |           |  |         |  |        
|----------------- |  | --------- |  | ------- |  | -------
|                  |  | March 31,
|                  |  | 2007      |  | 2008    |  | 2008   
|                  |  | RMB000   |  | RMB000 |  | US$000
|Raw materials     |  | 9,632     |  | 12,623  |  | 1,800  
|Work-in-progress  |  | 7,261     |  | 8,629   |  | 1,230  
|Finished goods    |  | 11,098    |  | 6,582   |  | 939    
|                  |  |           |  |         |  |        
|Total inventories |  | 27,991    |  | 27,834  |  | 3,969  
|                  |  |           |  |         |  |        



F-16



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|5 | Property, Plant and Equipment, net
|- | ----------------------------------

Property, plant
and equipment consist of the following:



|                                          |  |           |   |  |         |   |  |         |  
|----------------------------------------- |  | --------- | - |  | ------- | - |  | ------- | -
|                                          |  | March 31, |  
|                                          |  | 2007      |   |  | 2008    |   |  | 2008    |  
|                                          |  | RMB000   |   |  | RMB000 |   |  | US$000 |  
|Buildings                                 |  | 73,339    |   |  | 134,394 |   |  | 19,166  |  
|Leasehold improvements                    |  | 1,297     |   |  | 5,722   |   |  | 816     |  
|Machinery and equipment                   |  | 30,351    |   |  | 47,495  |   |  | 6,773   |  
|Furniture, fixtures and equipment         |  | 5,538     |   |  | 9,591   |   |  | 1,368   |  
|Motor vehicles                            |  | 4,392     |   |  | 7,222   |   |  | 1,030   |  
|Construction-in-progress                  |  | 39,437    |   |  | 25      |   |  | 4       |  
|                                          |  |           |   |  |         |   |  |         |  
|Total property, plant and equipment       |  | 154,354   |   |  | 204,449 |   |  | 29,157  |  
|Accumulated depreciation and amortization |  | (18,562   | ) |  | (39,950 | ) |  | (5,697  | )
|                                          |  |           |   |  |         |   |  |         |  
|Total property, plant and equipment, net  |  | 135,792   |   |  | 164,499 |   |  | 23,460  |  
|                                          |  |           |   |  |         |   |  |         |  

Depreciation and amortization of property, plant and equipment was allocated to the following
expense items:



|                                            |  |                      |  |         |  |         |  |        
|------------------------------------------- |  | -------------------- |  | ------- |  | ------- |  | -------
|                                            |  | Year ended March 31,
|                                            |  | 2006                 |  | 2007    |  | 2008    |  | 2008   
|                                            |  | RMB000              |  | RMB000 |  | RMB000 |  | US$000
|Cost of revenues                            |  | 1,641                |  | 2,610   |  | 7,033   |  | 1,003  
|Research and development                    |  | 80                   |  | 3,731   |  | 4,795   |  | 684    
|Sales and marketing                         |  |                     |  |        |  | 171     |  | 24     
|General and administrative                  |  | 2,061                |  | 2,143   |  | 4,068   |  | 580    
|                                            |  |                      |  |         |  |         |  |        
|Total depreciation and amortization expense |  | 3,782                |  | 8,484   |  | 16,067  |  | 2,291  
|                                            |  |                      |  |         |  |         |  |        



|6 | Intangible assets
|- | -----------------

The following table summarizes
the Companys intangible assets as of March 31, 2007 and 2008:



|                        |  |                     |  |                         |   |  |           |  |                                  
|----------------------- |  | ------------------- |  | ----------------------- | - |  | --------- |  | ---------------------------------
|                        |  | March 31, 2007     
|                        |  | Grosscarryingamount |  | Accumulatedamortization |   |  | Net       |  | Weightedaverageamortizationperiod
|                        |  | RMB000             |  | RMB000                 |   |  | RMB000   |  | Years                            
|Unpatented technologies |  | 1,532,426           |  | (27,509                 | ) |  | 1,504,917 |  | 20                               
|Non-compete agreements  |  | 64,956              |  | (13,442                 | ) |  | 51,514    |  | 9                                
|Patented technologies   |  | 10,530              |  | (1,599                  | ) |  | 8,931     |  | 17                               
|                        |  |                     |  |                         |   |  |           |  |                                  
|Total intangible assets |  | 1,607,912           |  | (42,550                 | ) |  | 1,565,362 |  |                                  
|                        |  |                     |  |                         |   |  |           |  |                                  



F-17



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|                        |  |                     |  |                         |   |  |           |  |                                  
|----------------------- |  | ------------------- |  | ----------------------- | - |  | --------- |  | ---------------------------------
|                        |  | March 31, 2008     
|                        |  | Grosscarryingamount |  | Accumulatedamortization |   |  | Net       |  | Weightedaverageamortizationperiod
|                        |  | RMB000             |  | RMB000                 |   |  | RMB000   |  | Years                            
|Unpatented technologies |  | 1,590,943           |  | (105,099                | ) |  | 1,485,844 |  | 20                               
|Non-compete agreements  |  | 66,358              |  | (20,705                 | ) |  | 45,653    |  | 9                                
|Patented technologies   |  | 10,530              |  | (2,219                  | ) |  | 8,311     |  | 17                               
|Customer relationships  |  | 2,019               |  | (34                     | ) |  | 1,985     |  | 15                               
|                        |  |                     |  |                         |   |  |           |  |                                  
|Total intangible assets |  | 1,669,850           |  | (128,057                | ) |  | 1,541,793 |  |                                  
|                        |  |                     |  |                         |   |  |           |  |                                  

Amortization of intangible assets was allocated to the following expense items:



|                           |  |                      |  |         |  |         |  |        
|-------------------------- |  | -------------------- |  | ------- |  | ------- |  | -------
|                           |  | Year ended March 31,
|                           |  | 2006                 |  | 2007    |  | 2008    |  | 2008   
|                           |  | RMB000              |  | RMB000 |  | RMB000 |  | US$000
|Cost of revenues           |  | 14,918               |  | 14,910  |  | 90,233  |  | 12,868 
|General and administrative |  |                     |  | 4,020   |  |        |  |       
|                           |  |                      |  |         |  |         |  |        
|Total amortization expense |  | 14,918               |  | 18,930  |  | 90,233  |  | 12,868 
|                           |  |                      |  |         |  |         |  |        

Estimated annual amortization expense for each of the next five years is RMB90,016,000 each year.



|7 | Accrued Expenses and Other Liabilities
|- | --------------------------------------

Accrued
expenses and other liabilities consist of the following:



|                                             |  |           |  |         |  |        
|-------------------------------------------- |  | --------- |  | ------- |  | -------
|                                             |  | March 31,
|                                             |  | 2007      |  | 2008    |  | 2008   
|                                             |  | RMB000   |  | RMB000 |  | US$000
|VAT payables                                 |  | 61,107    |  | 81,580  |  | 11,635 
|Accrued salaries and welfare                 |  | 24,430    |  | 31,071  |  | 4,431  
|Convertible notes interest payable           |  | 15,205    |  | 14,418  |  | 2,056  
|Payable related to BBE acquisition           |  |          |  | 14,944  |  | 2,131  
|Accrued professional fees                    |  | 14,392    |  | 8,740   |  | 1,247  
|Receipts in advance                          |  | 5,452     |  | 9,351   |  | 1,334  
|Other payables                               |  | 10,511    |  | 12,683  |  | 1,808  
|                                             |  |           |  |         |  |        
|Total accrued expenses and other liabilities |  | 131,097   |  | 172,787 |  | 24,642 
|                                             |  |           |  |         |  |        



|8 | Convertible Notes
|- | -----------------

On November 21, 2006, the
Company received an aggregate US$150 million in respect to the issuance of 3.5% convertible senior subordinated notes due on November 15, 2011 (the Convertible Notes) to Merrill Lynch & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. The net proceeds from the offering, after deducting the offering expenses, were approximately US$144.7 million. The Convertible Notes bear interest at a rate of 3.5% per year, payable semiannually in
arrears on May 15 and November 15 of each year beginning on May 15, 2007.



F-18



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



The Convertible Notes are convertible, at the discretion of the holders of the Convertible Notes (the
Notes Holders) at any time prior November 15, 2011, the maturity date, at an initial conversion rate of 31.0318 ADSs per US$1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately US$32.23 per
ADS), subject to dilution protection adjustment for the issuance of shares and dividends, as defined in the agreement.

Upon conversion of
the Convertible Notes, in lieu of delivery of ADS, the Company may elect to deliver cash or a combination of cash and ADSs based on the conversion price then in effect, which is the average trading price of the ADSs (over a 20 day period) and the
portion the Company elects to settle with cash.

If a fundamental change, as defined in the agreement, occurs, the Notes Holders of the
Convertible Notes may be entitled to an increase in the conversion rate and may require the Company to repurchase all or a portion of their Convertible Notes for cash at a repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest, if any.

The Convertible Notes are subordinated in right of payment to the Companys existing and future senior
indebtedness and are effectively junior to any existing and future debt and other liabilities, including trade payables.

Management has
determined that the conversion feature embedded in the Convertible Notes is not required to be bifurcated and accounted for as a derivative pursuant to SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, since the embedded conversion feature is indexed to the Companys own stock and would be classified in shareholders equity if it was a free-standing instrument. Further, since the conversion price of the Convertible
Notes exceeded the market price of the Companys ordinary shares on the date of issuance of Convertible Notes; no portion of the proceeds from the issuance was accounted for as attributable to the conversion feature.

In June 2007, as a result of the declaration of dividend by the Company, the conversion rate of the Convertible Notes was adjusted from 31.0318 ADSs to
31.3953 ADSs per US$1,000 principal amount of Convertible Notes (equivalent to conversion price change from US$32.225 to US$31.852). As the adjusted conversion price of US$31.852 per ADS exceeded the market price of the Companys ordinary
shares on the date of issuance of Convertible Notes, there was no beneficial conversion feature recognized.



|9 | Shareholders Equity
|- | --------------------



| | (a) | Statutory reserves
| | --- | ------------------

In
accordance with the relevant laws and regulations of the PRC, the Companys PRC subsidiaries are required to transfer 10% of their respective after tax profit, as determined in accordance with PRC accounting standards and regulations to a
general reserve fund until the balance of the fund reaches 50% of the registered capital of the respective subsidiary. The transfer to this general reserve fund must be made before distribution of dividends can be made. As of March 31, 2007 and
2008, the PRC subsidiaries had appropriated RMB36,147,000 and RMB80,750,000, respectively to the general reserve funds, which are restricted from being distributed to the Company.

Further, the PRC subsidiaries may, at the discretion of the enterprise, make appropriations to a staff welfare and bonus reserve in
accordance with the relevant laws and regulations in the PRC. The appropriation to staff welfare and bonus reserve is recognized as an expense as it is a current liability to the



F-19



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



employees. For the years ended March 31, 2006, 2007 and 2008, the PRC subsidiaries made appropriations to the staff welfare and bonus reserve of
RMB2,227,000, RMB4,162,000 and RMB8,700,000 (US$1,241,000), respectively.



| | (b) | Forward ordinary share purchase contract
| | --- | ----------------------------------------

In connection with the issuance of Convertible Notes, the Company entered into a prepaid forward repurchase contract (the Forward Repurchase Contract) on November 15, 2006 with an affiliate of Merrill
Lynch & Co. (the Dealer). Pursuant to the Forward Repurchase Contract, the Company paid, an aggregate of US$30 million of ADSs (1,163,692 ADSs at US$25.78 per ADS) for the Forward Repurchase Contract. The Dealer may deliver the
shares pursuant to the Forward Repurchase Contract at its discretion, in full or in part, over a period of five years from the date of the contract. As of March 31, 2008, the Dealer had not delivered any shares. Since the Forward Repurchase
Contract requires physical settlement of a fixed number of ADSs at a fixed price per ADS, the shares to be repurchased pursuant to the Forward Repurchase Contract are treated as retired for purposes of the Companys basic and diluted earnings
per share calculations. The Company has accounted for the prepaid forward repurchase of the shares as reduction of shareholders equity in the consolidated financial statements.



| | (c) | Declaration of dividend
| | --- | -----------------------

On
June 18, 2007, the Company declared a cash dividend on its ordinary shares of US$0.04 per share, equivalent to US$0.40 per ADS to the shareholders of record as of July 18, 2007. The dividend was paid in August 2007.



|10 | Earnings Per Share
|-- | ------------------

The following table sets forth
the computation of basic and diluted earnings per share for the years indicated:



|                                                                                                                    |  |                      |  |         |  |        
|------------------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ------- |  | -------
|                                                                                                                    |  | Year ended March 31,
|                                                                                                                    |  | 2006                 |  | 2007    |  | 2008   
|                                                                                                                    |  | RMB000              |  | RMB000 |  | RMB000
|Numerator:                                                                                                          |  |                      |  |         |  |        
|Net income used in computing basic earnings per share                                                               |  | 199,013              |  | 289,718 |  | 325,222
|Interest on Convertible Notes                                                                                       |  |                     |  | 18,453  |  | 47,086 
|                                                                                                                    |  |                      |  |         |  |        
|Adjusted net income used in computing diluted earnings per share                                                    |  | 199,013              |  | 308,171 |  | 372,308
|                                                                                                                    |  |                      |  |         |  |        
|Denominator:                                                                                                        |  |                      |  |         |  |        
|Weighted average number of ordinary shares outstanding and shares used in computing basic earnings per share (000) |  | 246,878              |  | 269,232 |  | 262,219
|Weighted average number of potential ordinary shares (000)                                                         |  | 285                  |  | 17,748  |  | 48,178 
|                                                                                                                    |  |                      |  |         |  |        
|Shares used in computing diluted earnings per share (000)                                                          |  | 247,163              |  | 286,980 |  | 310,397
|                                                                                                                    |  |                      |  |         |  |        
|Basic earnings per share                                                                                            |  | RMB0.81              |  | RMB1.08 |  | RMB1.24
|                                                                                                                    |  |                      |  |         |  |        
|Diluted earnings per share                                                                                          |  | RMB0.81              |  | RMB1.07 |  | RMB1.20
|                                                                                                                    |  |                      |  |         |  |        



F-20



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



The computation of basic and diluted earnings per share for the year ended March 31, 2006, 2007
and 2008 reflects a reduction for a weighted average of nil, 4,367,830 and 11,636,920, respectively, shares of ordinary shares deemed to have been retired as a result of the Forward Repurchase Contract (note 9(b)). The Companys ordinary
equivalent shares for the year ended March 31, 2006, 2007 and 2008 consist of 285,000, 276,293 and 1,245,625, respectively, shares of ordinary shares issuable upon exercise of share options (using the treasury stock method); and nil, 17,471,328
and 46,932,057 common shares issuable upon conversion of Convertible Notes (using the treasury stock method). The Company has no potential ordinary equivalent shares that are anti-dilutive for the years ended March 31, 2006, 2007 and 2008.



|11 | Income Taxes
|-- | ------------

China Medical Technologies, Inc. is
incorporated in the Cayman Islands, and is not subject to tax on income or capital gain under the current laws of the Cayman Islands. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax is
imposed. The subsidiaries that are incorporated in the British Virgin Islands are not subject to income taxes under the relevant jurisdiction. The Companys other subsidiaries are subject to income tax as described below.

PRC tax

Prior to January 1, 2005 Beijing
Yuande, being an entity located in an approved economic-technological development area in the PRC, was entitled to a PRC income tax rate of 15%. On February 8, 2006, Beijing Yuande, being a foreign-invested advanced technology
enterprise accredited by Beijing Commerce Bureau, was granted a reduction from 15% to 10% in its PRC income tax rate for the tax period from January 1, 2005 to December 31, 2007. The effect of the tax rate change was recognized in
the consolidated financial statements during the year ended March 31, 2006.

Beijing GP Medical Technologies, Ltd. (Beijing
GP), a subsidiary of the Company is also an entity located in an approved economic-technological development area in the PRC, and was entitled to a PRC income tax rate of 15%. Further, Beijing GP, which was deemed a production-oriented foreign
investment enterprise, was entitled to an exemption from PRC income tax from January 1, 2008 to December 31, 2009 and a 50% income tax reduction from January 1, 2010 to December 31, 2013.

On March 16, 2007, the National Peoples Congress passed the new Enterprise Income Tax law (the new EIT law) which imposes a single
income tax rate of 25% for most domestic enterprises and foreign investment enterprise. The new EIT law was effective as of January 1, 2008. The new EIT law provides a five-year transition period from its effective date for those enterprises
which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. Further, according to the new EIT law, entities that
qualify as High and New Technology Enterprises are entitled to the preferential EIT rate of 15%. However, the new recognition criteria and procedures for High and New Technology Enterprise under the new EIT law were not
issued until April 14, 2008. Therefore, as of March 31, 2008, the Companys PRC subsidiaries have not yet applied for the status as a High and New Technology Enterprises. Further, on December 26, 2007, the PRC
government passed the detailed implementation rules which allow enterprises to continue to enjoy their unexpired tax holiday under the previous income tax laws and rules. As a result, under the new EIT law, Beijing Yuandes tax rates are 18%,
20%, 22%, 24% for the calendar years from 2008 to 2011 and 25% thereafter; and Beijing GPs tax rates are 0%, 0%, 11%, 12%, 12.5% for the calendar years from 2008 to 2012 and 25% thereafter.



F-21



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



The new EIT law also imposes a 10% withholding income tax for dividends distributed by a
foreign-invested enterprise to its immediate holding company outside China beginning on January 1, 2008. Undistributed earnings generated prior to January 1, 2008 are exempted from such withholding tax. Under the previous income tax laws
and rules, no withholding tax was required. Since substantially of the Companys PRC subsidiaries, Beijing Yuande, Beijing GP and Beijing BBE are invested by immediate foreign holding companies, the Company will be subject to the withholding
tax for earnings accumulated beginning on January 1, 2008. Undistributed earnings that the Company intends to reinvest indefinitely, and for which no deferred tax liability was recognized, were RMB419 million (US$60 million) as of
March 31, 2008. The unrecognized deferred tax liability related to the undistributed earnings subject to withholding tax was RMB42 million (US$6 million) as of March 31, 2008.

The components of earnings before income taxes are as follows:



|                                   |  |                      |   |  |         |   |  |          |   |  |         |  
|---------------------------------- |  | -------------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|                                   |  | Year ended March 31, |  
|                                   |  | 2006                 |   |  | 2007    |   |  | 2008     |   |  | 2008    |  
|                                   |  | RMB000              |   |  | RMB000 |   |  | RMB000  |   |  | US$000 |  
|PRC                                |  | 220,757              |   |  | 333,602 |   |  | 555,298  |   |  | 79,193  |  
|Other countries                    |  | (3,656               | ) |  | (13,790 | ) |  | (151,879 | ) |  | (21,660 | )
|                                   |  |                      |   |  |         |   |  |          |   |  |         |  
|Total earnings before income taxes |  | 217,101              |   |  | 319,812 |   |  | 403,419  |   |  | 57,533  |  
|                                   |  |                      |   |  |         |   |  |          |   |  |         |  

Income tax expense, which is all incurred in the PRC, consists of:



|                            |  |                      |   |  |         |  |         |  |        
|--------------------------- |  | -------------------- | - |  | ------- |  | ------- |  | -------
|                            |  | Year ended March 31,
|                            |  | 2006                 |   |  | 2007    |  | 2008    |  | 2008   
|                            |  | RMB000              |   |  | RMB000 |  | RMB000 |  | US$000
|Current income tax expense  |  | 19,622               |   |  | 29,102  |  | 76,531  |  | 10,914 
|Deferred income tax expense |  | (1,534               | ) |  | 992     |  | 1,666   |  | 238    
|                            |  |                      |   |  |         |  |         |  |        
|Total income tax expense    |  | 18,088               |   |  | 30,094  |  | 78,197  |  | 11,152 
|                            |  |                      |   |  |         |  |         |  |        

Basic and diluted earnings per share effects of the tax holiday for the years ended March 31,
2006, 2007 and 2008 are as follows:



|                           |  |                      |  |         |  |         |  |         |     
|-------------------------- |  | -------------------- |  | ------- |  | ------- |  | ------- | ----
|                           |  | Year ended March 31,
|                           |  | 2006                 |  | 2007    |  | 2008    |  | 2008   
|                           |  | RMB000              |  | RMB000 |  | RMB000 |  | US$000
|Basic earnings per share   |  | RMB0.05              |  | RMB0.06 |  | RMB0.26 |  | US$     | 0.04
|                           |  |                      |  |         |  |         |  |         |     
|Diluted earnings per share |  | RMB0.05              |  | RMB0.05 |  | RMB0.22 |  | US$     | 0.03
|                           |  |                      |  |         |  |         |  |         |     



F-22



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



Income tax expense reported in the consolidated statements of income differs from the amount computed
by applying the PRC income tax rate of 15% for the years ended March 31, 2006 and 2007, and 25% for the year ended March 31, 2008 for the following reasons:



|                                                                   |  |                      |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------------ |  | -------------------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                   |  | Year ended March 31, |  
|                                                                   |  | 2006                 |   |  | 2007    |   |  | 2008    |   |  | 2008    |  
|                                                                   |  | RMB000              |   |  | RMB000 |   |  | RMB000 |   |  | US$000 |  
|Earnings before income taxes                                       |  | 217,101              |   |  | 319,812 |   |  | 403,419 |   |  | 57,533  |  
|                                                                   |  |                      |   |  |         |   |  |         |   |  |         |  
|Computed expected tax expense                                    |  | 32,565               |   |  | 47,972  |   |  | 100,855 |   |  | 14,383  |  
|Non-deductible expenses                                            |  | 1,875                |   |  | 1,128   |   |  | 2,510   |   |  | 358     |  
|Non-taxable income                                                 |  | (4,012               | ) |  | (5,295  | ) |  | (8,266  | ) |  | (1,179  | )
|Tax benefit resulting from tax holiday                             |  | (10,353              | ) |  | (15,570 | ) |  | (67,907 | ) |  | (9,684  | )
|Tax benefit resulting from preferential tax rates                  |  |                     |   |  |        |   |  | (9,247  | ) |  | (1,319  | )
|Change in enacted tax rate                                         |  | (2,567               | ) |  |        |   |  | 23,065  |   |  | 3,289   |  
|Change in valuation allowance                                      |  | 898                  |   |  | (15     | ) |  |        |   |  |        |  
|Tax effect related to foreign entities not subject to income taxes |  | (248                 | ) |  | 1,677   |   |  | 37,691  |   |  | 5,376   |  
|Other                                                              |  | (70                  | ) |  | 197     |   |  | (504    | ) |  | (72     | )
|                                                                   |  |                      |   |  |         |   |  |         |   |  |         |  
|Actual income tax expense                                          |  | 18,088               |   |  | 30,094  |   |  | 78,197  |   |  | 11,152  |  
|                                                                   |  |                      |   |  |         |   |  |         |   |  |         |  

The tax effect of temporary differences that gives rise to significant portions of the deferred
income tax assets and deferred income tax liabilities are presented below:



|                                       |  |           |  |         |   |  |         |  
|-------------------------------------- |  | --------- |  | ------- | - |  | ------- | -
|                                       |  | March 31, | 
|                                       |  | 2007      |  | 2008    |   |  | 2008    |  
|                                       |  | RMB000   |  | RMB000 |   |  | US$000 |  
|Deferred tax assets:                   |  |           |  |         |   |  |         |  
|Operating loss carryforwards           |  |          |  | 2,485   |   |  | 354     |  
|Intangible assets, net                 |  | 542       |  |        |   |  |        |  
|Accrued expenses and other liabilities |  |          |  | 1,000   |   |  | 143     |  
|                                       |  |           |  |         |   |  |         |  
|Total gross deferred tax assets        |  | 542       |  | 3,485   |   |  | 497     |  
|Less: valuation allowance              |  |          |  | (3,485  | ) |  | (497    | )
|                                       |  |           |  |         |   |  |         |  
|Net deferred tax assets                |  | 542       |  |        |   |  |        |  
|                                       |  |           |  |         |   |  |         |  
|Deferred tax liabilities:              |  |           |  |         |   |  |         |  
|Intangible assets, net                 |  |          |  | (1,124  | ) |  | (160    | )
|                                       |  |           |  |         |   |  |         |  
|Total gross deferred tax liabilities   |  |          |  | (1,124  | ) |  | (160    | )
|                                       |  |           |  |         |   |  |         |  
|Net deferred tax assets (liabilities)  |  | 542       |  | (1,124  | ) |  | (160    | )
|                                       |  |           |  |         |   |  |         |  

Tax operating loss carryforwards of the Company amounted to RMB9,941,000 as of March 31,
2008, which will expire during the year ended March 31, 2012.

In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those



F-23



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. As of March 31, 2007, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible or can be
utilized, management has not provided a valuation allowance because management believes it is more likely than not that the Company will realize the benefits. As of March 31, 2008, deferred income tax assets represented the acquired tax
operating loss carryforwards of BBE and other deferred tax assets identified in the BBE acquisition. BBE incurred tax operating loss through March 2008. Management believes that BBEs cumulative losses arising from recurring business in recent
years, constituted significant negative evidence that deferred tax assets would not be realizable and this evidence outweighed the Companys expectations that BBE would generate sufficient future taxable income. Therefore, a full valuation
allowance has been provided against BBEs deferred income tax assets as of the date of acquisition on January 8, 2008 and March 31, 2008. The subsequent recognition of those acquired tax benefits (by release of a valuation allowance)
will be allocated to reduce goodwill related to the acquisition of BBE. The amount of the deferred tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carry forward period also
change.

As of April 1, 2007 and for the year ended March 31, 2008, the Company did not have any unrecognized tax benefits and
thus, no interest and penalties recorded to unrecognized tax benefits were recorded. In addition, it does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to
computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, which are not clearly defined. In the case of transfer pricing issues, the statute of limitation is
ten years. There is no statute of limitation in the case of tax evasion. The income tax returns of the PRC subsidiaries for the tax calendar years 2003 to 2007 are subject to examination by the relevant tax authorities.



|12 | Related Party Transactions
|-- | --------------------------

Prior to July 31,
2006, GE China Co., Ltd. (GE) was a shareholder of the Company. Sales to GE and its related parties were RMB4,077,000 during the year ended March 31, 2006. Because of the relationship between the Company and GE at the time the sales
was made, it is possible that the terms of these transactions are not the same as those that would result from transactions with third parties. Sales for GE were generally at prices which are less than prices charged to third parties.

On March 22, 2006, the Company completed a secondary public offering of 57,500,000 shares held by certain existing shareholders. In this offering,
the selling shareholders received of the net proceeds from the sale of shares and all of the expenses, including underwriting discounts and commissions, related to this offering were funded by the selling shareholders. During the year ended
March 31, 2006, the Company received RMB10,422,000 from the selling shareholders to pay the expenses on behalf of the shareholders, which was recorded in accrued expenses and other liabilities in the accompanying balance sheet. During the year
ended March 31, 2006 and 2007, RMB802,000 and RMB9,620,000, respectively, in offering expenses were paid, respectively.

Further, upon
the completion of the secondary offering, the Company received RMB5,905,000 from certain selling shareholders to compensate the time, resources and effort of the Companys management in facilitating the secondary offering. The amount was
recorded in other income (expense) in the consolidated financial statements during the year ended March 31, 2006.



F-24



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|13 | Segment Information
|-- | -------------------

The Companys principal
operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Companys internal organization. The Companys reportable segments for the
year ended March 31, 2006, were HIFU System and ECLIA System. Following the Companys acquisition of FISH operation as described in note 3(a), the Companys three reportable segments are HIFU System, ECLIA System and FISH System.

The Companys chief operating decision-maker has been identified as the Chief Executive Officer. During the year ended March 31,
2008, the Company changed its measure of reported segment profit or loss to be gross profit (i.e., revenues less cost of revenues) in order to align the segment disclosures with the way the Chief Executive Officer assesses performance of the
segments. Prior periods have been revised to be consistent with current year presentation. The effect was to eliminate certain operating expenses that were included in previously reported segment profit or loss. The change had no impact on
previously reported gross profit by segment. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. The Company does not allocate any specific assets or expenditures for long lived assets to the
operating segments, as Chief Executive Officer does not use the information to measure the performance of the reportable segments.

The
accounting policies of the segments are the same as those used by the Company.



|                                                           |  |            |   |  |             |   |  |            |  |          |  
|---------------------------------------------------------- |  | ---------- | - |  | ----------- | - |  | ---------- |  | -------- | -
|                                                           |  | HIFUSystem |   |  | ECLIASystem |   |  | FISHSystem |  | Total    |  
|                                                           |  | RMB000    |   |  | RMB000     |   |  | RMB000    |  | RMB000  |  
|Year ended March 31, 2006                                  |  |            |   |  |             |   |  |            |  |          |  
|Revenues                                                   |  | 246,878    |   |  | 124,889     |   |  |           |  | 371,767  |  
|Cost of revenues                                           |  | (72,849    | ) |  | (37,645     | ) |  |           |  | (110,494 | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Segment income                                             |  | 174,029    |   |  | 87,244      |   |  |           |  | 261,273  |  
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Operating expenses                                         |  |            |   |  |             |   |  |            |  | (68,010  | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Operating income                                           |  |            |   |  |             |   |  |            |  | 193,263  |  
|Other income, net                                          |  |            |   |  |             |   |  |            |  | 9,790    |  
|Interest income                                            |  |            |   |  |             |   |  |            |  | 14,048   |  
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Earnings before income taxes                               |  |            |   |  |             |   |  |            |  | 217,101  |  
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Depreciation and amortization included in cost of revenues |  | (786       | ) |  | (15,773     | ) |  |           |  | (16,559  | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|                                                           |  |            |   | 
|Year ended March 31, 2007                                  |  |            |   |  |             |   |  |            |  |          |  
|Revenues                                                   |  | 331,420    |   |  | 215,550     |   |  |           |  | 546,970  |  
|Cost of revenues                                           |  | (93,864    | ) |  | (57,750     | ) |  |           |  | (151,614 | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Segment income                                             |  | 237,556    |   |  | 157,800     |   |  |           |  | 395,356  |  
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Operating expenses                                         |  |            |   |  |             |   |  |            |  | (105,085 | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Operating income                                           |  |            |   |  |             |   |  |            |  | 290,271  |  
|Other income, net                                          |  |            |   |  |             |   |  |            |  | 6,024    |  
|Interest income                                            |  |            |   |  |             |   |  |            |  | 41,970   |  
|Interest expense and amortization of debt issuance costs   |  |            |   |  |             |   |  |            |  | (18,453  | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Earnings before income taxes                               |  |            |   |  |             |   |  |            |  | 319,812  |  
|                                                           |  |            |   |  |             |   |  |            |  |          |  
|Depreciation and amortization included in cost of revenues |  | (794       | ) |  | (16,726     | ) |  |           |  | (17,520  | )
|                                                           |  |            |   |  |             |   |  |            |  |          |  



F-25



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|---------------------------------------------------------- |  | ---------- | - |  | ----------- | - |  | ---------- | - |  | -------- | -
|                                                           |  | HIFUSystem |   |  | ECLIASystem |   |  | FISHSystem |   |  | Total    |  
|                                                           |  | RMB000    |   |  | RMB000     |   |  | RMB000    |   |  | RMB000  |  
|Year ended March 31, 2008                                  |  |            |   |  |             |   |  |            |   |  |          |  
|Revenues                                                   |  | 368,317    |   |  | 380,520     |   |  | 166,901    |   |  | 915,738  |  
|Cost of revenues                                           |  | (100,999   | ) |  | (103,143    | ) |  | (142,294   | ) |  | (346,436 | )
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|Segment income                                             |  | 267,318    |   |  | 277,377     |   |  | 24,607     |   |  | 569,302  |  
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|Operating expenses                                         |  |            |   |  |             |   |  |            |   |  | (145,350 | )
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|Operating income                                           |  |            |   |  |             |   |  |            |   |  | 423,952  |  
|Other income, net                                          |  |            |   |  |             |   |  |            |   |  | 3,133    |  
|Interest income                                            |  |            |   |  |             |   |  |            |   |  | 28,649   |  
|Interest expense and amortization of debt issuance costs   |  |            |   |  |             |   |  |            |   |  | (52,315  | )
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|Earnings before income taxes                               |  |            |   |  |             |   |  |            |   |  | 403,419  |  
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  
|Depreciation and amortization included in cost of revenues |  | (892       | ) |  | (22,726     | ) |  | (73,648    | ) |  | (97,266  | )
|                                                           |  |            |   |  |             |   |  |            |   |  |          |  

The reconciliation of depreciation and amortization included in cost of revenues to consolidated
depreciation and amortization is as follow:



|                                            |  |                      |  |         |  |         |  |        
|------------------------------------------- |  | -------------------- |  | ------- |  | ------- |  | -------
|                                            |  | Year ended March 31,
|                                            |  | 2006                 |  | 2007    |  | 2008    |  | 2008   
|                                            |  | RMB000              |  | RMB000 |  | RMB000 |  | US$000
|Depreciation and amortization included in   |  |                      |  |         |  |         |  |        
|Cost of revenues                            |  | 16,559               |  | 17,520  |  | 97,266  |  | 13,871 
|Research and development                    |  | 80                   |  | 3,731   |  | 4,795   |  | 684    
|Sales and marketing                         |  |                     |  |        |  | 171     |  | 24     
|General and administrative                  |  | 2,061                |  | 6,163   |  | 4,068   |  | 580    
|                                            |  |                      |  |         |  |         |  |        
|Total depreciation and amortization expense |  | 18,700               |  | 27,414  |  | 106,300 |  | 15,159 
|                                            |  |                      |  |         |  |         |  |        



|14 | Fair Value of Financial Instruments
|-- | -----------------------------------

The carrying
amount of financial assets, such as cash, accounts receivable, other receivables, accounts payable and other current payables, approximates their fair values because of the short-term maturity of these instruments. As of March 31, 2007 and
2008, the fair value of the Convertible Notes, determined based on quoted market value, was approximately US$152,250,000 (RMB1,175,857,200) and US$222,000,000 (RMB1,556,664,000), respectively. As of March 31, 2007, the fair value of the
long-term payable related to FISH acquisition was approximately RMB67,206,000, which was determined as the present value of expected future cash flows discounted at a rate of 7.2%, representing the Companys borrowing rate for debt with similar
terms.



F-26



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



|15 | Business and Credit Concentrations
|-- | ----------------------------------

All of the
Companys customers are located in the PRC. During the year ended March 31, 2006, sales to Beijing Wei Jian Da Medical Technology Co., Ltd. and Beijing Yi Min Wei Kang Technology Co., Ltd. comprised 25% and 11%, respectively, of revenue.
The Company had no customer that individually comprised 10% or more of revenue for the years ended March 31, 2007 and 2008.

Accounts
receivable from five customers, who individually comprise 10% or more of the outstanding balance as of March 31, 2007, represented 68% of the balance of the account as of March 31, 2007. The Company has no customer that individually
comprised 10% or more of the outstanding balance as of March 31, 2008.

As of March 31, 2007 and 2008, the Companys cash
balance was held at major financial institutions located in the PRC. Further, as of March 31, 2007 and 2008, the Companys cash balance included US$ denominated bank deposits of US$74,840,000 and US$23,190,000 (equivalent to RMB578,004,000
and RMB162,608,000), respectively. Management believes that these major financial institutions are of high credit quality.

The Company is
dependent on single-source suppliers for much of the materials and major components used to manufacture its products. If the supply of certain materials or components were interrupted, the Companys own manufacturing process could be delayed
and could cause a possible loss of sales, which would adversely affect operating results. Purchases (net of VAT) made from the two local suppliers for the ultrasound imaging system and treatment bed for the years ended March 31, 2006, 2007 and
2008 were RMB53,288,000, RMB79,966,000 and RMB73,215,000 (US$10,441,000), respectively.

The Companys business is affected by
competition in the market for the products that many of the Companys major customers sell, and any decline in their businesses could reduce purchase orders from these customers. The loss of sales to any of these customers could have a material
adverse effect on the Companys business and results of operations. Furthermore, these customers have sought, from time to time, to prospectively renegotiate the pricing terms of their current agreements with the Company or obtain more
favorable terms upon renewal of the contracts. Any adverse revisions to the material terms of the Companys agreements with its key customers could have a material adverse effect on its business and results of operations.



|16 | Share-Based Compensation
|-- | ------------------------

On February 2, 2005,
the Company adopted the 2005 stock option plan (the Plan) pursuant to which the Companys Board of Directors may grant stock options to directors and employees. The Company has reserved an aggregate of 30,000,000 of its ordinary
shares for issuance under the Plan. The Plan will remain in effect for 5 years starting from the date of adoption.

On November 12,
2006, the Company adopted the Amended and Restated 2005 Stock Option Plan (the Restated Plan) pursuant to which the Companys Board of Directors may grant stock options to employees, directors and consultants. The Restated Plan is
administered by an administrative committee. The per share exercise price of the option for the ordinary shares shall be such price, determined by the administrative committee. The Restated Plan will remain in effect for 5 years starting from the
date of adoption.



F-27



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



Restricted shares

Prior to March 31, 2007, no shares were granted. On June 11, 2007, the Company granted 1,800,000 restricted shares, equivalent to 180,000 ADSs to certain directors and management personnel. The restricted
shares vest over a period of three years commencing from the date of grant.

On October 1, 2007 and November 16, 2007, the
Company granted a total of 120,000 restricted shares, equivalent to 12,000 ADSs to new independent directors. The restricted shares vest over a period of three years commencing from the date of grant.

Share-based compensation expense with respect to the restricted shares was measured based on the fair value of the Companys ordinary shares at the
date of grant and is recognized on a straight-line basis over the three-year vesting period. The grant-date fair value of restricted shares is based on the market price of the Companys ADR on the grant date.

No compensation cost for restricted shares was recognized for the years ended March 31, 2006 and 2007. The amount of compensation cost recognized
for restricted shares was RMB14,225,000 (US$2,029,000) for the year ended March 31, 2008 of which RMB1,336,000 (US$191,000) was recorded as research and development expenses and RMB12,889,000 (US$1,838,000) was recorded as general and
administrative expenses. No income tax benefit was recognized in the income statement for these restricted shares as such compensation expenses were recorded and incurred by China Medical Technologies, Inc., a Cayman Islands incorporated entity.

A summary of the restricted share activity for the year ended March 31, 2008 is as follows:



|                                 |  |                           |   |  |                                     |  
|-------------------------------- |  | ------------------------- | - |  | ----------------------------------- | -
|                                 |  | Number ofRestrictedshares |   |  | Grant DateWeightedAverageFair value |  
|                                 |  |                           |   |  | US$                                 |  
|Balance as of April 1, 2007      |  |                          |   |  |                                    |  
|Granted                          |  | 1,920,000                 |   |  | 5,064,000                           |  
|Vested                           |  |                          |   |  |                                    |  
|Forfeited                        |  | (90,000                   | ) |  | (227,700                            | )
|                                 |  |                           |   |  |                                     |  
|Balance as of March 31, 2008     |  | 1,830,000                 |   |  | 4,836,300                           |  
|                                 |  |                           |   |  |                                     |  
|Exercisable as of March 31, 2008 |  |                          |   |  |                                    |  
|                                 |  |                           |   |  |                                     |  

Stock options

On August 8, 2005, the Company granted options to purchase an aggregate of 400,000 ordinary shares, equivalent to 40,000 ADSs, at an exercise price of US$1.50 per share (August 2005 Option) to two
directors. The share options vest over a period of two years and expire on December 31, 2009.

On June 11, 2007, the Company
granted 750,000 share options, equivalent to 75,000 ADSs to certain management personnel at an exercise price of US$2.53 per share (June 2007 option). The share options vest over a period of three years and expire on May 31, 2012.

The amount of compensation cost recognized for share options was RMB238,000, RMB1,260,000 and RMB2,435,000 (US$347,000) for the year ended
March 31, 2006, 2007 and 2008, respectively, of which RMB



F-28



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



nil, RMB nil and RMB1,461,000 (US$208,000), respectively, was recorded as research and development expenses, and RMB238,000, RMB1,260,000 and RMB974,000
(US$139,000) respectively was recorded as general and administrative expenses. No income tax benefit was recognized in the income statement for these share options as such compensation expenses were recorded and incurred by China Medical
Technologies, Inc., a Cayman Island incorporated entity.

Stock option activity during the periods indicated is as follows:



|                                             |  |                  |   |  |                              |  |                                         |  |                        
|-------------------------------------------- |  | ---------------- | - |  | ---------------------------- |  | --------------------------------------- |  | -----------------------
|                                             |  | Numberof options |   |  | Weightedaverageexerciseprice |  | Weightedaverageremainingcontractuallife |  | Aggregateintrinsicvalue
|                                             |  |                  |   |  | US$                          |  | Years                                   |  | US$                    
|Balance as of March 31, 2005                 |  | 400,000          |   |  | 1.36                         |  |                                         |  |                        
|Granted during the year ended March, 31 2006 |  | 400,000          |   |  | 1.50                         |  |                                         |  |                        
|Balance as of March 31, 2006 and 2007        |  | 800,000          |   |  | 1.43                         |  |                                         |  |                        
|Granted                                      |  | 750,000          |   |  | 2.53                         |  |                                         |  |                        
|Exercised                                    |  | (466,660         | ) |  | 1.48                         |  |                                         |  |                        
|Forfeited                                    |  |                 |   |  |                             |  |                                         |  |                        
|                                             |  |                  |   |  |                              |  |                                         |  |                        
|Balance as of March 31, 2008                 |  | 1,083,340        |   |  | 2.17                         |  | 3.07                                    |  | 2,100,600              
|                                             |  |                  |   |  |                              |  |                                         |  |                        
|Exercisable at March 31, 2008                |  | 333,340          |   |  | 1.36                         |  | 0.61                                    |  | 916,400                
|                                             |  |                  |   |  |                              |  |                                         |  |                        

The weighted average option fair value of US$0.39 (RMB3.16) per share or an aggregate of
RMB1,265,000 (US$156,000) for the options granted on August 8, 2005 was estimated using the Black-Scholes option-pricing model. The weighted average option fair value of US$0.90 (RMB6.92) per share or an aggregate of RMB5,189,000 (US$677,000)
for the options granted on June 11, 2007, the date of grant was estimated using the Hull and White Binomial option-pricing model. The following assumptions were used to estimate the fair value of the options:



|                                          |  |                   |  |                
|----------------------------------------- |  | ----------------- |  | ---------------
|                                          |  | August 2005Option |  | June 2007Option
|Option granted                            |  | 400,000           |  | 750,000        
|Average risk-free interest rate of return |  | 4.216%            |  | 5.07%          
|Early Exercise Multiple                   |  |                  |  | 2.0x           
|Expected Exit Rate (Post-vesting)         |  |                  |  | 5.0%           
|Weighted average expected option life     |  | 3 years           |  |               
|Volatility rate                           |  | 30.00%            |  | 40.00%         
|Dividend yield                            |  | 0.0%              |  | 1.1%           
|Share price                               |  | US$1.50           |  | US$2.53        

The fair value of the Companys ordinary shares issuable under the options granted on
August 8, 2005 was determined by the Company with reference to the estimated price range of US$1.40 to US$1.60 per ordinary share and with discussions with the underwriter of the Companys IPO. Accordingly, no share-based compensation was
recorded under APB No. 25 as the exercise price of US$1.50 per ordinary share is the same as the estimated fair value of US$1.50 per ordinary share in respect of 400,000 ordinary shares issuable under the options granted on August 8, 2005.



F-29



---

##### Table of Contents

CHINA MEDICAL TECHNOLOGIES, INC.

Notes to the Consolidated Financial Statements (continued)

For the years
ended March 31, 2006, 2007 and 2008



As of March 31, 2008, there was RMB20,047,000 (US$2,859,000) of total unrecognized compensation
cost related to stock options and restricted shares. This cost is expected to be recognized over a weighed average period of 1.68 years.



|17 | Commitments and Contingencies
|-- | -----------------------------



| | (a) | Operating lease obligation
| | --- | --------------------------

Rental expense under operating leases was RMB1,268,000, RMB3,855,000 and RMB5,801,000 (US$827,000), for the years ended March 31, 2006, 2007 and 2008, respectively. As of March 31, 2008, total future minimum lease payments under
non-cancellable operating leases are as follows:



|                      |  |        
|--------------------- |  | -------
|                      |  | RMB000
|Year ending March 31, |  |        
|2009                  |  | 5,987  
|2010                  |  | 1,992  
|2011 to 2013          |  |       
|                      |  |        
|                      |  | 7,979  
|                      |  |        



| | (b) | Purchase obligation
| | --- | -------------------

In
December 2005, BBE entered into an agreement with a supplier to purchase ECLIA analyzers for RMB18,000,000 at a unit price of RMB60,000 over a three year period commencing from January 1, 2006. As of March 31, 2008, BBE has purchased ECLIA
analyzers amounting to RMB4,800,000 from this supplier.



|18 | Subsequent events
|-- | -----------------



| | (a) | Declaration of dividend
| | --- | -----------------------

On
June 6, 2008, the Companys Board of Directors declared a cash dividend on the Companys ordinary shares of US$0.05 per share, equivalent to US$0.5 per ADS to the shareholders of record as of July 25, 2008. As a result of the
declaration of dividend by the Company and pursuant to the terms of the indenture governing the Convertible Notes, the conversion rate of the Convertible Notes will be adjusted based on the closing market price of the Companys ADS on
July 25, 2008 and the conversion price of the Convertible Notes was subject to change.



| | (b) | Share-based compensation
| | --- | ------------------------

On
June 6, 2008, the Company granted 3,560,000 restricted shares, equivalent to 356,000 ADSs to certain directors, officers and employees. The restricted shares will vest over a period of three years.



F-30