UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D. C. 20549





FORM
10-K





x
            Annual
      Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For
      the Fiscal Year endedDecember
      31, 2008.





 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from _____________to______________





Commission
File No. 0-23416





MODERN MEDICAL MODALITIES
      CORPORATION





(Exact
name of registrant as specified in its charter)





New Jersey
                            
                            
                            22-3059258(State
      or other jurisdiction of
                            
                            
                            (I.R.S.
      Employer Identification No.)Incorporation
      or organization)





439 Chestnut Street, Union, NJ
      07083(Address
      of principal executive offices) (Zip
code)





Registrant's telephone number, including area
      code: (908) 687-8840Securities
      registered pursuant to Section 12(b) of the
Act:





Title of each Class Name of each Exchange on which
      RegisteredNot
      Applicable
None





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





Common
Stock, $.0002 Par Value


(Title
of Class)





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 o.





Check if there is no disclosure of
delinquent filers in response to Item 405 contained in this form, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K o.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer    o       Accelerated
filer   o        Non-accelerated
filer    o       Smaller
reporting company   x





Indicate
by check mark whether registrant is a shell company, as defined in Rule 12b-2 of
the Exchange Act. Yes o No x





The
issuer's net sales for the most recent fiscal year were $
7,333,904.





The
aggregate market value of the voting stock held by non-affiliates based upon the
last sale price on March20,2009 was approximately
$189,454.66.





As of
March 20, 2009 there were 25,673,385 shares of Common Stock, par value $.0002
per share, outstanding.





FORWARD
LOOKING STATEMENTS





Some of
the statements under “Management’s Discussion and Analysis of Financial
Condition or Plan of Operations,” and “Description of Business” in this Annual
Report on Form 10-K are forward-looking statements.  These statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by forward-looking statements.





In some
cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative
of these terms or other comparable terminology.  You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other “forward-looking” information.  There may be
events in the future that we are not able to accurately predict or
control.  Before you invest in our securities, you should be aware
that the occurrence of any of the events described in this Annual Report could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your
investment.  Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, growth rates, levels of activity, performance or
achievements.  We are under no duty to update any of the
forward-looking statements after the date of this Annual Report to conform these
statements to actual results.





PART
I





Item 1.
Business





We
provide healthcare administrative, clinical, and information services that are
supported by our advanced, web-based, enterprise-wide information system. Our
network of healthcare services is currently focused on the diagnostic imaging
services specialty market, and has the capacity to service other multi-specialty
markets. Our healthcare services are delivered through a network of owned
diagnostic imaging centers, joint venture operations, and contractual services
agreements. The healthcare management services include marketing, procurement of
medical equipment, facilities construction and maintenance, recruitment and
training of technical and support staff, and administrative and information
services, such as leasing, managed care and contract management, human
resources, inventory management, and medical records, and billing and
collections. The healthcare clinical services include magnetic resonance imaging
(MRI), computerized axial tomography
(CT Scan), positron emission tomography (PET), ultrasound, densitometry,
mammography, nuclear medicine, and general radiography (X-ray).





We
believe that our network of centers are being optimized by providing a full
array of management and imaging services to better meet the varied needs of our
customers, providers of care, and other participants in our growing network. In
addition, we are seeking to maximize the productivity and quality of each center
that we own, as well as of each network of centers we contract with, by
providing integrated technology solutions through state-of-the art medical
equipment and industry leading information management systems.





As of
December 31, 2008, we own, operate, and manage three diagnostic imaging centers
located in New Jersey. The Company's ownership interests range from 50% to 100%.
On January 30, 2009, we and our wholly-owned subsidiaries, Union Imaging
Associates, Inc., a New Jersey corporation, Union Imaging Center, LLC, a New
Jersey limited liability company, and PET Scan at Union Imaging, LLC, a New
Jersey limited liability company, entered into an Asset Purchase Agreement (the
“Agreement”) with Health Diagnostics of New Jersey, L.L.C. (“HD”), a New Jersey
limited liability company, pursuant to which HD agreed to purchase substantially
all of the assets used by or in connection with the Seller Companies’ Imaging
Centers, for cash consideration in the amount of $8,800,000 (the “Purchase
Price”) minus (a) any liabilities paid off or assumed by HD on the Closing Date
of the Asset Sale, not to exceed $1,600,000 in the aggregate, (b) a $1,200,000
credit to HD for capital expenditures and leasehold improvements, and (c) the
amount, if any, by which the Closing Date working capital (the “Closing Date
Working Capital”) of the Seller Companies falls short of $525,000 in the
aggregate (a “Closing Date Working Capital Shortfall”).  If the
Closing Date Working Capital exceeds $525,000 then HD will pay us such excess
amount.  HD will determine the Closing Date Working Capital within 90
days of the Closing Date.  We will have the right to dispute and
propose adjustments to HD’s calculation of the Closing Date Working Capital in
accordance with the procedures set forth in the Agreement. Assuming we satisfy
the conditions to completing the Asset Sale, the Closing Date is estimated to be
on or before March 31, 2009.  If the Closing Date does not occur on or
prior to that date or if any of the conditions to the closing are not satisfied
on or prior to that date, we, the Seller Companies and HD shall each have the
right to terminate the Agreement. If the Closing does occur, we intend to focus
on providing more outsourced information and administrative services through our
wholly-owned subsidiary HealthIXS, in order to expand into the more profitable
information and administrative services markets.  In addition, we may
invest the proceeds of the Asset Sale in businesses or ventures that may or may
not be synergistic with our past operations or our remaining information and
administrative services business operated by HealthIXS.  HealthIXS has
not generated any revenues thus far.  We have not identified any
proposed investments at this time.








On a
consolidated basis, we currently recognize the majority of our revenues from a
range of diagnostic imaging services that allow us to leverage the variety of
imaging systems in our network of centers, in order to potentially increase
operating income once fixed costs are more rapidly covered with higher volumes
of procedures performed. As we are in the process of selling our diagnostic
imaging business, we are creating the infrastructure to expand our revenues
through management services contracts with an increasing emphasis on providing
web-based, comprehensive information services as the healthcare outpatient
services and related markets to continue to grow and operate within larger
networks.





Our
diagnostic imaging centers are dependent on referrals from physicians and other
healthcare professionals, and if the Asset Sale does not occur, we intend to
conduct direct marketing activities to consumers in order to supplement our
valued referrals. In addition, the Company accepts referred patients that are
insured through managed care contracts that help keep a more consistent volume
of business flowing while requiring more competitive rates for procedures
performed. If the Asset Sale does not occur, we expect to continue to better
integrate the optimal mix of managed care and traditional insurance covered
services and reimbursements with consumer driven on-demand services and payments
while maximizing the ratio of effective diagnostic imaging utilization over
capacity in each center, and maintaining high quality patient outcomes and
overall service.





We have
also positioned ourselves to expand our business and participate more in
outsourced management services and the expanding, more profitable information
and administrative services markets, and intend to seek out more networks of
clinics and other outpatient facilities through joint ventures and collaborative
contractual arrangements with hospitals, physician managed ambulatory centers,
payers, and other key participants in the industry. In order to support our
business expansion, we acquired advanced software assets and added
customizations to produce an integrated information system that will allow us to
provide better management and related services and improve overall
profitability.





On
February 28, 2007 Modern Medical Modalities Corporation entered into an Asset
Purchase Agreement (the "Agreement") with MTI Partners II, L.P. ("MTI-II") to
acquire MTI-II's Medical Software Assets (the "Assets") in exchange for 1
million shares of the Company's common stock. The transaction closed on March
23, 2007. The Assets consist of medical computer software that organizes,
manages, and maintains patient scheduling, registration, medical records,
billing, and includes other customized components. The shares of common
stock  were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended. Paul Harrison, a member of the Company's
Board of Directors, is the President of INEX Group, Inc., which serves as the
General Partner of MTI-II. Mr. Harrison will be entitled to receive 562,500
shares of the Company's common stock issuable to MTI-II pursuant to this
Agreement.








On
September 14, 2007 we entered into an Asset Purchase Agreement (the "Agreement")
with MTI Partners II, L.P.("MTI-II") to acquire MTI-II's Healthcare Payer Admin
Software Asset (the "Asset") in exchange for 500,000 shares of our common stock
("Common Stock"), warrants ("Warrants") for 900,000 shares of our common stock
with an exercise price of $0.70 per share, and $250,000 to be paid within 12
months from the date of the Agreement. The transaction closed in October,
2007.The Asset
consists of healthcare payer admin computer software that helps organize,
manage, and maintain health plans, membership, eligibility, claims
administration, and includes other customized components. The shares of Common
Stock were issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended. Paul Harrison, a member of the Board
of Directors of MODM, is the President of INEX Group, Inc., which serves as the
General Partner of MTI-II. Mr. Harrison will be entitled to receive 281,250
shares of our Common Stock, and a Warrant for 506,250 of our Common Stock with
an exercise price of $0.70 per share issuable to MTI-II pursuant to this
Agreement. On
February 28, 2008, we filed a Certificate of Incorporation for HealthIXS
Corporation, a newly formed subsidiary of Modern Medical Corporation. HealthIXS
was formed to focus on using our health information system to provide
information and administrative services to healthcare organizations. Our health
information system is based on the integration of the software assets acquired
on February 28, 2007 and September 14, 2007 and value-added customizations that
has culminated into a health common system platform with a comprehensive array
of software applications that can be used to provide web-based information and
administrative services.





UNION
JOINT VENTURE





In July
1990, Modern Medical entered into a Joint Venture Agreement with Union Imaging
Associates, Inc. for the purpose of providing magnetic resonance and CT Scan
imaging services to radiologists and other medical professionals, including
leasing and financing equipment for use in such business. Modern Medical serves
as the managing joint venture pursuant to the Union joint venture agreement and
provides a comprehensive range of management services for the business
including:





o     Hiring
of personnel;


o     Leasing
equipment;


o     Budgeting;


o     Contracting;


o     Billing;


o     Paying
debts;


o     Making
lease payments;


o     Information
services; and


o     Making
distributions to the joint venturers.





Initially
Modern Medical owned 10% and Union Imaging Associates Inc. owned 90% of the
Joint Venture. Starting in 2003 Modern Medical began acquiring shares of Union
Imaging Associates, Inc. and as a result increased its ownership to 50% of the
Union Joint Venture at the end of 2003 and acquired additional shares in Union
Imaging Associates, Inc., further increasing its interest in Union Imaging
Associates, Joint Venture during 2004, from 50% to 80%.  On September
1, 2006, we purchased Dr. Wolkstein's share of his ownership interest in Union
Imaging Associates, Inc. ("UIA, Inc.") in exchange for 350,000 shares of the
Company's common stock with a valuation of $154,000 at the time of purchase, and
a note for $27,000 to be paid in 18 payments of $1500.00 per month. The 350,000
shares of common stock were issued on October 20, 2006. As a condition of the
purchase, the Company agreed to re-purchase the 350,000 shares from Dr.
Wolkstein for $75,000 if for any consecutive 20 day period commencing September
1, 2008 through the last day of February 2009, the stock price was below $1.00
per share. The purchase of Dr. Wolkstein's ownership interest brings the
Company's total ownership in UIA, Inc. to 88.98 %.  On June 20, 2008,
we purchased Dr. Haidri’s share of his ownership interest in Union Imaging
Associates, Inc. ("UIA, Inc.") in exchange for 150,000 shares, of the Company's
common stock with a valuation of $15,000 at the time of purchase, and a note for
$36,000 to be paid in 18 payments of $2,000.00 per month. The 150,000 shares of
common stock were issued on August 28, 2008. As a condition of the purchase, the
Company agreed to re-purchase the 150,000 shares from Dr. Haidri for $45,000 if
for any consecutive 20 day period during the first 90 day period commencing at
the end of the fifteenth month subsequent to June 20, 2008, the stock price was
below $0.30 per share. The purchase of Dr. Haidri’s ownership interest brings
the Company's total ownership in UIA, Inc. to 100%.





The
assets of Union Imaging Associates Joint Venture are being sold to HD as part of
the Asset Sale.





Union
Imaging Center, LLC





In
February 2004, Modern Medical established Union Imaging Center LLC, a wholly
owned subsidiary, to acquire and manage a multi-modality imaging center, in
Union, NJ. There was a $225,000 note with $25,000 down and a monthly payment of
$6,666.67 for 30 months beginning 90 days after closing.  This
obligation was fully paid in mid 2007.  Union Imaging Center, LLC,
does approximately $2,700,000 in revenues per year.  It is adjacent to
our Union Imaging Associates; the combined radiology practices offer a full
range of imaging services.  The assets of Union Imaging Center, LLC
are being sold to HD as part of the Asset Sale.





PET Scan
at Union Imaging, LLC





PET Scan
at Union Imaging, LLC is an equal partnership between Union Imaging Associates
and Medical Equipment Solutions. The Partnership was formed in 2003 to acquire a
Positive Emission Tomography Unit or PET Scanner. The PET Scan center was
licensed and opened in March 2004. Modern Medical is the managing
partner.  The assets of  PET Scan at Union Imaging, LLC are
being sold to HS as part of the Asset Sale.





Modern
Medical Imaging at Atrium LLC





In July,
2006, we entered into a Letter of Intent to divest its ownership interests in
Modern Medical Imaging at Atrium, L.L.C., a Limited Liability Company ("the
L.L.C."). The transaction was structured in the form of a sale of the L.L.C.
whereby 100% of the membership interest is acquired, in exchange for $250,000 in
cash with specific provisions included for the timing of payments with the
majority of payment due at closing. In addition, assignments will be included
for the Company to assume certain accounts receivables and accounts payables as
of the closing date of the transaction. On September 1, 2006, we entered into a
definitive agreement with a privately-held organization and sold the
organization our ownership interests in Modern Medical Imaging at Atrium, L.L.C.
for $250,000 under essentially the same terms and conditions as described above
and outlined in the Letter of Intent. Even though the new owners of the Imaging
Center at Atrium assumed the liabilities of the business, the Company is
contingently liable for a long term facility lease, and medical equipment
contracts.  The purchaser of Modern Medical Imaging at Atrium, LLC,
subsequently acquired the condominium property housing the imaging center
terminating the long term facility lease that we were contingently liable
for.


Medical
imaging industry and systems:





Modern
Medical has focused on the advanced imaging technologies of MRI and CT Scan.
Management believes that the use of these technologies has grown significantly
in the U.S. during the last several years. This growth is attributable to
physicians' beliefs that diseases can be detected in their early stage, in a
non-invasive manner, through the use of MRI and CT Scan. Hospitals are facing
competitive pressures to provide technology and related services despite strict
budgetary limitations. Changes in third party reimbursement systems have
resulted in declining profit margins for many hospitals, thus reducing capital
available to hospitals and the traditional incentives to purchase or lease
equipment and pass such costs through to third parties. By leasing equipment and
purchasing services from third parties, hospitals are able to conserve their
limited capital resources for other purposes and reduce the risks associated
with technological obsolescence and under-utilization of equipment and services.
As a result hospitals are increasingly utilizing companies that provide MRI and
CT Scan equipment, such as Modern Medical, in order to decrease their equipment
and personnel costs. Medical diagnostic imaging systems facilitate the diagnosis
of disease and disorders at an early stage, often minimizing the amount and cost
of care needed to stabilize or cure the patient and frequently obviating the
need for invasive diagnostic procedures, such as exploratory surgery. Diagnostic
imaging systems are based on the ability of energy waves to penetrate human
tissue and generate images of the body, which can be displayed either on film or
on a video monitor. Imaging systems have evolved from conventional x-ray to the
advanced technologies of MRI and CT Scan.





MRI is an
advanced imaging system that uses a strong magnetic field and radio waves to
allow physicians to explore the inner workings of the human body. The pictures
produced by this technology assist the doctor in detecting and defining the
differences between healthy and diseased tissue.





CT is a
specialized method of examining various body parts using x-rays and computer
reconstruction to form a cross sectional image. During the exam the-ray tube
travels completely around the body and the computer reconstructs the information
to form a cross sectional image. A series of these images, or slices, is taken
through the area of interest, providing the physician with a detailed look at
structures not otherwise seen with regular X-rays.





Our
services:





Modern
Medical provides full managerial responsibility and control over facility
operations at our medical technology centers, and offers the full range of
services discussed below. The needs of a particular hospital or physician group
determine the extent of the services offered in each instance, which Modern
Medical can deliver either on a limited basis or through a full service medical
technology center. In addition, a physician and a physician group provide
professional services and interpret MRI or CT Scans. Modern Medical does not
engage in the practice of medicine. Such physicians are not employees of Modern
Medical. However, the most significant cost of operating an imaging center is
the capital and finance costs of equipment.





Modern
Medical provides equipment and related services, technical and support staffing,
marketing, patient scheduling, billing and collection and management in all of
Modern Medicals sites located throughout New Jersey, and has positioned itself
to expand the information based side of the business by providing more
information services with the support of its web-based, enterprise-wide
information system.





Equipment
and related services.





Modern
Medical consults with its potential clients and existing clients to identify the
equipment best suited to meet the client's needs on a cost-effective basis.
Modern Medical then acquires the equipment through lease/purchase agreements. In
addition, Modern Medical assists the hospital or physicians and their personnel
in complying with licensing and other regulatory requirements, which consist of
all applicable county building permits and architectural filings as well as
filing all necessary equipment registration forms with the applicable state
agencies. Modern Medical supervises the installation and testing of the
equipment and provides periodic inspection of the equipment at the facility.
Modern Medical undertakes to maintain its clients' equipment and typically
enters into agreements with equipment manufacturers or other third parties for
the delivery of maintenance services.





Technical
and support staffing.





Modern
Medical provides technologists who operate the equipment at the facility. Modern
Medical trains and provides on-going safety instruction and educational programs
for its technologists as well as the hospital's technologists. Modern Medical
also provides clerical personnel to provide administrative duties such as
scheduling and answering phone inquiries.





Marketing.





Modern
Medical provides its customers with marketing services, including the design and
formulation of a marketing program for each facility to inform physicians in the
community as to the technology and services available at the facility. Modern
Medical also provides marketing personnel who market patient referral sources,
including HMOs and other health plans.





Patient
scheduling, billing and collection at the medical technology
centers.





Modern
Medical schedules patient appointments, prepares all patient billing and is
responsible for collection. In providing billing and collection services, Modern
Medical bills the patients directly and, therefore, assumes the credit risk on
such billings and any delays attendant to reimbursement through governmental
programs or third party payors. Modern Medical also is responsible at the
centers for related administrative and record-keeping functions and all
management information services.





Delivery
of our services:





Modern
Medical delivers its services to its customers through either contractual
arrangements with hospitals and clinics or medical technology center
arrangements with hospitals or physician groups, as discussed below. Modern
Medical may acquire or contract with imaging centers utilizing a variety of
ownership vehicles and collaborative agreements. Presently, Modern Medical
operates its sites under joint venture agreements. Below is a description of
Modern Medicals medical technology centers and radiology group
centers:





Medical
technology centers. Modern Medical will establish a medical technology center
within a hospital or with a physician group through which Modern Medical will
offer its full range of services. A hospital center is located on hospital
campus, is affiliated with that hospital and provides both inpatient and
outpatient services.





In
addition to the equipment and facility services provided in its arrangements,
Modern Medical provides at a medical technology center all technical and support
staffing, expanded marketing services, patient scheduling, billing and
collection services, management information systems, and other management
services.





Radiology
group centers. Modern Medical began its medical technology center operations by
establishing freestanding, outpatient-imaging centers with groups of
radiologists.





In most
cases Modern Medical is approached by a group of physicians or hospitals that
are looking to install a MRI or CT scanner. Modern Medical first reviews the
location that the equipment is to be placed in and reviews a general outline or
business plan. Information that is presented includes other centers in the area,
patient financial
class, patient demographics in the area served, and potential referring
physicians. In the case of a hospital, Modern Medical requests the number of MRI
and CT scans that the hospital sends to other facilities. Modern Medical also
contacts neighboring sites to determine the waiting time for scheduling an exam
to see if patients are waiting an excessive amount of time for an exam. Modern
Medical contacts potential referring physicians to determine if they are
experiencing problems with existing facilities and if they would support a new
facility. Managed care groups' anthems are contacted to determine if contracts
for providing service are available and to ascertain the membership in their
service area of the potential new sites. If the site is considered to be
positive a request is made to the various equipment manufacturers for a bid on
the equipment Modern Medical deems necessary. Modern Medical then makes a
determination as to the financial viability of the project. Based on the
criteria above, Modern Medical reviews each site to determine whether the site
can generate revenues to support the costs associated with the operation of the
site.





Our
growth strategy and marketing plan





We expect
to grow through a combination of acquisitions and direct marketing of our
services to physicians and hospitals through various methods. We entered into an
Asset Purchase Agreement (the “Agreement”) with HD.  The Agreement
with HD included a non-competition provision. The non-competition provision
calls for a period commencing on the Closing Date and ending on the third (3rd)
anniversary of the Closing Date, no Seller Company nor Parent shall, without the
prior written consent of Purchaser, (a) directly or indirectly, own, manage,
operate, control or participate in any manner in the ownership, management,
operation or control of, or serve as a partner, director, employee, manager,
principal, agent, consultant or otherwise contract with, or have any financial
interest in or with, or aid or assist any other person or entity that operates
imaging equipment or an imaging facility or competes with an Imaging Center or
the Business within a twenty five (25) mile radius of any Imaging Center or any
other imaging centers managed by Purchaser, and (b) in any capacity, either
separately, jointly or in association with others, directly or indirectly do any
of the following:  (i) employ or seek to employ any Person or agent
who is then employed or retained by the Business, Purchaser or its Affiliates
(or who was so employed or retained at any time within the two (2) years prior
to the date a Seller Company or Parent employs or seeks to employ such Person);
(ii) solicit, induce, or influence any proprietor, partner, stockholder, lender,
director, officer, manager, employee, joint venturer, investor, consultant,
agent, lessor, supplier, customer or any other Person that has a business
relationship with the Business, Purchaser or its Affiliates, to discontinue or
reduce or modify the extent of such relationship with the Business, Purchaser or
its Affiliates; or (iii) submit, solicit, encourage or discuss any proposal,
plan or offer to acquire an interest in any of the Business’, Purchaser’s or its
Affiliates’ identified potential acquisition candidates.  The clinics
and medical centers may include complimentary multi-specialty healthcare centers
that enhance the network of services being provided by us. The direct marketing
methods include telemarketing, direct solicitation, direct mail, and sponsorship
of in service education programs for physicians and technical staff, and
personal visits to physician offices. Modern Medicals management also attends
many of the large radiology and other selected healthcare shows throughout the
country.








Modern
Medical is pursuing a strategy of building a network of more participants using
its enterprise-wide information system, which will include additional hospital
centers and physician managed ambulatory centers. In addition to acquiring new
business, we expect to continue to engage in intensive marketing in areas of
specialized physician groups, chiropractors, health maintenance organizations
(HMO), preferred provider organizations (PPO), union locals, municipalities and
insurance companies. Modern Medical currently negotiates discounts with large
suppliers of patients, as allowed by law. Modern Medical's objective is to
respond to the concerns of spiraling health care costs while maintaining quality
of care to the patient. Increased volume and improved information management
results in a reduction of the cost of each procedure because fixed costs at each
facility are spread over a larger number of procedures. This reduction in cost
is passed along to Modern Medicals contracted clients. In addition, in order to
increase patient volume, Modern Medical has expanded its hours of operations,
including extended hours during the week and weekend scheduling.





Modern
Medical applies a variety of criteria in evaluating each prospective customer.
These criteria include: (a) the extent of the hospitals' present diagnostic
imaging services; (b) its competitive environment; (c) the size and type of
facility; (d) the number of referring physicians and their specialties; (e)
patient volume; and (f) the nature of the payors (private insurance programs,
government reimbursement programs or other health or medical
organizations).





Modern
Medical’s plan of operation will be to continue to expand the equipment use of
its current customers, and Modern Medical has entered into an Asset Purchase
Agreement, which may change its plan of operation (see Part 1 - Item 1 in the
Business section above). Modern Medical will, with its direct marketing efforts,
continue to seek new clients, either through the acquisition of complementary
businesses or the establishment of new centers. Modern Medical currently does
not have any agreements to acquire complementary businesses. Equipment and
supplies





Modern
Medical obtains its medical equipment and ancillary supplies from various
manufacturers, including, but not limited to, General Electric, Siemens,
Philips, Konica and Kodak. Modern Medical is not dependent on any one supplier
and believes that it has good relationships with its suppliers. Equipment
acquisition costs can range dramatically depending upon the model and peripheral
equipment acquired. Installation and maintenance costs on the equipment can be
substantial, particularly with respect to MRI units. Installation costs can
range from $250,000 to $500,000 for an MRI unit depending on the particular
installation circumstances, such as excavation costs, electrical problems (i.e.
bringing additional power into the facility), delays in construction and
problems encountered in installing the equipment. Maintenance costs on a unit
can be as high as $150,000 per year. Modern Medical typically enters into
agreements with equipment manufacturers or other third parties for equipment
maintenance.





Either
Modern Medical or its joint venture finances equipment, typically over a
sixty-month period, with the lender or leasing company. In each case the
equipment serves as security for the loans and in certain instances the lessor
requires a corporate guarantee for a percentage of the amount being financed,
which is based on the financial projections of the equipment purchased. Modern
Medical leases the majority of its medical equipment.





Modern
Medical's equipment and supplies are available from a variety of sources. The
loss of any single supplier is not expected to have a material adverse effect on
Modern Medical.





Governmental
reimbursement and regulations of our business.





In major
areas of its business, Modern Medical relies on third party reimbursement for
payment of its services, which is typically the federal government. Its charges
are predominantly paid either directly by third-party payors or by its clients,
which in turn receive reimbursement from such sources. Extensive payment delays
are not uncommon and adversely affect our operations while awaiting
payment.





The
centers with which Modern Medical is affiliated all participate in many
reimbursement programs including Medicare and Medicaid as well as private
insurers. Under these arrangements the center agrees to accept the approved
amount of reimbursement from each individual payor. In certain cases the amount
billed may exceed the predefined fee schedule, resulting in an amount to be
written off by Modern Medical as disallowed.





Regulations.





Congress
has enacted certain legislation, referred to as Anti-Kickback Laws, in order to
curb the potential for fraud and abuse under the Medicare and Medicaid programs.
Anti-Kickback Laws prohibit the payment or receipt for referring patients to a
healthcare provider if such payments may be made in whole or in part by the
Medicare or Medicaid programs. New Jersey and some other states have enacted
similar laws.





The
Anti-Kickback Laws apply both to the provider making, as well as receiving, the
referral. Violation of the Anti-Kickback Laws is a criminal felony punishable by
fines of up to $25,000 and/or up to five years imprisonment for each count.
Federal law also permits the Department of Health and Human Services, or HHS, to
impose civil fines against violators of the Anti-Kickback Laws and to exclude
them from participation in the Medicare and Medicaid programs. These civil
sanctions can be levied under circumstances that do not involve the more
rigorous requirements and standards of proof required in a criminal
trial.




In 1991,
New Jersey enacted the Health Care Cost Reduction Act, or so-called "Codey
Bill", (N.J.S.A. 45: 9-22.4 et seq.) which provided that: a medical practitioner
shall not refer a patient, or direct one of its employees to refer a patient, to
a health care service in which the practitioner and/or the practitioner's
immediate family has any beneficial interest;





For
beneficial interests, which were created prior to the effective date of the Act,
July 31, 1991, the practitioner could continue to refer patients, or direct an
employee to do so, if the practitioner disclosed such interest to his patients.
The disclosure must take the form of a sign posted in a conspicuous place in the
practitioner's office. It must inform the patients of the beneficial interest
and state that a list of alternative health care service providers could be
found in the telephone directory, and all physicians who refer in the sites in
New Jersey and also have a financial interest in those sites must have a
signposted as mandated by the law.





The
federal "Ethics in Patient Referrals Law of 1989", often referred to as the
"Stark Bill", prohibits a physician who has a financial relationship with an
entity from making referrals to the entity for the furnishing of clinical
laboratory services for which payment is made under the Medicare or Medicaid
programs. The Stark Bill, passed with an effective date of January 1, 1995,
expands the application of the Medicare ban on self- referrals after December
31, 1994.





As of the
date of this filing, Modern Medical has not experienced any material adverse
effects of limited Medicare and Medicaid referrals and has not experienced any
material adverse effect as a result of the "Codey Bill", the "Stark Bill", or
any other governmental regulations applicable to our business.





Competition





Modern
Medical faces competition from various other companies ranging from small local
companies to those operating on a regional or national scale, such as Medical
Resources Inc. Although these companies may be more experienced or have more
financial resources at their disposal, Modern Medical competes in the
marketplace on the basis of its performance in the industry, its reputation for
the quality of its services and its expertise in tailoring the structure of its
contractual arrangements and services to meet the specific needs of its
customers. Modern Medical does this by meeting with the hospital or physician to
discuss the specific needs of each site. Thereafter a determination can be made
as to which services Modern Medical will perform at a particular site and
whether the hospital or physician wants to be financially involved in the
site.





Modern
Medical believes that few of its competitors provide the same comprehensive
range of services.  Modern Medical maintains close working
relationships with two major equipment manufacturers (Siemens and General
Electric). From time-to-time, representatives of these manufacturers introduce
Modern Medical to various clients in an effort to arrange joint ventures between
Modern Medical and physician groups, or hospitals, in an effort to sell their
equipment to the joint venture. Modern Medical's imaging centers compete for
patients with other hospitals and radiology groups in their area. These centers
and hospital customers compete on the basis of efficiency and
service.





Insurance





Modern
Medical carries general liability insurance with coverage of up to $1,000,000
per claim, and a commercial umbrella policy of $10,000,000. Modern Medical
believes that such coverage is adequate. Additionally, Modern Medical maintains
insurance for the replacement of all leased equipment at each of its
facilities.





Employees





As of
December 31, 2008 Modern Medical employed 42 persons on a full-time basis and 21
persons on a part time basis. The following table reflects the equivalent full
and part-time employees per facility:





Total
                  
                  
                  Full Time
                  
                  
                  Part TimeModern
      Medical
                  
                  
                  3
                  
                  
                  
                  3
                  
                  
                  
                  0Metairie,
      LA
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  0Union
      Imaging Assoc., Union, NJ
                  
                  
                  26
                  
                  
                  
                  16
                  
                  
                  
                  10Union
      Imaging Center, Union, NJ
                  
                  
                  31
                  
                  
                  
                  21
                  
                  
                  
                  10PET
      Scan at Union Imaging
                  
                  
                  2
                  
                  
                  
                  1
                  
                  
                  
                  1Total
                  
                  
                  63
                  
                  
                  
                  42
                  
                  
                  
                  21





Equipment
lease agreements:





Union
Imaging Associates and Modern Medical Modalities Corporation entered into a line
of credit with GE Healthcare Financial Services in the amount of $2,500,000.
This line of credit has been fully utilized in acquiring new medical
equipment.   Under this line of credit Union Imaging has a
restrictive covenant relating to a master lease agreement with GE Healthcare
Financial Services. This restrictive covenant requires Union Imaging Associates
to be current in its lease payments before making any payments or distributions
to Modern Medical Modalities Corporation.  See schedule detailing use
of this line and payment schedule below.





In
February 2004, PET scan at Union Imaging entered into a financing lease to
purchase a Philips ADAC PET Scanner with a loan amount of $530,000. The term is
for 60 months at $11,449.40 per month.





Union
Imaging Associates, the sub lessee, entered in a lease with Spur Imaging for a
Siemens 1.5T Symphony MRI, located in Union, NJ. Spur Imaging is the lessee of
the equipment from Siemens Financial Services. The amount financed is $1,050,000
over 63 months with an option to purchase the MRI for $100.





In July
2006, Modern Medical Modalities entered into an operating lease with IBM Credit
for various hardware and software for the implementation of a Radiology
Information System at our Union, NJ site and a common system platform project
for the company. The term is for 48 months at $9,300 per
month.





Payments
schedule listed in table below:





Equipment
                                                                          
                                                                          Operating/
                                                                            Financial
                                                                          
                                                                          Start
                                                                          
                                                                          End
                                                                          
                                                                          No.
      of
                                                                            Pymts
                                                                          
                                                                          
                                                                          Recurring
                                                                            Payments
                                                                          
                                                                          
                                                                          Leased/Loan
                                                                            AmountGE-CT
                                                                          
                                                                          Operating
                                                                          
                                                                          12/31/03
                                                                          
                                                                          02/28/04
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0003/31/04
                                                                          
                                                                          05/31/04
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          5,879.6906/30/04
                                                                          
                                                                          06/30/06
                                                                          
                                                                          
                                                                          24
                                                                          
                                                                          
                                                                          $
                                                                          19,782.5207/31/06
                                                                          
                                                                          09/30/06
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0010/31/06
                                                                          
                                                                          09/30/08
                                                                          
                                                                          
                                                                          24
                                                                          
                                                                          
                                                                          $
                                                                          23,062.6104/30/08
                                                                          
                                                                          07/31/08
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0008/01/08
                                                                          
                                                                          06/01/09
                                                                          
                                                                          
                                                                          11
                                                                          
                                                                          
                                                                          $
                                                                          23,903.35
                                                                          
                                                                          
                                                                          $
                                                                          1,155,000.00GE-Dell
      Hardware
                                                                          
                                                                          Financing
                                                                          
                                                                          01/01/04
                                                                          
                                                                          03/01/09
                                                                          
                                                                          
                                                                          63
                                                                          
                                                                          
                                                                          $
                                                                          1,184.38
                                                                          
                                                                          
                                                                          $
                                                                          61,199.53GE-Medrad
      Injector
                                                                          
                                                                          Operating
                                                                          
                                                                          05/11/04
                                                                          
                                                                          04/11/09
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          1,987.12
                                                                          
                                                                          
                                                                          $
                                                                          99,167.81GE-Ultrasound
      &
                                                                          
                                                                          Operating
                                                                          
                                                                          04/17/04
                                                                          
                                                                          07/17/04
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.00Bone
      Density
                                                                          
                                                                          
                                                                          
                                                                          08/17/04
                                                                          
                                                                          04/17/08
                                                                          
                                                                          
                                                                          49
                                                                          
                                                                          
                                                                          $
                                                                          6,041.0805/17/08
                                                                          
                                                                          07/17/08
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0008/17/08
                                                                          
                                                                          11/17/09
                                                                          
                                                                          
                                                                          16
                                                                          
                                                                          
                                                                          $
                                                                          6,492.71
                                                                          
                                                                          
                                                                          $
                                                                          295,500.00GE-Digital
      Mammo
                                                                          
                                                                          Operating
                                                                          
                                                                          12/17/04
                                                                          
                                                                          02/17/05
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0003/17/05
                                                                          
                                                                          06/17/06
                                                                          
                                                                          
                                                                          16
                                                                          
                                                                          
                                                                          $
                                                                          8,320.4607/17/06
                                                                          
                                                                          09/17/06
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0010/17/06
                                                                          
                                                                          04/17/08
                                                                          
                                                                          
                                                                          19
                                                                          
                                                                          
                                                                          $
                                                                          9,539.4405/17/08
                                                                          
                                                                          07/17/08
                                                                          
                                                                          
                                                                          03
                                                                          
                                                                          
                                                                          $
                                                                          0.0008/17/08
                                                                          
                                                                          01/17/09
                                                                          
                                                                          
                                                                          19
                                                                          
                                                                          
                                                                          $
                                                                          8,671.76
                                                                          
                                                                          
                                                                          $
                                                                          398,500.00GE-iCAD
      SL GE V5.1
                                                                          
                                                                          Financing
                                                                          
                                                                          12/05/05
                                                                          
                                                                          11/05/09
                                                                          
                                                                          
                                                                          48
                                                                          
                                                                          
                                                                          $
                                                                          1,067.93
                                                                          
                                                                          
                                                                          $
                                                                          42,503.90CIT
      Tech - Mas90
                                                                          
                                                                          Financing
                                                                          
                                                                          10/30/04
                                                                          
                                                                          09/30/09
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          430.36
                                                                          
                                                                          
                                                                          $
                                                                          20,000.00Dell
      Financial Ser –Eq
                                                                          
                                                                          Operating
                                                                          
                                                                          01/31/07
                                                                          
                                                                          04/30/11
                                                                          
                                                                          
                                                                          48
                                                                          
                                                                          
                                                                          $
                                                                          3,619.91
                                                                          
                                                                          
                                                                          $
                                                                          173,755.68Dell
                                                                          
                                                                          Financing
                                                                          
                                                                          06/01/06
                                                                          
                                                                          05/01/09
                                                                          
                                                                          
                                                                          36
                                                                          
                                                                          
                                                                          $
                                                                          334.96
                                                                          
                                                                          
                                                                          $
                                                                          9,191.23Marcap-PET
      Scan
                                                                          
                                                                          Financing
                                                                          
                                                                          02/07/04
                                                                          
                                                                          01/15/09
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          11,449.40
                                                                          
                                                                          
                                                                          $
                                                                          530,000.00Siemens/Spur
      MRI
                                                                          
                                                                          Financing
                                                                          
                                                                          04/01/06
                                                                          
                                                                          06/01/07
                                                                          
                                                                          
                                                                          63
                                                                          
                                                                          
                                                                          $
                                                                          22,684.0007/01/07
                                                                          
                                                                          09/01/08
                                                                          
                                                                          
                                                                          15
                                                                          
                                                                          
                                                                          $
                                                                          35,634.0010/01/08
                                                                          
                                                                          08/01/11
                                                                          
                                                                          
                                                                          36
                                                                          
                                                                          
                                                                          $
                                                                          22,684.00
                                                                          
                                                                          
                                                                          $
                                                                          1,050,000.00GE-Konica
      CR Sys
                                                                          
                                                                          Financing
                                                                          
                                                                          02/01/06
                                                                          
                                                                          02/28/06
                                                                          
                                                                          
                                                                          01
                                                                          
                                                                          
                                                                          $
                                                                          964.7203/01/06
                                                                          
                                                                          12/31/10
                                                                          
                                                                          
                                                                          58
                                                                          
                                                                          
                                                                          $
                                                                          913.0001/01/11
                                                                          
                                                                          01/01/11
                                                                          
                                                                          
                                                                          01
                                                                          
                                                                          
                                                                          $
                                                                          913.01
                                                                          
                                                                          
                                                                          $
                                                                          42,399.91IBM-Hard/Software
                                                                          
                                                                          Operating
                                                                          
                                                                          07/01/06
                                                                          
                                                                          10/31/10
                                                                          
                                                                          
                                                                          48
                                                                          
                                                                          
                                                                          $
                                                                          7,144.00
                                                                          
                                                                          
                                                                          $
                                                                          216,926.70CCA
      Financial
                                                                          
                                                                          Operating
                                                                          
                                                                          07/01/06
                                                                          
                                                                          10/31/10
                                                                          
                                                                          
                                                                          48
                                                                          
                                                                          
                                                                          $
                                                                          2,156.00
                                                                          
                                                                          
                                                                          $
                                                                          103,488.00DocuTeam-copiers
                                                                          
                                                                          Operating
                                                                          
                                                                          01/03/07
                                                                          
                                                                          12/31/12
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          1,056.00
                                                                          
                                                                          
                                                                          $
                                                                          55,000.00Verizon
      Credit, Inc.
                                                                          
                                                                          Operating
                                                                          
                                                                          11/01/07
                                                                          
                                                                          10/01/12
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          3,424.61
                                                                          
                                                                          
                                                                          $
                                                                          205,476.60KEY
      Eq. – Chili PACS
                                                                          
                                                                          Financing
                                                                          
                                                                          09/25/07
                                                                          
                                                                          10/25/12
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          1,518.06
                                                                          
                                                                          
                                                                          $
                                                                          59,180.36AEL
      – Disc BU/X-ray
                                                                          
                                                                          Financing
                                                                          
                                                                          12/01/07
                                                                          
                                                                          11/01/12
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          $
                                                                          1,810.56
                                                                          
                                                                          
                                                                          $
                                                                          70,364.00AEL
      – Radwhere
                                                                          
                                                                          Financing
                                                                          
                                                                          03/11/08
                                                                          
                                                                          02/11/11
                                                                          
                                                                          
                                                                          36
                                                                          
                                                                          
                                                                          $
                                                                          1,001.85
                                                                          
                                                                          
                                                                          $
                                                                          36,066.60MES
      – Automobile
                                                                          
                                                                          Financing
                                                                          
                                                                          07/10/07
                                                                          
                                                                          06/10/10
                                                                          
                                                                          
                                                                          36
                                                                          
                                                                          
                                                                          $
                                                                          1,226.00
                                                                          
                                                                          
                                                                          $
                                                                          48,000.00







LONG TERM
DEBT TABLE.





Balance
      atDecember
      31, 2008
                              
                              Debt
      holder
                              
                              Commencement
      date
                              
                              Final
      payment dateNotes
      payable:$
                              104,120.75
                              
                              Union
      Imaging Associates, PA
                              
                              March
      18, 2005
                              
                              May
      1, 2009$
                              71,834.24
                              
                              Union
      Imaging Associates, PA
                              
                              December
      8, 2008
                              
                              March
      6, 2009$
                              100,000.00
                              
                              Union
      Imaging Associates, PA
                              
                              December
      8, 2008
                              
                              March
      6, 2009$
                              160,899.08
                              
                              Two
      founding shareholders
                              
                              Various
                              
                              Open$
                              130,750.27
                              
                              Union
      Imaging Associates,Inc.
                              
                              Various
      (1)
                              
                              Various
      (1)$
                              75,000.00
                              
                              Jacov
      Hayut
                              
                              February
      11, 2006
                              
                              February
      11, 2010$
                              59,178.88
                              
                              Irit
      & Yosef Azoulai
                              
                              November
      10, 2006
                              
                              May
      9, 2008$
                              118,246.58
                              
                              Irit
      & Yosef Azoulai
                              
                              March
      6, 2007
                              
                              September
      5, 2008$
                              29,453.67
                              
                              Complete
      Flooring
                              
                              November
      1, 2006
                              
                              October
      1, 2008$
                              116,166.03
                              
                              Complete
      Flooring
                              
                              December
      6, 2006
                              
                              December
      5, 2010$
                              250,000.00
                              
                              MTI
      Partners II, L.P.
                              
                              September
      14, 2007
                              
                              September
      13, 2008$
                              100,000.00
                              
                              Moseh
      & Aliza Lazarian
                              
                              October
      3, 2008
                              
                              October
      1, 2009$
                              100,000.00
                              
                              Issak
      Hayut
                              
                              November
      6, 2008
                              
                              November
      5,
2009




Capitalized
      lease obligations:$
                                        3,518.26
                                        
                                        GE
      Financial Services
                                        
                                        April
      1, 2004
                                        
                                        March
      1, 2009$
                                        11,207.81
                                        
                                        GE
      Financial Services
                                        
                                        December
      5, 2005
                                        
                                        November
      5, 2009$
                                        20,290.32
                                        
                                        GE
      Financial Services
                                        
                                        February
      1, 2006
                                        
                                        January
      01, 2011$
                                        14,212.39
                                        
                                        MARCAP
      Financial Services
                                        
                                        November
      7, 2003
                                        
                                        January
      15, 2009$
                                        3,534.29
                                        
                                        CIT
      Technology
                                        
                                        October
      30, 2004
                                        
                                        September
      30, 2009$
                                        235,000.00
                                        
                                        Spur
      Imaging (Siemens)
                                        
                                        April
      1, 2006
                                        
                                        October
      1, 2011$
                                        1,599.53
                                        
                                        Dell
      Financial Services
                                        
                                        June
      1, 2006
                                        
                                        May
      1, 2009$
                                        49,025.17
                                        
                                        Key
      Equip. Leasing
                                        
                                        September
      25, 2007
                                        
                                        October
      25, 2012$
                                        60,098.17
                                        
                                        AEL
      Financial, LLC
                                        
                                        December
      1, 2007
                                        
                                        November
      1, 2012$
                                        20,627.20
                                        
                                        AEL
      Financial, LLC
                                        
                                        March
      11, 2008
                                        
                                        February
      11, 2011$
                                        19,363.19
                                        
                                        Medical
      Equipment Solutions
                                        
                                        July
      10, 2007
                                        
                                        June
      10, 2010$
                                        1,854,125.25
                                        
                                        Total
      long-term debt$
                                        1,406,840.08
                                        
                                        Less
      current portion$
                                        447,285.75
                                        
                                        Long-term
      debt net of current portion





(1)
            = Represents
      a series of notes used to acquire an additional 90% of theownership
      of Union Imaging Associates, JV (UIA, JV), commencing March 2003through
      June 2008. The purchase of additional ownership interest in UIA, JV brings
      the Company's  total ownership in its related company UIA, Inc.
      to 100%.  Average monthly payments are $7,573 (2009), $2,459
      (2010) and $864 (2011).








Available
Information





We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission (the “SEC”). You may read and copy
any document we file with the SEC at the SEC's public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC's Website at www.sec.gov.





Item 2.
Properties





In April
2005, Modern Medical entered into a five (5) year lease agreement for
approximately 7,150 square feet on 441-445 Chestnut St. in Union, NJ for
approximately $15,000 per month. This lease is renewable for an additional
5-year term at no more than $17,875 per month, which term expires on April 1,
2015.  On March 19, 2008, Modern Medical exercised its lease option
through March 31, 2015 at $17,875 per month and obtained an additional 5 year
option through March 31, 2020 at $19,067 per month.





In April
2005, Modern Medical entered into a five (5) year lease agreement for
approximately 2,250 square feet on 439 Chestnut St. in Union, NJ for
approximately $3,844 per month. This lease is renewable for an additional 5-year
term at no more than $4,500 per month, which term expires on April 1,
2015.  On March 19, 2008, Modern Medical exercised its lease option
through March 31, 2015 at $4,500 per month and obtained an additional 5 year
option through March 31, 2020 at $4,875 per month.





In
February 2001 Modern Medical and Union Imaging Associates, JV entered into a
five (5) year lease agreement for approximately 960 square feet on 418 Chestnut
St. in Union, NJ for approximately $1,760 per month. Effective September 1,
2004, Union Imaging Associates, JV and Modern Medical took an additional 600
square feet for an additional $1,000 per month and extending the lease to
February 1, 2007 and obtained an option to renew the lease for an additional 3
years upon 180 days prior written notice of the Company's intent to exercise its
option. The Company exercised its option to extend the lease for 3 years,
extending the lease through February 1, 2010. The Company returned the
additional 600 square feet to the landlord, effective October 31, 2008 and
negotiated a release from the original 960 square feet upon two calendar months
written notice to the landlord.





Modern
Medical believes that its current facilities are adequate to operate its
business.





Item 3.
Legal Proceedings





On
September 29, 2008, we were served with a legal complaint and summons by Burgio
Enterprises, Ltd. (“Burgio”) for breach of contract and other related claims.
Burgio is seeking a judgment, and awards for contract damages in an amount in
excess of $10,000, compensatory damages in an amount in excess of $10,000,
punitive damages in an amount in excess of $10,000, and recovery of attorney
fees and costs of court and other expenses. We intend to vigorously defend this
claim.





On April 9, 2008, a complaint was filed
by Spur Imaging Service, L.L.C. against Modern Medical and Union Imaging
Associates for breach of contract and other related matters. The complaint was
related to a Sub-Lease Agreement that we entered into with Spur on or about May
18, 2005 for using certain MRI equipment that was leased from Siemens Medical
Solutions, USA, Inc. by Spur Imaging Service, LLC. We agreed to make 63 payments
of $21,400 totaling $1,348,200. We also entered into a Forbearance Agreement
with Spur that modified the Sub-Lease Agreement payment terms. Spur filed the
complaint claiming we owe them for payments not made per the Sub-Lease and
Forbearance Agreements, and for other costs, fees, and expenses, and declared
that we should return the MRI equipment. On September 16, 2008, we negotiated a
settlement whereby Parent agreed to pay Siemens Medical Solutions, USA, Inc.
$525,000 and Spur Imaging Service, LLC $25,000, in exchange for full settlement
of the sub-lease. In October 2008, in exchange for Siemens Medical Solutions,
USA, Inc. (“Siemens Medical”) and Spur Imaging Service, LLC (“Spur”) agreeing to
forbear from exercising their enforcement rights under the Consent Judgment
through February 15, 2009. We paid Siemens Medical $525,000 between October 6,
2008 and February 15, 2009 and paid Spur $25,000 between October 6, 2008 and
February 28, 2009 in full payment of the $550,000 settlement of a sub-lease
involving Siemens.





On July
9, 2008, we received copies of a lawsuit from Antoinette Gregoire. The lawsuit
claims that on or about July 11, 2006, Plaintiff Antoinette Gregoire underwent a
mammography at the facilities of Park Imaging Associates, P.A. and Union Imaging
Associates P.A. and that at such time, a suspicious abnormality of the left
breast was noted, consisting of a nodule requiring biopsy and it was later
determined that such nodule constituted ductal carcinoma. We are defending
against any claims being made.





Other
than the matters described above, we are not involved in any material legal
proceedings.  We also are not aware of any pending material legal
proceedings.





Item 4.
Submission of Matters to a Vote of Security Holders





No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.





PART
II





Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities





Our
common stock is traded on the over-the-counter market on the OTC Bulletin Board
under the symbol MODM. The following table sets forth the high and low bid
information for our common stock for each quarter within the last two fiscal
years.Such
prices represent quotations between dealers, without dealer markup, markdown or
commissions, and may not represent actual transactions.





Common
Stock:





Fiscal 2008
                    
                    High
                    
                    
                    LowFirst
      Qtr
                    
                    $
                    0.42
                    
                    
                    $
                    0.12Second
      Qtr
                    
                    
                    0.15
                    
                    
                    
                    0.02Third
      Qtr
                    
                    
                    0.07
                    
                    
                    
                    0.02Fourth
      Qtr
                    
                    
                    0.06
                    
                    
                    
                    0.03Fiscal 2007First
      Qtr
                    
                    $
                    0.96
                    
                    
                    $
                    0.61Second
      Qtr
                    
                    
                    0.81
                    
                    
                    
                    0.53Third
      Qtr
                    
                    
                    0.65
                    
                    
                    
                    0.30Fourth
      Qtr
                    
                    
                    0.45
                    
                    
                    
                    0.40





On March
20, 2009, there were approximately 278 holders of record of Modern Medical's
25,673,385outstanding shares of
Common Stock.





On March
20, 2009, the last sale price of the Common Stock as reported on the OTC
Bulletin Board was $0.02.





Dividend
Policy





Modern
Medical has never paid or declared dividends on its common stock. The payment of
cash dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon Modern Medicals earnings, its capital
requirements, financial condition and other relevant factors. Modern Medical
intends, for the foreseeable future, to retain future earnings for use in Modern
Medical's business.





Equity
Compensation Plan Information





The
following table sets forth certain information, as of March 20, 2009, concerning
shares of common stock authorized for issuance under the Company’s existing
equity compensation plans.





Plan
      Category
                          
                          Number
      of Securities to be
                            issued
      upon exercise of
                            outstanding
      options
                          
                          
                          Weighted-average
                            exercise
      price of
                            outstanding
      options,
                            warrants
      and rights
                            plans(excluding
                            securities
      reflected
                            in
      column (a))
                          
                          
                          Number
      of Securities
                            remaining
      available for
                            future
      issuance under
                            equity
      compensationEquity
      compensation plans approved by security holders
                          
                          
                          1,241,000
                          
                          
                          $
                          0.4801
                          
                          
                          
                          1,259,000Equity
      compensation plans not approved by security holders
                          
                          
                          8,640,198
                          
                          
                          $
                          0.5248
                          
                          
                          
                          -0-





2003
Stock Option Plan





In
October 2003, the board of directors and shareholders adopted the 2003 stock
option plan. The plan will be administered by the compensation committee or our
board of directors, who will determine among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of common stock issuable upon the
exercise of the options and the option exercise price. The options may be
granted as either or both of the following: (a) incentive stock options, or (b)
non-qualified stock options. 2,000,000 shares may be issued under this
plan.  The shares issuable pursuant to this plan were registered on
Form S-8, Registration No. 333-143-653.





In
connection with the plan, the exercise price of each incentive stock option may
not be less than 100% of the fair market value of our common stock on the date
of grant or 110% of fair market value in the case of an employee holding 10% or
more of our outstanding common stock. The aggregate fair market value of shares
of common stock for which incentive stock options granted to any employee are
exercisable for the first time by such employee during any calendar year,
pursuant to all of our, or any related corporation's, stock option plan, may not
exceed $100,000. Non-qualified stock options may be granted at a price
determined by our compensation committee, but not at less than 85% of the fair
market value of our common stock. Stock options granted pursuant to our stock
option plan would expire not more than ten years from the date of
grant.





The plan
is effective for a period of ten years, expiring in 2013. Options maybe granted
to officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to us. The plan is designed to enable our
management to attract and retain qualified and competent directors, employees,
consultants and independent contractors. Options granted under the plan may be
exercised for up to ten years, and shall be at an exercise price all as
determined by our board. Options are non-transferable except by the laws of
descent and distribution or a change in control of us, as defined in the plan,
and are exercisable only by the participant during his or her lifetime. Change
in control includes (a) the sale of substantially all of the assets of us and
merger or consolidation with another company, or (b) a majority of the board
changes other than by election by the stockholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation
of such person.





If a
participant ceases affiliation with us by reason of death, permanent disability
or retirement at or after age 70, the option remains exercisable for one year
from such occurrence but not beyond the option's expiration date. Other types of
termination allow the participant three months to exercise, except for
termination for cause, which results in immediate termination of the
option.





Any
unexercised options that expire or that terminate upon an employee's ceasing to
be employed by us become available again for issuance under the
plan.





The plan
may be terminated or amended at any time by our board of directors, except that
the number of shares of common stock reserved for issuance upon the exercise of
options granted under the plan may not be increased without the consent of our
stockholders.





1999
Stock Option Plan





The plan
will be administered by the compensation committee or our board of directors,
who will determine among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of common stock issuable upon the exercise of
the options and the option exercise price. The options may be granted as either
or both of the following: (a) incentive stock options, or (b) non-qualified
stock options. 500,000 shares may be issued under this plan. 300,000 options
were previously issued under this plan to former officers and directors of the
Company, which by their terms expired and such 300,000 options are available for
reissuance under the 1999 Stock Option Plan.





In
connection with the plan, the exercise price of each incentive stock option may
not be less than 100% of the fair market value of our common stock on the date
of grant or 110% of fair market value in the case of an employee holding 10% or
more of our outstanding common stock. The aggregate fair market value of shares
of common stock for which incentive stock options granted to any employee are
exercisable for the first time by such employee during any calendar year,
pursuant to all of our, or any related corporation's, stock option plan, may not
exceed $100,000. Non-qualified stock options may be granted at a price
determined by our compensation committee, but not at less than 85% of the fair
market value of our common stock. Stock options granted pursuant to our stock
option plan would expire not more than ten years from the date of
grant.





The plan
is effective for a period of ten years, expiring in 2009. Options maybe granted
to officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to us. The plan is designed to enable our
management to attract and retain qualified and competent directors, employees,
consultants and independent contractors. Options granted under the plan may be
exercised for up to ten years, and shall be at an exercise price all as
determined by our board. Options are non-transferable except by the laws of
descent and distribution or a change in control of us, as defined in the plan,
and are exercisable only by the participant during his or her
lifetime.





Change in
control includes (a) the sale of substantially all of the assets of us and
merger or consolidation with another company, or (b) a majority of the board
changes other than by election by the stockholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation
of such person.





If a
participant ceases affiliation with us by reason of death, permanent disability
or retirement at or after age 70, the option remains exercisable for one year
from such occurrence but not beyond the option's expiration date. Other types of
termination allow the participant three months to exercise, except for
termination for cause, which results in immediate termination of the
option.





Any
unexercised options that expire or that terminate upon an employee's ceasing to
be employed by us become available again for issuance under the
plan.





The plan
may be terminated or amended at any time by our board of directors, except that
the number of shares of common stock reserved for issuance upon the exercise of
options granted under the plan may not be increased without the consent of our
stockholders.





Recent
Sales of Unregistered Securities





During
the years ended December 31, 2008 and 2007, we did not issue any securities that
were not registered under the Securities Act of 1933, as amended (the
“Securities Act”) except as disclosed in previous SEC filings.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers








There
were no repurchases of equity securities by the issuer or affiliated purchasers
during the fourth quarter of the year ended December 31, 2008.





Item 6.
Selected Financial Data





Not
applicable.





Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations





Forward-looking
Statements





Some of
the statements under “Management’s Discussion and Analysis of Financial
Condition or Plan of Operations,” and “Description of Business” in this Annual
Report on Form 10-KSB are forward-looking statements.  These
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by forward-looking
statements.





In some
cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative
of these terms or other comparable terminology.  You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other “forward-looking” information.  There may be
events in the future that we are not able to accurately predict or
control.  Before you invest in our securities, you should be aware
that the occurrence of any of the events described in this Annual Report could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your
investment.  Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, growth rates, levels of activity, performance or
achievements.  We are under no duty to update any of the
forward-looking statements after the date of this Annual Report to conform these
statements to actual results.





Management's
Discussion and Analysis.





We
provide healthcare administrative, clinical, and information services that are
supported by our advanced, web-based, enterprise-wide information system. Our
network of healthcare services is currently focused on the diagnostic imaging
services specialty market, and has the capacity to service other multi-specialty
markets. Our healthcare services are delivered through a network of owned
diagnostic imaging centers, joint venture operations, and contractual services
agreements. The healthcare management services include marketing, procurement of
medical equipment, facilities construction and maintenance, recruitment and
training of technical and support staff, and administrative and information
services, such as leasing, managed care and contract management, human
resources, inventory management, and medical records, and billing and
collections. The healthcare clinical services include magnetic resonance imaging
(MRI), computerized axial tomography (CT Scan), positron emission tomography
(PET), ultrasound, densitometry, mammography, nuclear medicine, and general
radiography (X-ray).





We
believe that our network of centers are being optimized by providing a full
array of management and imaging services to better meet the varied needs of our
customers, providers of care, and other participants in our growing network. In
addition, we are seeking to maximize the productivity and quality of each center
that we own, as well as of each network of centers we contract with, by
providing integrated technology solutions through state-of-the art medical
equipment and industry leading information management systems.





As of
December 31, 2008, we own, operate, and manage three diagnostic imaging centers
located in New Jersey. The Company's ownership interests range from 50% to 100%.
We intend to continue to expand through a combination of joint ventures,
acquisitions, and targeted marketing activities.  We have also
positioned ourselves to expand our business and participate more in outsourced
management services and the expanding, more profitable information and
administrative services markets.








On a
consolidated basis, we currently recognize the majority of our revenues from a
range of diagnostic imaging services that allow us to leverage the variety of
imaging systems in our network of centers, in order to potentially increase
operating income once fixed costs are more rapidly covered with higher volumes
of procedures performed. In addition, we are creating the infrastructure to
expand our revenues through management services contracts with an increasing
emphasis on providing web-based, comprehensive information services as the
healthcare outpatient services and related markets to continue to grow and
operate within larger networks.





Our
diagnostic imaging centers are dependent on referrals from physicians and other
healthcare professionals, and we intend to conduct direct marketing activities
to consumers in order to supplement our valued referrals. In addition, the
Company accepts referred patients that are insured through managed care
contracts that help keep a more consistent volume of business flowing while
requiring more competitive rates for procedures performed. We expect to continue
to better integrate the optimal mix of managed care and traditional insurance
covered services and reimbursements with consumer driven on-demand services and
payments while maximizing the ratio of effective diagnostic imaging utilization
over capacity in each center, and maintaining high quality patient outcomes and
overall service.





Results
of Operations:





For the
year ended December 31, 2008 compared to the year ended December 31,
2007:





Net
revenue from services has decreased approximately $378,300 to approximately
$7,333,900, for the year ended December 31, 2008 from approximately
$7,712,200 for the same period in 2007. The decrease resulted from reduced
reimbursements for procedures being performed at both the Union Imaging
Associates and Union Imaging Center sites decreasing net revenues by
approximately $243,300 and $135,000, respectively.





Cost of
services provided:





For the
year ended December 31, 2008, cost of services provided totaled approximately
$5,773,900 as compared to approximately $5,796,900 for the same period in
2007, resulting in a decrease of approximately $23,000. These costs are affected
by changes resulting from a decrease in net revenues and in equipment service
cost, medical supplies, payroll, and facility costs.





Selling,
General and Administrative (SG&A) Expenses:





For the
year ended December 31, 2008, selling, general and administrative expenses
totaled approximately $2,750,400 as compared to approximately $4,498,900 for the
same period in 2007, resulting in a decrease of approximately $1,748,500. This
decrease related primarily to a decrease in stock-based expenses of
approximately $1,287,500 and approximately $331,100, in cash related to cash
payments for investment banking advisory contracts.  The decrease
balance of approximately $129,900  related to various other expenses
($55,000 in legal fees  related to acquisition activities, $9,600 in
marketing expenses, $44,300 in management fees and $32,000 software maintenance
costs, all off-set by a $11,000 reduction in accounting fees) related to
decreases in net revenues.





Results
of Operations:





For the
year ended December 31, 2007 compared to the year ended December 31,
2006:





Net
Revenues from Services:





Net
revenue from services has increased approximately $858,200 to approximately
$7,712,200, for the year ended December 31, 2007 from approximately $6,854,000
for the same period in 2006. The increase resulted from additional procedures
being performed at both the Union Imaging Associates and Union Imaging Center
sites increasing net revenues by approximately $570,500 and $271,200,
respectively.   These increases resulted from increased marketing
and decreased competition resulting from the closing of Union Memorial Hospital
approximately 1 mile from the two sites.  The balance of the increase
came from collections of approximately $16,500 in receivables from our site in
Metairie, Louisiana, as a result of damages sustained from hurricane
Katrina.





Cost of
services provided:





For the
year ended December 31, 2007, cost of services provided totaled approximately
$5,796,900 as compared to approximately $5,493,900 for the same period in 2006,
resulting in an increase of approximately $303,000. These costs are affected by
changes resulting from an increase in net revenues and increases in equipment
service cost, medical supplies, payroll, and facility costs.





Selling,
General and Administrative (SG&A) Expenses:





For the
year ended December 31, 2007, selling, general and administrative expenses
totaled approximately $4,498,900 as compared to $981,700 for the same period in
2006, resulting in an increase of approximately $3,517,200. This increase
related to an increase in stock-based expenses of approximately $2,035,000, and
approximately $1,482,200, in adjustments made to reserves that resulted from
expenses related to the sale of the Atrium business and the closing of the
Metairie site as a result of the damage sustained from hurricane Katrina, and an
increase of other administrative expenses incurred while increasing net
revenues.





Liquidity
and Capital Resources:





Modern
Medical has a working capital deficiency of $2,340,720 at December 31, 2008 as
compared to a working capital deficiency of $2,098,952 at December 31, 2007,
resulting in an additional working capital deficiency of $241,768, due primarily
to a decrease in net accounts receivable of $280,000, increase in accrued
expenses $176,863 net of decrease in accounts payable of $262,079 and a increase
in net other assets and liabilities of approximately $46,757.





Debt:





On March
18, 2005 Modern Medical entered into an unsecured loan agreement with Dr. Howard
Kessler MD PA, in the amount of $300,000 payable in 12 monthly payments of
$8,333 with a lump sum due on the 13th month in the amount of $221,826.71 and
bears an interest rate of 8% per annum. In March 2006, this note was extended 33
months under the same terms as the first 12 months. This loan funded the
settlement of the DVI/US Bank loan settlement.





Effective October 1, 2005 Union Imaging
Associates entered into a 63 month financing lease with Siemens Medical
Systems/Spur Imaging to acquire a Siemens 1.5T Symphony MRI unit. The amount
financed is $1,050,000, payable at $22,684.00 per month commencing April 2006.
Union Imaging Associates has the option to purchase the unit for $100 at the end
of the lease.   On June 13, 2007 we paid Siemens Medical Systems
$100,000 on the lease. We paid Spur
Imaging  $12,950.00  leaving a balance on the lease of
$954,772.94.   On September 16, 2008, we negotiated a settlement
whereby Parent agreed to pay Siemens Medical Solutions, USA, Inc. $525,000 and
Spur Imaging Service, LLC $25,000, in exchange for full settlement of the
sub-lease.  In October 2008, in exchange for Siemens Medical
Solutions, USA, Inc. (“Siemens Medical”) and Spur Imaging Service, LLC (“Spur”)
agreeing to forbear from exercising their enforcement rights under the
agreement. We paid Siemens Medical $525,000 between October 6, 2008 and February
15, 2009 and paid Spur $20,000 between October 6, 2008 and February 28, 2009 in
full payment of the $550,000 settlement of a sub-lease involving
Siemens





Commencing
March 2003 through June 2008, the Company acquired an additional 90% interest in
Union Imaging Associates, JV.  This additional 90% brought the
Company's ownership of Union Imaging Associates, JV to 100%. It was acquired for
varying prices totaling $1,757,000, inclusive of 365,000 shares of Modern
Medical Modalities common stock valued at $169,000.  The cash portions
of the purchases were paid monthly through April 2011.  The remaining
average monthly payments are $7,573 (2009), $2,459 (2010) and $864
(2011).





In
February 2006, the Company entered into an unsecured note with Jacov Hayut in
the amount of $150,000. The loan was for 12 months with interest at 15%; monthly
payments are interest only with lump sum payment of $150,000 February 2007. This
note was extended for 36 months under the same terms and conditions, except that
the Company agreed to pay the note in full or in part at the lenders option upon
the first equity capital raise or February 2010, which ever comes first. On June
13, 2007 we paid $50,000 on the unsecured note, and on June 20, 2007 we paid
$25,000 on the unsecured note.








In July
2006, we signed a Lease Agreement with IBM for financing and providing
information technology. The various contracts signed under the Agreement total
$320,000. The terms of the Agreements include 48 months at approximately
$9,200.00 per month. Each component of the information technology is billed and
paid for separately. These leases are being accounted for as operating
leases.





On
October 25, 2006, we entered into an unsecured promissory note with Complete
Flooring and Renovation, Inc. in the principal amount of $65,000. The loan is
for a period of 24 months with an annual interest rate of 15%. The payments are
to be made on the 26th of each month in 23 equal installments of $3,151.63 and 1
final installment of $3,151.67. The payments commenced on November 26,
2006.





On
November 9, 2006, we entered into a Loan Agreement with Irit and Yosef Azoulai
for $50,000. The terms of the Agreement include an annual interest rate of 20%
and the loan is to paid, in a lump sum with accrued interest, at the earlier of
6 months from the effective date of the Agreement, or the closing date of an
equity based financing by the Company. In addition, the Company issued a Warrant
for the rights to 50,000 shares of the Company's common stock with an exercise
price $0.70, the closing market price of the Company's common stock on November
10, 2006. Irit and Yosef Azoulai have waived the 6 month payment terms and
effective January have changed the interest rate from 20% to 10%
annually.





On
December 6, 2006, we entered into an unsecured promissory note with Complete
Flooring and Renovation, Inc. in the principal amount of $150,000. The loan is
for a period of 48 months with an annual interest rate of 12%. The payments are
to be made on the 6th of each month in 48 equal installments of $3,950.08. The
payments commenced on January 6, 2006.





On March
6, 2007, we entered into a Loan Agreement with Irit and Yosef Azoulai for
$100,000. The terms of the Agreement include an annual interest rate of 20% and
the loan is to be paid, in a lump sum with accrued interest, at the earlier of 6
months from the effective date of the Agreement, or the closing date of an
equity based financing by the Company. In addition, the Company issued a Warrant
for the rights to 100,000 shares of the Company's common stock with an exercise
price $0.82 based on the closing market price of the Company's common stock as
March 6, 2007.  Irit and Yosef Azoulai have waived the 6 month payment
terms and effective January have changed the interest rate from 20% to 10%
annually.





On May
10, 2007, we offered and the State of New Jersey accepted an agreement to settle
past due taxes for the Company in the amount of $97,117. On April 24, 2007, we
paid a down payment of $31,028. The balance of $66,089 is to be paid over 36
equal installments of $2,381 beginning June 27, 2007.





On
October 29, 2007, we offered and the State of New Jersey accepted an agreement
to settle past due taxes for Union Imaging Associates, Inc. in the amount of
$103,854. The terms of the agreement include payments of $3,936 paid October 23,
2007 and $1,411 due November 15, 2007, a payment of $10,000 paid on October 31,
2007, four $5,000 payments due on November 7, 2007, November 14, 2007, November
21, 2007, and November 28, 2007. The balance of $68,508 is to be paid in 36
equal monthly installments of $2,300 due on the 20th of each
month starting December 20, 2007.  A Judgment has been entered in the
Superior Court of New Jersey in the amount of $91,137 pending final settlement
of these taxes.





On
February 11, 2008, Union Imaging Associates entered into a financing lease
agreement with AEL Financial, LLC to fund the purchase of a structured speech
reporting system. The amount financed was $26,853.44, payable in 36 equal
installments of $1,001.85, commencing March 11, 2008, at the end of the lease
the Company can purchase the system for $1.





On
October 3, 2008, we entered into a Loan Agreement with Moseh & Aliza
Lazarian for $100,000. The terms of the Agreement include an annual interest
rate of 12% and the loan is to be paid in amounts of $50,000 on or before
February 1, 2009 and $50,000 on or before October 1, 2009. In addition, the
Company issued a Warrant for the rights to 500,000 shares of the Company’s
common stock with a term of 5 years and an exercise price of $0.10 per
share.








On
November 6, 2008, we entered into a Loan Agreement with Issak Hayut for
$100,000. The terms of the Agreement include an annual interest rate of 12% and
the loan is to be paid in full on or before November 5, 2009. In addition, the
Company issued a Warrant for the rights to 500,000 shares of the Company’s
common stock with a term of 5 years and an exercise price of $0.10 per
share.





On
December 8, 2008, we entered into a Loan Agreement with Union Imaging
Associates, P.A., for $71,834.24. The terms of the Agreement include monthly
interest payments of $718.34 (12% per annum) starting January 9, 2009, and the
loan is to be paid in full March 6, 2009.  The note maybe extended by
mutual written agreement of the Note Holder and the Borrower.





On
December 8, 2008, we entered into a Loan Agreement with Union Imaging
Associates, P.A., for $100,000.00. The terms of the Agreement include monthly
interest payments of $1,000.00 (12% per annum) starting January 9, 2009, and the
loan is to be paid in full March 6, 2009.  The note maybe extended by
mutual written agreement of the Note Holder and the Borrower.





These are
the only trends, commitments, events and/or material uncertainties known to
Modern Medical.





Going
Concern





Modern
Medical's December 31, 2008 and 2007 financial statements have been presented on
a basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  The Company has incurred losses of $1,217,753 and
$3,486,006 for the years ended December 31, 2008 and 2007.  In
addition the Company had working capital deficiencies at those year ends of
$2,340,726 and $2,098,952, respectively.  Also, as of December 31,
2008 and 2009 the Company had stockholder deficiencies of $3,273,525 and
$783,460.  These factors raise doubt about the Company’s ability to
continue as a going concern.  Although the Company has experienced
financial gains for fiscal years ended December 31, 2008 and 2007 and has made
improvements since last recording losses, the audit reports have an explanatory
paragraph stating that Modern Medicals continued existence is in
doubt.





Valuation
of Accounts Receivable





Modern
Medical values its uncollected accounts receivable as part of its determination
of profit. Modern Medical constantly reviews the accounts receivable valuation.
The continuing monthly review, gathering of additional information, as well as
changing reimbursement rate, may cause adjustments to the accounts receivable
valuation.





Item 7A.
Quantitative and Qualitative Disclosure About Market Risk.





Not
Applicable.





Item 8.
Financial Statements





See Pages
F-1 to F-33





Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item 9A.
Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (“Exchange Act”), means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by the company
in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures also include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company's management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure. are effective to provide
reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable SEC rules and
forms.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.  Our internal control over financial reporting
is 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. Our
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 our assets;




(2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that our receipts and expenditures are being made only in accordance with the
authorization of our management and directors; and




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




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008.  In making this assessment, management used
the framework set forth in the report entitled Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. The COSO framework summarizes each of the
components of a company’s internal control system, including (i) the
control environment, (ii) risk assessment, (iii) control activities,
(iv) information and communication, and
(v) monitoring.  This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permits us to provide only
management's report in this annual report.







Identified Material
Weaknesses




A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.
Management did not identify any internal control deficiencies during its
assessment of our internal control over financial reporting as of
December 31, 2008.





A
regionally-recognized independent consulting firm assisted management with its
assessment of the effectiveness of our internal control over financial
reporting, including scope determination, planning, staffing, documentation,
testing, remediation and retesting and overall program management of the
assessment project.  In conclusion, our Chief Executive Officer and
Chief Financial Officer surmised that Modern Medical did maintain effective
internal control over financial reporting as of December 31, 2008.





Changes
in Internal Control Over Financial Reporting.





There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15 (f) under the Exchange Act) that occurred during the period
covered by this Annual Report on Form 10-KSB that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Item
9B.  Other Information





None.





PART
III





Item 10.
Directors and Executive Officers, Promoters and Control Person Compliance with
Section 16(a) of the Exchange Act.





The
officers and directors of the Company, and further information concerning them,
are as follows:





Name
                
                Age
                
                PositionBaruh
      Hayut
                
                46
                
                Chairman
      of the Board of Directors and CEOPaul
      W. Harrison
                
                54
                
                Lead
      DirectorMinesh
      Patel
                
                37
                
                Chief
      Operating Officer, Chief FinancialOfficer
      and Director





Each of
the above officers and directors shall hold office until the next annual meeting
of the Company's shareholders and until a successor is elected and
qualified.





BARUH
HAYUT was appointed Chairman of the Board of Directors and Chief Executive
Officer on March 31, 2004. From June 2003 through March 31, 2004, Mr. Hayut
served as a financial consultant to the Company. Prior thereto, Mr. Hayut served
as a corporate finance and investment banker with Thornhill Group and Joseph
Charles and Associates. From 1992 to 1997, Mr. Hayut was a registered
representative with H.J. Meyers & Co. Mr. Hayut received his Bachelors
degrees in Business Administration and Economics from Hebrew University in
Jerusalem, Israel.





PAUL W.
HARRISON was appointed to the Board of Directors of the Company in June 2006,
and was subsequently appointed Lead Director of the Company in February 2007.
From August 2005 to June 2006, Mr. Harrison was a consultant to the Company.
Since 1994, he has been the Chairman and President of INEX Group, Inc, a
technology holding company, and since 2004, the CEO of INEX's software
subsidiary Attune, Inc. Mr. Harrison has held Executive positions with
publicly-traded Fortune 500 companies including McKesson Corporation and Lincoln
National Corporation. He was the Chairman and CEO of small publicly-held
companies, and
founded and sold several private companies for high returns on investments. He also participated in and
completed many mergers and acquisitions, and was instrumental in numerous
business ventures and software technologies that ultimately resulted in
additional revenues and increased market capitalizations to these companies in
excess of $1 billion. He
has a Business Degree (BBA) from Georgia State University, and has many
professional certifications.








MINESH
PATEL was appointed to the Board of Directors of the Company in June 2003 and on
November 2003 was appointed Chief Financial Officer. In November 2004, Mr. Patel
was appointed Chief Operating Officer. From February 2001 through November 2003,
Mr. Patel was an Investment Broker with the firm of JP Turner & Company LLC.
From October 1998 through February 2001, Mr. Patel was an Investment Broker with
the firm of JW Genesis. Mr. Patel received his Masters in Business
Administration with a concentration in Finance from Georgia State
University.





Family
Relationships





There are
no family relationships among the directors and executive officers.





Involvement
in Certain Legal Proceedings





None of
the directors or executive officers has, during the past five
years:





(a)
Had any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;





(b)
Been convicted in a criminal proceeding or subject to a pending criminal
proceeding;





(c)
Been subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities, futures, commodities or banking activities;
and





(d)
Been found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.





Compliance
with Section 16(a) of the Exchange Act:





Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports were required, the Company believes that
for the fiscal year ended December 31, 2008, beneficial owners complied with
Section 16(a) filing requirements applicable to them with the exception of the
following:





Issak
Hayut had a late Form 3 reflecting beneficial ownership of common stock acquired
on December 8,  2006 and a late Form 4 reflecting common stock
acquired on May18, 2007 and a stock warrant to purchase common stock acquired on
October 9, 2007 (both Forms were filed April 11, 2008).





On August
29, 2008, we issued Minesh Patel 1,000,000 shares of our common stock at $.02
per share based on the last trading closing price of the Company’s common stock
as of August 29, 2008 to compensate him for working with the Company at a
reduced salary for several years as a key manager.  Mr. Patel filed
the Form 4 required pursuant to this issuance late (Form 4 was filed on March
27, 2009).





Code of
Ethics





The
Company has not adopted a formal code of ethics because its executive officers
are also directors, who are already subject to ethical and fiduciary standards
imposed by law.





Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors





None.





Audit
Committee and Financial Expert





The
Company's board of directors has elected Minesh Patel as sole audit committee
member.  The Board has determined that it does not have a member of
its Board that qualifies as an “audit committee financial expert” as defined in
Item 407(d)(5)(ii) of Regulation S-K.





We
believe that the members of our Board of Directors are collectively capable of
analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. However, as part of
implementing Sarbanes Oxley, we plan to appoint a qualified audit committee
financial expert to our Board of Directors to strengthen and improve our
internal disclosure controls and procedures during the fiscal year ended
December 31, 2009.





Compensation
Committee





We do not
have a separate compensation committee.   At this point, we do
not intend to establish a separate compensation committee as this function will
be performed by our full Board of Directors.





Nominating
Committee





We do not
currently have a separate nominating committee as this function is performed by
our full Board of Directors.





Securities Authorized for
Issuance Under Equity Compensation Plans





For
information regarding securities authorized for issuance under Equity
Compensation Plans, and the equity compensation plan information table see Part
II, “Item 5: Market for Common Equity and Related Stockholder
Matters.”





Item 11.
EXECUTIVE COMPENSATION





The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive officers below for the fiscal years
ending December 31, 2007 and December 31, 2008. The following table summarizes
all compensation for fiscal years 2007 and 2008 received by our Chief Executive
Officer, and the Company's two most highly compensated executive officers who
earned more than $100,000 in fiscal year s 2007 and 2008.





SUMMARY
COMPENSATION TABLE





Name
      and
                          Principal
                          Position
                          (A)
                        
                        Year
                          (B)
                        
                        Salary
                          ($)
                          (C)
                        
                        
                        Bonus
                          ($)
                          (D)
                        
                        
                        Stock
                          Awards
                          ($)
                          (E)
                        
                        
                        Options/
                          Option
                          Awards
                          ($)
                          (F)
                        
                        
                        Non-Equity
                          Incentive
                          Plan
                          Compensation
                          ($)
                          (G)
                        
                        
                        Non-Qualified
                          Deferred
                          Compensation
                          Earnings
                          ($)
                          (H)
                        
                        
                        AllOther
                          Compensation
                          ($)
                          (I)
                        
                        
                        Total
                          ($)
                          (J)Baruh
      Hayut, Chairman & CEO
                        
                        2007
                        
                        $
                        178,784
                        (1)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        460,728
                        (3)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        15,870
                        
                        
                        $
                        655,382Baruh
      Hayut, Chairman & CEO
                        
                        2008
                        
                        $
                        163,000
                        (1)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        33,384
                        
                        
                        $
                        196,384Minesh
      Patel, COO & CFO
                        
                        2007
                        
                        $
                        89,315
                        (1)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        259,160
                        (4)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        6,500
                        
                        
                        $
                        354,975Minesh
      Patel, COO & CFO
                        
                        2008
                        
                        $
                        94,218
                        (1)
                        
                        $
                        0
                        
                        
                        $
                        20,000
                        (2)
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        16,480
                        
                        
                        $
                        130,698





(1)
            =
      Does not receive any Director fees, the amount shown above is executive
      compensation.





(2)
            =
      Represents the total fair value of 1,000,000 shares of common stock
      granted during the year ended December 31,
2008.





(3)
            =
      Represents the total fair value of 720,000 warrants granted during the
      year ended December 31, 2007. In September of 2008 the performance
      criteria was removed and all 720,000 warrants were
  vested.





(4)
            =
      Represents the total fair value of 400,000 warrants granted during the
      year ended December 31, 2007.  In September of 2008 these
      warrants were canceled.





Warrants
are also included in the Option Award Chart above.





Narrative
to Summary Compensation Table





The
Company does not currently have any employment agreements with any of its
executive officers.





Identification
to the extent material of any item included under All Other Compensation (column
(I)) in the Summary Compensation Table. Identification of an item shall not be
considered material if it does not exceed the greater of $25,000 or 10% of all
items included in the specified category in question set forth in paragraph
(b)(2)(ix) of Item 402. All items of compensation are required to be included in
the Summary Compensation Table without regard to whether such items are required
to be identified.





The
following table sets forth certain information concerning unexercised options,
stock that has not vested, and equity incentive plan awards for each of our
named executive officers outstanding as of December 31, 2008.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END DECEMBER 31, 2008





OPTION
      AWARDS
                      
                      STOCK
      AWARDSName
                      
                      Number
      of
                        securities
                        underlying
                        unexercised
                        options
      (#)
                        Exercisable
                      
                      
                      Number
      of
                        securities
                        underlying
                        unexercised
                        options
      (#)
                        Un-exercisable
                      
                      
                      Equity
                        Incentive
                        Plan
                        Awards:
                        Number
      of
                        Securities
                        Underlying
                        Unexercised
                        Unearned
                        options
      (#)
                      
                      
                      Option
                        Exercise
                        price
      ($)
                      
                      Option
                        expiration
                        date
                      
                      Number
                        of
                        shares
                        or
                        units
                        of
                        stock
                        that
                        have
                        not
                        vested
                        (#)
                      
                      
                      Market
                        value
                        of
                        shares
                        or
                        units
                        of
                        stock
                        that
                        have
                        not
                        vested
                        ($)
                      
                      
                      Equity
                        incentive
                        plan
                        awards:
                        number
                        of
                        unearned
                        shares,
                        units
                        or
                        other
                        rights
                        that
                        have
                        Not
                        Vested
                        (#)
                      
                      
                      Equity
                        incentive
                        plan
                        awards:
                        Market
                        or
                        payout
                        value
                        of
                        unearned
                        shares,
                        units
                        or
                        other
                        rights
                        that
                        have
                        not
                        vested
                        ($)Baruh
      Hayut
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      720,000
                      
                      
                      $
                      0.75
                      
                      10/07/12
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0





DIRECTOR
COMPENSATION





The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the fiscal year ended December 31,
2008.





Name
                
                Fees
      Earned or
                  Paid
      in Cash ($)
                
                
                Stock
                  Awards
                  ($)
                
                
                Option
                  Awards
                  ($)
                
                
                Non-
                  Equity
                  Incentive
                  Plan
                  ($)
                
                
                Change
                  in
      Pension
                  Value
      and
                  Non-Qualified
                  Deferred
                  Compensation
                  Earnings
                  ($)
                
                
                All
      Other
                  Compensation
                  ($)
                
                
                Total
                  ($)Baruh
      Hayut (1)
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Minesh
      Patel (1)
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Paul
      Harrison
                
                $
                60,000
                (2)
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                $
                14,714
                
                
                $
                74,714





(1) =
Serves as a Director, receives no additional compensation for being a director,
and only receives compensation as an Executive Officer as shown in the Summary
Compensation Table above.





(2) =
Director Fee with no written agreement or special arrangements





Warrants
are also included in the Option Awards chart above.





Item
12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters.





The
following table sets forth certain information as of March 19, 2009 with respect
to each beneficial owner of five percent (5%) or more of the outstanding shares
of common stock of Modern Medical, each officer and director of Modern Medical
and all officers and directors as a group. The table does not include securities
exercisable into common stock that have not yet vested or are not exercisable
within 60 days of the date hereof.





Percentage
      ofBeneficialNumber
                    
                    
                    Ownership
      ofName
                    
                    Address
                    
                    of Shares
                    
                    
                    Common StockBIBY
      Family Partners, LLC (1)
                    
                    439
      Chestnut St, Union, NJ
                    
                    
                    8,435,000
                    
                    
                    
                    32.86
                    %Issak
      Hayut (2)
                    
                    135
      Nautica Way, Roswell, GA
                    
                    
                    4,600,028
                    
                    
                    
                    17.53
                    %Paul
      W. Harrison (3)
                    
                    439
      Chestnut St, Union, NJ
                    
                    
                    4,290,666
                    
                    
                    
                    16.71
                    %Ronnie
      Antebi (4)
                    
                    552
      Decatur St SE, Atlanta, GA
                    
                    
                    2,062,286
                    
                    
                    
                    8.03
                    %Jacov
      Hayut (5)
                    
                    5281
      Marston Rd, Atlanta, GA
                    
                    
                    1,898,918
                    
                    
                    
                    7.40
                    %Minesh
      Patel
                    
                    439
      Chestnut St, Union, NJ
                    
                    
                    1,000,000
                    
                    
                    
                    3.90
                    %





All
officers and directors 13,725,666 and 53.47% as a group (3 persons)





(1)
            Mr.
      Barry Hayut, our Chairman and CEO, is the managing member of BIBYFamily
      Partners, LP, and has shared voting and dispositive power over
      theshares
      of common stock owned by BIBY Family Partners, LLC. Includes:(i)7,715,000
      shares of Common Stock directly owned, and (ii) 720,000 shares
      ofCommon
      Stock issuable upon the exercise of outstanding
  options.





(2)
            Includes:
      (i) 3,285,028 shares of Common Stock owned jointly with Mr. Issak Hayut’s
      spouse,and
      (ii) 1,215,000 shares of common stock issuable upon exercise of certain
      outstanding warrantsheld
      in the name of Complete Flooring & Renovation, Inc., an entity owned
      by Mr. Issak Hayut.Mr.
      Issak Hayut has sole voting and shared dispositive power over the
      shares.





(3)
            Includes:
      (i) 888,750 shares of Common Stock directly owned, and (ii) 3,401,916
      shares of CommonStock
      issuable upon the exercise of outstanding options.  Does not
      include 33,333 shares of CommonStock
      issuable upon the  exercise of outstanding options that have not yet
      vested or are not exercisablewithin
      60 days.





(4)
            Includes:
      (i) 2,012,286 shares of Common Stock directly owned, and (ii) 50,000
      shares of CommonStock
      issuable upon exercise of a warrant held in the name of Medical Equipment
      Solutions, an entityof
      which Mr. Antebi is a principal
owner.





(5)
            Includes:
      (i) 1,748,918 shares of Common Stock directly owned, and (ii) 150,000
      shares of CommonStock
      issuable upon the exercise of outstanding
  options.





Item 13.
Certain Relationships and Related Transactions and Director
Independence:





Modern
Medical believes that the transactions set forth below were made on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions, including any loans between Modern Medical and any of
its officers, directors, principal stockholders and their affiliates will be
approved by a majority of Modern Medical's board of directors and will continue
to be on terms no less favorable to Modern Medical than could be obtained from
unaffiliated third parties.





Medical
Equipment Solutions LLC., which consists of Ronnie Antebi and Yosef Azoulai, has
a management agreement with Modern Medical. MES provides services in selecting,
providing, and installing medical equipment. For these services, they are
compensated 5% of Union Imaging Center’s collections net of professional fees
belonging to the doctors and 6.5% for the Manalapan site collections net of
professional fees, the 6.5% fee was terminated upon sale of the Manalapan site
on August 1, 2006.  Medical Equipment Solutions LLC has a 50% partnership
interest in the Company’s PET Scan at Union Imaging site and owns a nuclear
camera that the Company uses as part of its Union Imaging Associates
site.  Medical Equipment Solutions supplies the camera and all service
on the equipment and in turn it receives 50% of the camera cash revenues after
professional fees paid to the nuclear radiologist.  Ronnie Antebi has
provided term financing for various loan restructurings and Mr. Antebi
beneficially owns more than 5% of our outstanding shares of common
stock.








On August
29, 2008, we issued Minesh Patel 1,000,000 shares of our common stock at $.02
per share based on the last trading closing price of the Company’s common stock
as of August 29, 2008 to compensate him for working with the Company at a
reduced salary for several years as a key manager.




On
September 2, 2008, we cancelled Minesh Patel’s Option & Warrant Agreements
that represented 717,000 shares of our common stock since he was issued the
stock bonus as described above, and to reduce the total number of shares
outstanding on a fully-diluted basis.




On
September 2, 2008, we removed performance criteria that is not time based
criteria in all previously issued Option & Warrant Agreements that included
applicable performance criteria for Baruh Hayut and Paul W. Harrison, and other
key managers in the company.This action was taken
since the hurdle of meeting an exercise price that is much higher price than the
common share price as of September 02, 2008 requires substantial positive
performance, and to provide incentives to fundamentally increase the value of
the company.





Director
Independence





The
Company has not determined whether it has any independent directors as that term
is defined under Nasdaq Rule 4200(a)(15).





Item 14.
Principal Accountant Fees and Services.





Our board
of directors appointed Liebman Goldberg & Hymowitz, LLP to serve as our
independent auditors for 2008.




The
following table sets forth fees billed to us by our independent registered
public accounting firm, Liebman Goldberg & Hymowitz, LLP, during the fiscal
years ended December 31, 2008, and December 31, 2007, for: (i) services rendered
for the audit of our annual financial statements and the review of our quarterly
financial statements; (ii) services by our independent registered public
accounting firms that are reasonably related to the performance of the audit or
review of our financial statements and that are not reported as Audit Fees;
(iii) services rendered in connection with tax compliance, tax advice and tax
planning; and (iv) all other fees for services rendered.





Fee
      Category
                
                Year
      Ended
                  December
      31,
                  2008
                
                
                Year
      Ended
                  December
      31,
                  2007Audit
      fees
                
                $
                49,500
                
                
                $
                49,500Audit-related
      fees
                
                $
                0
                
                
                $
                0Tax
      fees
                
                $
                5,500
                
                
                $
                5,500All
      other fees
                
                $
                0
                
                
                $
                0





Policy
Related to Board of Directors Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Accounting Firm.





The
Company's board of directors has elected Minesh Patel as sole audit committee
member.  The audit committee functions to review and approve the audit
services provided by Liebman Goldberg & Hymowitz, LLP and the fees incurred
in connection therewith.





Audit Fees. Consists of fees
billed for professional services rendered for the audit of our consolidated
financial statements and review of our interim consolidated financial statements
included in quarterly reports and services that are normally provided in
connection with statutory and regulatory filings or engagements.





Audit-Related Fees. Consists
of fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of our consolidated financial statements
and are not reported under “Audit fees.” These services include employee benefit
plan audits, accounting consultations in connection with acquisitions, attest
services that are not required by statute or regulation, and consultations
concerning financial accounting and reporting standards.





Tax Fees. Consists of fees
billed for professional services for tax compliance, tax advice, and tax
planning. These services include assistance regarding federal, state and local
tax compliance, tax audit defense, mergers and acquisitions, and tax
planning.





All Other Fees.  No
other fees have been billed for products and services billed by our
accountants.





Part
IV





Item 15.
Exhibits:





3.1
              Certificate
      of Incorporation (incorporated by reference to Exhibit 3.1 to the
      Company's Registration Statement on Form SB-2, Registration No. 333-86931)3.2
              Restated
      and Amendment to Certificate of Incorporation (incorporated by reference
      to Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
      Registration No. 333-86931)3.3
              By-Laws
      (incorporated by reference to Exhibit 3.2 to the Company's Registration
      Statement on Form SB-2, filed in February, 1994)4.1
              Form
      of Warrant – Cash Exercise Format. (Incorporated by reference to Exhibit
      4.1 to the Company's Report on Form 10KSB dated April 15,
      2008).4.2
              Form
      of Warrant – Cashless Exercise Format.  (Incorporated by
      reference to Exhibit 4.1 to the Company's Report on Form 10KSB dated April
      15, 2008).10.2
              Agreement
      for Purchase and Sales of Assets between the Company and  MTI
      Partners II, L.P., dated September 14, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company's Current Report on Form 8-K dated September
      20 2007).10.
      3
              Agreement
      for Purchase and Sales of Assets between the Company and  MTI
      Partners II, L.P., dated February 28, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 12,
      2007).10.4
              2003
      Stock Option Plan, dated September 19, 2003, incorporated herein by
      reference to Form 14A filed with the U.S. Securities and Exchange
      Commission on October 1, 2003.10.5
              Performance
      for Stock Options Agreement between the Company and Paul W. Harrison dated
      September 27, 2006 (incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K dated October 3,
  2006)10.6
              Performance
      for Stock Options Agreement between the Company and Minesh Patel dated
      September 27, 2006 (incorporated by reference to Exhibit 10.3 to the
      Company’s Current Report on Form 8-K dated October 3,
  2006)10.7
              Performance
      for Stock Options Agreement between the Company and Bruce Phillips dated
      September 27, 2006 (incorporated by reference to Exhibit 10.4 to the
      Company’s Current Report on Form 8-K dated October 3,
  2006)10.8
              Performance
      Bonus Agreement between the Company and Paul W. Harrison dated September
      27, 2006 (incorporated by reference to Exhibit 10.5 to the Company’s
      Current Report on Form 8-K dated October 3, 2006)10.9
              Performance
      Bonus Agreement between the Company and Minesh Patel dated September 27,
      2006 (incorporated by reference to Exhibit 10.6 to the Company’s Current
      Report on Form 8-K dated October 3, 2006)10.10
              Performance
      Bonus Agreement between the Company and Bruce Phillips dated September 27,
      2006 (incorporated by reference to Exhibit 10.7 to the Company’s Current
      Report on Form 8-K dated October 3, 2006)10.11
              Agreement
      for Purchase and Sale of Assets between the Company and Medical Equipment
      Solutions, Inc. dated January 27, 2009, (incorporated by reference to
      Exhibit 10.2 to the Company's Current Report on Form 8-K dated February
      02, 2009).21
              Subsidiaries  (Incorporated
      by reference to Exhibit 4.1 to the Company's Report on Form 10KSB dated
      April 15, 2008).31.1
              *
      Certification of the Company's Chief Executive Officer  pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              *
      Certification of the Company's  Chief Financial Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              *
      Certification of the Company's Chief Executive Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
              *
      Certification of the Company's Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





* filed
herewith





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.








Modern
      Medical Modalities CorporationDate:
      March 31, 2009
                          By:
      /s/ Baruh HayutName:  Baruh
      HayutTitle:
      Chief Executive
Officer


Pursuant
to and in accordance with the requirements of the Securities and Exchange Act of
1934, as amended, this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated





Name
                              
                              Title
                              
                              Date/s/ Baruh Hayut
                              
                              Chairman,
      Chief Executive
                              
                              March
      31, 2009Baruh
      Hayut
                              
                              Officer
      and Director(Principal
      Executive Officer)/s/ Minesh Patel
                              
                              Chief
      Financial Officer, Chief
                              
                              March
      31, 2009Minesh
      Patel
                              
                              Operating
      Officer and Director(Principal
      Financial Officer)/s/ Paul
      Harrison
                              
                              Lead
      Director
                              
                              March
      31, 2009Paul
      Harrison





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors Modern Medical Modalities Corporation and Subsidiaries Union, New
Jersey





We have
audited the accompanying consolidated balance sheets of Modern Medical
Modalities Corporation and Subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the years ended December 31, 2008 and 2007. 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 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 the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Modern Medical
Modalities Corporation and Subsidiaries as of December 31, 2008 and 2007, and
the consolidated results of income and operations and their cash flows for each
of the years ended December 31, 2008 and 2007, in conformity with accounting
principles generally accepted in the United States.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficiency
and has suffered recurring losses from operations. These factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters also are described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





/s/
LIEBMAN GOLDBERG & HYMOWITZ, LLP





Garden
City, New York


March 27,
2009


F-1





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


December
31,





ASSETS2008
                        
                        
                        2007Current
      assets:Cash
      and cash equivalents
                        
                        $
                        46,518
                        
                        
                        $
                        52,425Accounts
      receivable (less contractual allowances of $2,813,800 and $3,112,000,
      respectively)
                        
                        
                        989,544
                        
                        
                        
                        1,269,767Prepaid
      expenses
                        
                        
                        41,808
                        
                        
                        
                        11,098Total
      current assets
                        
                        
                        1,077,870
                        
                        
                        
                        1,333,290Property
      and equipment, net of accumulated depreciation of $3,351,672 and
      $3,081,470, respectively
                        
                        
                        1,088,894
                        
                        
                        
                        1,274,421Other
      assets:Purchased
      software
                        
                        
                        1,287,917
                        
                        
                        
                        1,224,480Note
      Receivable
                        
                        
                        -
                        
                        
                        
                        15,884Deposits
                        
                        
                        37,670
                        
                        
                        
                        39,661Total
      other assets
                        
                        
                        1,325,587
                        
                        
                        
                        1,280,025TOTAL
      ASSETS
                        
                        $
                        3,492,351
                        
                        
                        $
                        3,887,736





See notes
to consolidated financial statements.


F-2





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


December
31,





LIABILITIES
      AND STOCKHOLDERS' (DEFICIENCY)2008
                    
                    
                    2007Current
      liabilities:Accounts
      payable
                    
                    $
                    708,911
                    
                    
                    $
                    970,990Accrued
      expenses
                    
                    
                    1,302,839
                    
                    
                    
                    1,125,976Current
      portion long term debt
                    
                    
                    1,406,840
                    
                    
                    
                    1,335,276Total
      current liabilities
                    
                    
                    3,418,590
                    
                    
                    
                    3,432,242Other
      liabilities:Long
      term debt, net of current portion
                    
                    
                    211,387
                    
                    
                    
                    937,433Loans
      payable shareholders
                    
                    
                    235,899
                    
                    
                    
                    235,899Total
      other liabilities
                    
                    
                    447,286
                    
                    
                    
                    1,173,332Total
      liabilities
                    
                    
                    3,865,876
                    
                    
                    
                    4,605,574Minority
      interest
                    
                    
                    -
                    
                    
                    
                    65,622Commitments
      and contingenciesStockholders'
      (deficiency):Preferred
      stock, $0.0002 par value, authorized - 1,000,000 shares, issued and
      outstanding - 0 shares
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.0002 par value, authorized - 99,000,000 shares, issued –
      26,527,051 shares and outstanding – 25,673,385 shares at December 31, 2008
      and issued  - 24,594,051 shares and outstanding 24,234051 at
      December 31, 2007
                    
                    
                    5,305
                    
                    
                    
                    4,918Additional
      paid-in capital
                    
                    
                    11,799,216
                    
                    
                    
                    10,109,415Accumulated
      (deficit)
                    
                    
                    (12,115,546
                    )
                    
                    
                    (10,897,793
                    )Treasury
      common stock, $0.0002 par value, 853,666 shares at cost
                    
                    
                    (62,500
                    )
                    
                    
                    -Total
      stockholders' (deficiency)
                    
                    
                    (373,525
                    )
                    
                    
                    (783,460
                    )TOTAL
      LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
                    
                    $
                    3,492,351
                    
                    
                    $
                    3,887,736





See notes
to consolidated financial statements.


F-3





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


For the
Years Ended December 31,





2008
                
                
                2007Operating
      income:Net
      revenues from services
                
                $
                7,333,904
                
                
                $
                7,712,216Cost
      of services provided
                
                
                5,773,937
                
                
                
                5,796,880Total
      operating income
                
                
                1,559,967
                
                
                
                1,915,336Operating
      Expenses:Selling,
      general and administrative
                
                
                2,750,368
                
                
                
                4,498,875Depreciation
      and amortization
                
                
                269,379
                
                
                
                568,186Total
      operating expenses
                
                
                3,019,747
                
                
                
                5,067,061(Loss)
      from operations
                
                
                (1,459,780
                )
                
                
                (3,151,725
                )Other
      (expenses) income:Interest
      expense
                
                
                (141,930
                )
                
                
                (251,768
                )Gain
      from renegotiation of debt
                
                
                529,293
                
                
                
                -Net
      other income (expenses)
                
                
                387,363
                
                
                
                (251,768
                )(Loss)
      before income taxes and minority interests
                
                
                (1,072,417
                )
                
                
                (3,403,493
                )Provision
      for income taxes
                
                
                145,336
                
                
                
                51,183(Loss)
      before minority interests
                
                
                (1,217,753
                )
                
                
                (3,454,676
                )Minority
      interests
                
                
                -
                
                
                
                (31,330
                )Net
      loss
                
                $
                (1,217,753
                )
                
                $
                (3,486,006
                )(Loss)
      per share, basic and diluted
                
                $
                (0.05
                )
                
                $
                (0.15
                )Number
      of weighted average shares outstanding
                
                
                24,737,648
                
                
                
                23,134,342





See notes
to consolidated financial statements.


F-4


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY)


FOR THE
YEARS ENDED DECEMBER 31, 2008 and 2007





Number of
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  Treasury
                  
                  
                  RetainedShares
                  
                  
                  Common
                  
                  
                  Paid-In
                  
                  
                  Stock
                  
                  
                  EarningsOutstanding
                  
                  
                  Stock
                  
                  
                  Capital
                  
                  
                  at Cost
                  
                  
                  (Deficit)
                  
                  
                  TotalBalance
      at January 1, 2007
                  
                  
                  21,197,468
                  
                  
                  
                  4,239
                  
                  
                  
                  6,264,371
                  
                  
                  
                  -
                  
                  
                  
                  (7,411,787
                  )
                  
                  
                  (1,143,177
                  )Shares
      issued during 2007
                  
                  
                  3,396,583
                  
                  
                  
                  679
                  
                  
                  
                  2,175,849
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,176,528Value
      associated with SFAS 123(R) compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,802,395
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,802,395Shares
      surrendered to Treasury
                  
                  
                  (360,000
                  )
                  
                  
                  -
                  
                  
                  
                  (133,200
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (133,200
                  )Net
      loss for the year ended December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,486,006
                  )
                  
                  
                  (3,486,006
                  )Balance
      at January 1, 2008
                  
                  
                  24,234,051
                  
                  
                  
                  4,918
                  
                  
                  
                  10,109,415
                  
                  
                  
                  -
                  
                  
                  
                  (10,897,793
                  )
                  
                  
                  (783,460
                  )Shares
      issued during 2008
                  
                  
                  1,933,000
                  
                  
                  
                  387
                  
                  
                  
                  90,273
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  90,660Value
      associated with SFAS 123(R) compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,599,528
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,599,528Shares
      surrendered to Treasury
                  
                  
                  (493,666
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (62,500
                  )
                  
                  
                  -
                  
                  
                  
                  (62,500
                  )Net
      loss for the year ended December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,217,753
                  )
                  
                  
                  (1,217,753
                  )Balance
      at December 31, 2008
                  
                  
                  25,673,385
                  
                  
                  $
                  5,305
                  
                  
                  $
                  11,799,216
                  
                  
                  $
                  ( 62,500
                  )
                  
                  $
                  (12,115,546
                  )
                  
                  $
                  (373,525
                  )





See notes
to consolidated financial statements.





F-5


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the years ended December
31,





2008
                  
                  
                  2007Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (1,217,753
                  )
                  
                  $
                  (3,486,006
                  )Adjustments
      to reconcile net loss to net cash (used) provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  269,379
                  
                  
                  
                  568,186Contractual
      allowances
                  
                  
                  (298,200
                  )
                  
                  
                  (761,200
                  )(Decrease)
      increase in minority interest
                  
                  
                  (65,622
                  )
                  
                  
                  60,695Increase
      in Common Stock from issuance of shares and conversion of
    debt
                  
                  
                  387
                  
                  
                  
                  379Increase
      in Additional Paid in Capital from issuance of shares and conversion of
      debt
                  
                  
                  90,273
                  
                  
                  
                  1,137,949Increase
      in Additional Paid in Capital from stock-based compensation resulting from
      the issuance of employee stock options and warrants
                  
                  
                  1,599,528
                  
                  
                  
                  1,802,395(Increase)
      in Treasury Stock at cost, from purchase of the Company’s
      shares
                  
                  
                  (62,500
                  )
                  
                  
                  -Increase
      (decrease) in cash attributable to changes in operating assets and
      liabilities:Accounts
      receivable
                  
                  
                  578,422
                  
                  
                  
                  1,128,350Prepaid
      expense
                  
                  
                  (30,710
                  )
                  
                  
                  109,652Other
      current assets and deposits
                  
                  
                  1,991
                  
                  
                  
                  6,871Accounts
      payable
                  
                  
                  (262,080
                  )
                  
                  
                  627,540Accrued
      expenses
                  
                  
                  176,862
                  
                  
                  
                  (628,808
                  )Total
      adjustments
                  
                  
                  1,997,730
                  
                  
                  
                  4,052,009Net
      cash provided by operating activities
                  
                  
                  779,977
                  
                  
                  
                  566,003Cash
      flows from investing activities:Fixed
      asset acquisitions
                  
                  
                  (83,851
                  )
                  
                  
                  (175,324
                  )Purchased
      software
                  
                  
                  (63,437
                  )
                  
                  
                  (319,480
                  )Net
      cash (used) by investing activities
                  
                  
                  (147,288
                  )
                  
                  
                  (494,804
                  )Cash
      flows from financing activities:(Decrease)
      in shareholder loans
                  
                  
                  -
                  
                  
                  
                  (75,000
                  )Decrease
      in Note Receivable
                  
                  
                  15,884
                  
                  
                  
                  -Increase
      long term debt
                  
                  
                  397,582
                  
                  
                  
                  405,909(Reduction)
      long term debt
                  
                  
                  (1,052,062
                  )
                  
                  
                  (493,595
                  )Net
      cash (used) in financing activities
                  
                  
                  (638,596
                  )
                  
                  
                  (162,686
                  )Net
      (decrease) in cash and cash equivalents
                  
                  
                  (5,907
                  )
                  
                  
                  (91,487
                  )Cash
      and equivalents, beginning of year
                  
                  
                  52,425
                  
                  
                  
                  143,912Cash
      and equivalents, end of year
                  
                  $
                  46,518
                  
                  
                  $
                  52,425





See notes
to consolidated financial statements.





F-6





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the years ended December
31,





2008
                                
                                
                                2007Supplemental
      cash flow information:Cash
      items:Interest
      paid
                                
                                $
                                189,324
                                
                                
                                $
                                250,703Income
      taxes paid
                                
                                $
                                91,235
                                
                                
                                $
                                -Non-cash
      items:Common
      shares issued for purchased share in subsidiary
                                
                                
                                150,000
                                
                                
                                
                                -Common
      shares issued for conversion of debt
                                
                                
                                -
                                
                                
                                
                                -Common
      shares issued for compensation
                                
                                
                                .
      1,283,000
                                
                                
                                
                                -Common
      shares issued for purchased software
                                
                                
                                -
                                
                                
                                
                                1,500,000Common
      shares issued for private placement
                                
                                
                                500,000
                                
                                
                                
                                770,000Common
      shares issued in payment of consulting agreements
                                
                                
                                -
                                
                                
                                
                                766,583





See notes
to consolidated financial statements.


F-7


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 1 -
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:





Organization
and Business:





Modern
Medical Modalities Corporation (the "Company") was incorporated in the State of
New Jersey on December 6, 1989. The Company provides high technology medical
equipment and management services to hospitals and physicians. Modern Modalities
Corporation was incorporated in the State of New Jersey on June 4, 1990, for the
same purpose. The two companies had common ownership, directors and officers. In
July 1992 the two companies were merged under the laws of the State of New
Jersey, by way of an agreement accounted for as a tax-free merger. The surviving
corporation was Modern Modalities Corporation and was renamed Modern Medical
Modalities Corporation.





Basis of
Presentation:





The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Union Imaging Center, LLC, Medical Marketing and
Management, Inc., Somerset Imaging Corporation, Amherst Medical Equipment
Leasing Corp., Metairie Medical Equipment Leasing Corp., Ohio Medical Equipment
Leasing Corp., Union Imaging Associates, Inc. Union Imaging Associates, JV and
its subsidiary PET Scan at Union Imaging, LLC owned 50% and its joint venture,
Plainfield MRI Associates, JV owned 84. By contract the Company manages the
joint ventures, is the managing joint venturer and has unilateral control. All
significant inter-company transactions and accounts have been eliminated in
consolidation.





Revenue
recognition:





At each
of the Company's diagnostic imaging centers, all medical services are performed
exclusively by physician groups (the "Physician Group" or the "Interpreting
Physician(s)"), generally consisting of radiologists with whom the Company has
entered into a facility service or independent contractor agreements. Pursuant
to such agreements, the Company agrees to provide equipment, premises,
comprehensive management and administration, typically including billing and
collection of receivables and technical imaging services, to the interpreting
Physician(s).





Net
revenues from services are reported, when services are completed and billed, at
their net realizable amounts from third party payers, patients, and others for
services rendered at contractually established billing rates, which generally
are at a discount from gross billing rates. Known and estimated differences
between contractually established billing rates and gross billing rates
("contractual allowances") are recognized in the determination of net revenues
from services at the time services are rendered. Subject to the foregoing and
various State and Federal regulations, imaging centers operated or managed by
the Company recognize revenue under one of the following two types of agreements
with Interpreting Physician(s):





Type I -
In accordance with a facility service agreement with Interpreting Physician(s)
or Physician Group, the Company receives a technical fee for diagnostic imaging
procedures performed, the amount of which is dependent upon the type of
procedures performed at the center. The fee included in revenues is net of
estimated contractual allowances. The Company and the Interpreting Physician(s)
or Physician Group proportionally share in any losses due to uncollectible
amounts from patients and third party payers, and the Company has established
reserves for its share of the estimated uncollectible amount.





Type II -
The Company bills patients and third party payers directly for services provided
and pays the Interpreting Physician(s) either (i) a fixed percentage of fees
collected for services performed at the center, or (ii) a contractually fixed
amount based upon the specific diagnostic imaging procedures performed. Revenues
are recorded net of contractual allowances and the Company accrues the
Interpreting Physician(s) fees as an expense on the consolidated Statements of
Operations. The Company bears the risk of loss due to uncollectible amounts from
patients and third party payers, and the Company has established reserves for
such amounts.


F-8


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 1 -
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:





The
Company recognizes revenue from services upon performance of medical, management
and marketing services for financial statement reporting purposes.





Contractual
Allowances:





The
physicians with which the Company contracts, operate under various payment
systems with third-party payers. A substantial portion of the Company's revenues
is attributable to payments made by government-sponsored health care programs
and other third party payers. The Company receives these payments either
directly, in the case of imaging center revenues relating to reimbursable direct
patient billings, or indirectly, in the case of technical fee-for-service
payments by hospitals. Any change in reimbursement regulations, or the enactment
of legislation, which would have the effect of placing material limitations on
the amount of reimbursement for imaging services could adversely affect the
operations of the Company. In addition, health care reimbursement programs are
not uniformly prompt in making required payments. Extensive payment delays are
not uncommon, and the Company's financial resources could be strained while
awaiting payment.





Use of
Estimates:





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses in those financial statements. Actual results could differ from those
estimates.





Concentration
of Credit Risk/Fair Value:





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and accounts receivable.





The
Company maintains, at times, deposits in federally insured financial
institutions in excess of federally insured limits. Management attempts to
monitor the soundness of the financial institutions and believes the Company's
risk is negligible. Concentrations with regard to accounts receivable are
limited due to the Company's large customer base.





The
carrying amounts of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term of these items. The
carrying amount of long-term debt also approximates fair value since the
interest rates on these instruments approximate market interest
rates.





Cash and
Cash Equivalents:





The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company places its
cash with high credit quality financial institutions.





Accounts
Receivable:





Accounts
receivable is stated net of contractual allowances. Based upon its past history,
the Company estimates the amount of the accounts receivable it does not expect
to receive. The Company values its uncollected accounts receivable as part of
its determination of profit and constantly reviews the valuation. The continuing
review and gathering of additional information, as well as changing
reimbursement rates, may cause adjustments.


F-9


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 1 -
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:





Property
and Equipment:





Furniture,
fixtures, equipment and leasehold improvements are stated at cost. Depreciation
and amortization are provided for, generally using the straight-line method over
the lease term or the estimated useful lives of the related asset, which is five
to seven years for office equipment and furniture and fixtures, and ten years
for medical equipment.





Deferred
Financing Costs:





All
deferred financing costs incurred by the Company in conjunction with the
issuance of convertible notes and warrants were amortized over a period of
twelve months, the term of the debt.





Income
Taxes:





The
Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". SFAS 109 requires an asset and liability approach for financial
reporting for income taxes. Under SFAS 109, deferred taxes are provided for
temporary differences between the carrying values of the assets and liabilities
for financial reporting and tax purposes at the enacted rates at which these
differences are expected to reverse.





Net
Income (Loss) Per Share:





Net
income (loss) per common share amounts ("basic EPS") are computed by dividing
net earnings (loss) by the weighted average number of common shares outstanding,
excluding any potential dilution. Net income (loss) per common share amounts
assuming dilution ("diluted EPS") are computed by reflecting


potential
dilution from the exercise of stock options and warrants.





Stock-based
Compensation:





Under the
provisions of SFAS 123(R), employee stock awards under the Company’s
compensation plan, the Company measures compensation expense for cost of
services received from employees in a share-based payment transaction using fair
market value of  the underlying stock award on the date of grant net
of any employees pay (or obligated to pay) for the stock granted.





The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issued Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments
that are issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”. The fair value of the stock awarded is used to
measure the transaction, as this is more reliable than the fair value of
services received. Fair value is measured as the value of the Company’s common
stock on the date that the commitment for performance by the counterparty has
been reached or the counterparty’s performance is complete.  The fair
value of the stock award is charged directly to compensation expense and
additional-paid-in-capital.




The
Company uses the most recent closing price in valuing common stock used in
financial transactions. This policy is used for both employee and non-employee
transactions involving common stock and the setting of exercise prices for
options or warrants.




Advertising
and Promotion Costs:





Advertising
and promotion costs, which are included in general and administrative expenses,
are expensed as incurred. For the two years ended December 31, 2008 and 2007,
such costs aggregated $45,022 and $75,135, respectively.





Retirement
Plan:





The
Company maintains a qualified 401-(k) wage deferral plan. Employees may defer a
portion of their salary. The Company did not contribute to the plan during 2008
or 2007.  However, for 2006 the Company agreed to match 50% of
employee contributions up to 6% of the employee’s compensation. For 2006 the
Company portion of the matching program was $34,371, this amount was accrued for
in 2006 and paid in 2007.


F-10


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 1 -
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:





Impairment
or Disposal of Long-Lived Assets:





In August
2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". The statement supersedes SFAS No. 121 and Accounting
Principles Board Opinion No. 30 "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". The Statement retains the
fundamental provisions of SFAS No. 121 for the recognition and measurement of
impairment, but accounting and reporting standards for segments of a business to
be disposed of. The provisions of this statement are required to be adopted no
later than fiscal years beginning after December 31, 2001, with early adoption
encouraged. The impact of adoption of SFAS No. 142 will not be
material.





Purchased
Software Asset and FASB 144 Financial Valuation and Analysis:





On
February 28, 2007 and September 14, 2007, we purchased two software assets and
combined them into one software asset. The software asset has been enhanced
through customizations to meet a broader range of needs, and is key to our
web-based, enterprise-wide, healthcare information system (HIS). We recorded at
cost the HIS software asset for the period ending December 31, 2007 based on the
combined purchase prices of the two software assets and certain costs related to
the customizations made in 2008.





In order
to validate the value of the HIS software asset as recorded in our financial
statements and to determine if there is any impairment or reduction in value, we
hired an independent Company in 2007 to perform financial valuation consulting
and calculation analysis services using guidance provided in FASB 144 by
applying the fair value standard as defined in FASB pronouncements and business
valuation calculations and consultation analysis. These services were performed
in accordance with the standards and definitions of the American Institute of
Certified Public Accountants’ (AICPA’s) Code of Professional Conduct and
Statement on Standards for Valuation Services (SSVS) and all standards of the
National Association of Certified Valuation Analysts (NACVA).





The
result of the independent FASB 144 business valuation calculations and
consultation analysis conducted for us in 2007 was that our HIS software asset
shows no indication of impairment based on current market conditions and its
projected net cash flow - undiscounted. We determined that based on the
independent FASB 144 business valuation calculations and consultation analysis
conducted for us in 2007 and the on-going enhancements made to the software in
2008, that the HIS software asset is worth at the least the value recorded in
our financial statements, and that we do not need to reduce the recorded value
of the HIS software asset at this time.  Amortization will be
recognized when the asset is placed in service and over its useful
life.





Instruments
with Characteristics of Both Liabilities and Equity:





In May
2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
recorded as equity, be recorded as liabilities. The financial instruments
affected include mandatorily redeemable stock; certain financial instruments
that require the issuer to buy back some of its shares in exchange for cash or
other assets, and certain obligations that can be settled with shares of stock.
The Company adopted SFAS No. 150 on June 1, 2003. The adoption of this statement
did not have any effect on the Company's financial position, results of
operations or cash flows.





Classification





Certain
items of 2007 have been reclassified to conform to 2008
classification.


F-11


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 2 -
GOING CONCERN UNCERTAINTY:





The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has a working capital deficiency of
$2,340,720 as of December 31, 2008, and has sustained significant losses from
operations, which raised substantial doubt about the Company's ability to
continue as a going concern. In view of these matters, realization of the assets
of the Company is dependent upon the Company's ability to meet its financing
requirements and the success of future operations. The consolidated financial
statements do not include adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might be necessary should the Company be unable to continue in
existence.





The
Company has continued its implementation of a restructuring plan for its
subsidiaries and believes this plan will make the Company profitable in future
periods. The plan includes increasing marketing personnel to increase patient
service revenue, as well as a reduction of administrative personnel. Duties of
those employees whose jobs were eliminated were reassigned to existing
employees. We have also positioned ourselves to expand our business and
participate more in outsourced management services and the expanding, more
profitable information and administrative services markets, and intend to seek
out more networks of clinics and other outpatient facilities through joint
ventures and collaborative contractual arrangements with hospitals, physician
managed ambulatory centers, payers, and other key participants in the industry.
In order to support our business expansion, we acquired advanced software assets
and added customizations to produce an integrated information system that will
allow us to provide better management and related services and improve overall
profitability. Management believes that the steps it is taking will allow the
Company to continue in existence.





NOTE 3 -
MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS:





Commencing
March 20, 2003 through April 11, 2004, the Company acquired an additional 70%
interest in Union Imaging Associates, JV. This additional 70% brought the
Company's ownership of Union Imaging Associates, JV to 80%. It was acquired for
varying prices totaling $1,525,000, payable in monthly installments over
approximately 36 months. On September 1, 2006, we purchased Dr. Wolkstein's
share of his ownership interest in Union Imaging Associates, Inc. ("UIA, Inc.")
in exchange for 350,000 shares, of the Company's common stock with a valuation
of $154,000 at the time of purchase, and a note for $27,000 to be paid in 18
payments of $1,500.00 per month. The 350,000 shares of common stock were issued
on October 20, 2006. As a condition of the purchase, the Company agreed to
re-purchase the 350,000 shares from Dr. Wolkstein for $75,000 if for any
consecutive 20 day period commencing September 1, 2008 through the last day of
February 2009, the stock price was below $1.00 per share (see footnote 47
Subsequent Events). The purchase of Dr. Wolkstein's ownership interest brings
the Company's total ownership in UIA, Inc. to 90%.    On
June 20, 2008, we purchased Dr. Haidri’s share of his ownership interest in
Union Imaging Associates, Inc. ("UIA, Inc.") in exchange for 150,000 shares, of
the Company's common stock with a valuation of $15,000 at the time of purchase,
and a note for $36,000 to be paid in 18 payments of $2,000.00 per month. The
150,000 shares of common stock were issued on August 28, 2008. As a condition of
the purchase, the Company agreed to re-purchase the 150,000 shares from Dr.
Haidri for $45,000 if for any consecutive 20 day period during the first 90 day
period commencing at the end of the fifteenth month subsequent to June 20, 2008,
if the stock price was below $0.30 per share. The purchase of Dr. Haidri’s
ownership interest brings the Company's total ownership in UIA, Inc. to
100%.  The cash portions of the purchases are being paid monthly
through April 2011.  The remaining average monthly payments are $6,855
(2009), $2,636 (2010) and $879 (2011).


F-12


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 3 -
MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS, continued:





In July,
2006, we entered into a Letter of Intent to divest its ownership interests in
Modern Medical Imaging at Atrium, L.L.C., a Limited Liability Company ("the
L.L.C."). The transaction is to be structured in the form of a sale of the
L.L.C. whereby 100% of the membership interest is acquired, in exchange for
$250,000 in cash with specific provisions included for the timing of payments
with the majority of payment due at closing. In addition, assignments will be
included for the Company to assume certain accounts receivables and accounts
payables as of the closing date of the transaction. On September 1, 2006, we
entered into a definitive agreement with a privately-held organization and sold
its ownership interests in Modern Medical Imaging at Atrium, L.L.C. for $250,000
under essentially the same terms and conditions as described above and outlined
in the Letter of Intent. Even though the new owners of the Imaging Center at
Atrium assumed the liabilities of the business, the Company remained
contingently liable for a long term facility lease, and MRI equipment
lease.   Subsequent to us selling the facility, the purchaser
also acquired the condominium space covered by this facility lease, terminating
our contingent liability under the lease.  Effective December 31,
2008, the Company was released of all lease obligations under the MRI lease by
TD Equipment Finance, Inc. the successor in interest to Commerce Commercial
Leasing, Inc. resulting from a pay-off of lease balance by Atrium Diagnostic
Imaging , LLC, the successor in interest to the original lease.





On
February 28, 2007 we entered into an Asset Purchase Agreement (the "Agreement")
with MTI Partners II, L.P. ("MTI-II") to acquire MTI-II's Medical Software
Assets (the "Assets") in exchange for 1 million shares of our common stock
("Common Stock") valued at $730,000 based on $0.73 per share. The transaction
closed in March of 2007. The Assets consist of medical computer software that
organizes, manages, and maintains patient scheduling, registration, medical
records, billing, and includes other customized components. The shares of Common
stock were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended. Paul Harrison, a member of our Board of Directors, is the President of
INEX Group, Inc., which serves as the General Partner of MTI-II. Mr. Harrison
received 562,500 shares of our Common Stock of the total 1 million shares issued
to MTI-II pursuant to this Agreement. The Assets purchased are expected to be
used to bring new web-based, information system solutions to help automate and
provide expanded outsourced management and business process services to our
existing clinics and to the large market of other outpatient clinics that are
owned or operated by physicians (including radiologists), hospitals, employers,
and health insurers.





On
September 14, 2007 we entered into an Asset Purchase Agreement (the "Agreement")
with MTI Partners II, L.P.("MTI-II") to acquire MTI-II's Healthcare Payer Admin
Software Asset (the "Asset") in exchange for 500,000 shares of our common stock
("Common Stock"), warrants ("Warrants") for 900,000 shares of our common stock
with an exercise price of $0.70 per share, and $250,000 to be paid within 12
months from the date of the Agreement. The transaction is expected to close by
the end of September 2007. The Asset consists of healthcare payer admin computer
software that helps organize, manage, and maintain health plans, membership,
eligibility, claims administration, and includes other customized components.
The shares of Common stock were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended. Paul Harrison, a member of the Board of
Directors of MODM, is the President of INEX Group, Inc., which serves as the
General Partner of MTI-II. Mr. Harrison will be entitled to receive 281,250
shares of our Common Stock, and a Warrant for 506,250 of our Common Stock with
an exercise price of $0.70 per share issuable to MTI-II pursuant to this
Agreement.


F-13


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 4 -
PROPERTY AND EQUIPMENT:





Property
and equipment are summarized by major classification as follows:





December 31, .Useful lives
                            
                            2008
                            
                            
                            2007Medical
      Equipment
                            
                            5 -
      10 years
                            
                            $
                            3,430,972
                            
                            
                            $
                            3,385,258Furniture
      and Fixtures
                            
                            3
      -  5 years
                            
                            
                            39,041
                            
                            
                            
                            39,040Automobiles
                            
                            5
      years
                            
                            
                            67,865
                            
                            
                            
                            67,865Computer
      equipment and software
                            
                            3
      -  5 years
                            
                            
                            287,860
                            
                            
                            
                            260,969Leasehold
      improvements
                            
                            5 -
      10 years
                            
                            
                            614,828
                            
                            
                            
                            602,7594,440,566
                            
                            
                            
                            4,355,891Less:
      Accumulated Depreciation and Amortization
                            
                            
                            
                            
                            3,351,672
                            
                            
                            
                            3,081,470$
                            1,088,894
                            
                            
                            $
                            1,274,421Depreciation
      expense for the years ended
                            
                            
                            
                            $
                            269,379
                            
                            
                            $
                            568,186





NOTE 5 -
EMPLOYEE STOCK OPTIONS AND RELATED BONUS PLANS:





The
purpose of the 2003 and 1999 Option Plans is to grant officers, employees and
others who provide significant services to the Company a favorable opportunity
to acquire Common Stock so that they have an incentive to contribute its success
and remain in its employ. Under the 2003 and 1999 Option Plans, the Company is
authorized to issue options for a total of 2,000,000 and 500,000 shares of
Common Stock, respectively.





On
September 27, 2006 the Board of Directors of Modern Medical Modalities
Corporation (the "Company") approved the grant of a total of 1,168,000 stock
options pursuant to the Company's 2003 Stock Option Plan ("2003 Plan") to two
employees and one non-employee director. Specifically, the Company issued
performance-based stock options pursuant to Performance for Stock Options
Agreements equal to a potential of 868,000 shares of the Company's common stock
exercisable at $0.50 per share, based primarily on the Company achieving certain
amounts of new revenue upon the successful completion of strategic acquisition
opportunities ("Performance Based Stock Options"), and stock options to purchase
300,000 shares of the Company's common stock at an exercise price of $0.50 per
share that vest one-third (1/3) annually from the date of grant ("Three-Year
stock Options").





Mr. Paul
W. Harrison, a non-employee director of the Company, received Performance Based
Stock Options to purchase a potential of 434,000 shares, and Three-Year Stock
Options to purchase 100,000 shares. Mr. Minesh Patel, the Company's Chief
Financial Officer, and Mr. Bruce Phillips, the Company's Controller, each
received Performance Based Stock Options to purchase a potential of 217,000
shares, and Three-Year Stock Options to purchase 100,000 shares.





On
October 17, 2006 the Board of Directors of Modern Medical Modalities Corporation
(the "Company") approved the grant of a total of 200,000 stock options pursuant
to the Company's 2003 Stock Option Plan ("2003 Plan") to two employees.
Specifically, the Company issued Stock Option Agreements for stock options to
purchase 200,000 shares of the Company's common stock at an exercise price of
$0.50 per share that vest one-third (1/3) annually from the date of grant
("Three-Year stock Options"). Ms. Elli Pittas, a manager in the Company,
received Three-Year Stock Options with vesting provisions to purchase 100,000
shares at an exercise price of $0.50 per share. Mr. John Lentini, a manager in
the Company, received Three-Year Stock Options with vesting provisions to
purchase 100,000 shares at an exercise price of $0.50 per share.





In
addition to the stock option grants, the Board of Directors approved Performance
Bonus Agreements for Messrs. Harrison, Patel, and Phillips whereby Mr. Harrison
was allocated a total of $226,500 cash bonus, and Messrs. Patel and Phillips
were each allocated a total of $113,250 cash bonus, upon the Company achieving
certain amounts of new revenue pursuant to the successful completion of
strategic acquisition opportunities.


F-14


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 5 -
EMPLOYEE STOCK OPTIONS AND RELATED BONUS PLANS, continued:





On June
1, 2007, we entered into performance-based stock agreements with certain
directors and management to encourage extraordinary efforts in key categories in
a short time frame and provide incentives based on defined performance criteria.
The Company believes that Paul Harrison will be very instrumental in providing
growth strategy and guidance and in using his experience, contacts, and track
record to help rapidly grow the Company through acquisitions, and certain
management will be important to helping integrate the acquisitions and the
Modern Medical Network System on a profitable basis. We issued Paul Harrison a
performance based stock warrant agreement for 1,800,000 shares at $0.65 per
share (using the June 1, 2007 closing price) based on the following criteria and
allocations: 360,000 stock warrants upon execution of the Agreement, 360,000
stock warrants upon the Company closing profitable acquisitions with aggregate
revenues of $10,000,000 (pro-rata award if revenues are less) within 12 months,
360,000 stock warrants after the Modern Medical Network System is used by an
acquisition, and720,000 stock warrants
after the Company achieves 4 quarters of positive income
from operations (following the date of the Agreement). We issued Minesh Patel a
performance based stock option agreement for 400,000 shares at $0.65 per share
(using the June 1, 2007 closing price) based on the following criteria and
allocations: 100,000 stock options upon execution of the Agreement, 100,000
stock options upon the Company closing profitable acquisitions with aggregate
revenues of $10,000,000 (pro-rata award if revenues are less) within 12 months,
100,000 stock options after the Modern Medical Network System is used by an
acquisition, 100,000 stock options after the Company achieves 4 quarters of
positive Income from Operations (following the date of the Agreement). We issued
Bruce Phillips a performance based stock option agreement for 400,000 shares at
$0.65 per share (using the June 1, 2007 closing price) based on the following
criteria and allocations: 100,000 stock options upon execution of the Agreement,
100,000 stock options upon the Company closing profitable acquisitions with
aggregate revenues of $10,000,000 (pro-rata award if revenues are less) within
12 months, 100,000 stock options after the Modern Medical Network System is used
by an acquisition, 100,000 stock options after the Company achieves 4 quarters
of positive Income from Operations (following the date of the Agreement). We
issued Elli Pittas performance based stock warrant agreement for 100,000 shares
at $0.65 per share (using the June 1, 2007 closing price) based on the following
criteria and allocations: 50,000 stock warrants upon execution of the Agreement
and 50,000 stock  warrants after the Company achieves 4 quarters of
positive Income from Operations (following the date of the Agreement). We issued
John Lentini a performance based stock warrant agreement for 100,000 shares at
$0.65 per share (using the June 1, 2007 closing price) based on the following
criteria and allocations: 50,000 stock warrants upon execution of the Agreement
and 50,000 stock warrants after the Company achieves 4 quarters of positive
Income from Operations (following the date of the Agreement).





On June
11, 2007, we filed an S-8 registration statement for securities related to our
2003 Stock Option Plan. Descriptions of our 2003 Stock Option Plan and the
securities are contained in our filing of the S-8 registration statement, which
includes 2,000,000 shares of common stock to cover stock options for up to
2,000,000 shares with a proposed maximum offering price of $0.67 per share and a
proposed maximum aggregate offering price of $1,340,000. On November 6, 2007, we
entered into incentive stock option agreements with employees of the Company to
provide incentives for remaining with the Company and to encourage extra efforts
and increased performance. We issued stock options for 190,000 shares of our
common stock at an exercise price of $0.37 per share. The stock options have a
10 year term and the vesting criteria is based on a 3 year period, whereby 1/3
of the shares are vested each year for the periods November 5, 2008, November 5,
2009, and November 5, 2010.


F-15


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 5 -
EMPLOYEE STOCK OPTIONS AND RELATED BONUS PLANS continued:




On
October 9, 2007, we entered amended, cancelled, and issued new Performance Stock
Agreements with certain directors and management to encourage extraordinary
efforts in key categories that better fit our expanded growth strategy, which
now includes obtaining new direct sales of our information system and
administrative services to other healthcare organizations in addition to
obtaining new business through acquisitions and to provide incentives based on
new performance criteria. The Company believes that Paul Harrison will be very
instrumental in providing growth strategy and guidance and in using his
experience, contacts, and track record to help rapidly grow the Company
through direct sales of its systems and services and through acquisitions, and
certain management will be important to helping integrate the acquisitions and
the Modern Medical Network System on a profitable basis. On October 9, 2007, we
amended Paul Harrison’s performance based stock warrant agreement with the same
number of 1,800,000 shares at the same exercise price of $0.65 per share based
on the following new criteria and allocations: 360,000 stock warrants upon
execution of the Agreement; 360,000 stock warrants awarded for each $1,000,000,
up to an aggregate award of 1,080,000 stock warrants based on up to $3,000,000
in aggregate revenues, contracted for, or
generated by, the Company (including its subsidiaries and affiliates) in
information systems and services related sales or transactions and in related
administrative services sales or transactions using the Company’s information
system; and 360,000 stock warrants after the Company’s Information System is
used by another organization. We cancelled Minesh Patel’s performance based
stock option agreement for 400,000 shares at $0.65 per share issued on June 1,
2007 and on October 9, 2007, issued him a performance based warrant agreement
for the same number of 400,000 shares at the same price of $0.65 per share based
on the following criteria and allocations: 200,000 stock warrants upon execution
of the Agreement; 50,000 stock warrants awarded for each $1,000,000, up to an
aggregate award of 150,000 stock warrants based on up to $3,000,000 in aggregate
revenues, contracted for, or generated by the Company (including its
subsidiaries and affiliates) in information systems and services related sales
or transactions and in related administrative services sales or transactions
using the Company’s information system; 50,000 stock warrants after the
Company’s Information System is used by another organization. We cancelled Bruce
Phillips’ performance based stock option agreement for 400,000 shares at $0.65
per share issued on June 1, 2007 and on October 9, 2007, issued him a
performance based warrant agreement for the same number of 400,000 shares at the
same price of $0.65 per share based on the following criteria and allocations:
200,000 stock warrants upon execution of the Agreement; 50,000 stock warrants
awarded for each $1,000,000, up to an aggregate award of 150,000 stock warrants
based on up to $3,000,000 in aggregate revenues, contracted for, or generated by
the Company (including its subsidiaries and affiliates) in information systems
and services related sales or transactions and in
related administrative services sales or transactions using the Company’s
information system; 50,000 stock warrants after the Company’s Information System
is used by another organization. On October 9, 2007, the Company entered into a
warrant agreement with Baruh Hayut and granted him a stock warrant for 720,000
shares at $0.75 per share based on the following criteria: 720,000 stock
warrants awarded once $3,000,000 in aggregate revenues have been contracted for,
or generated by, the Company (including its subsidiaries and affiliates) in
information systems and services related sales or transactions and in related
administrative services sales or transactions using the Company’s information
system.





On August
29, 2008, we issued Minesh Patel 1,000,000 shares of our common stock at $.02
per share based on the last trading closing price of the Company’s common stock
as of August 29, 2008 to compensate him for working with the Company at a
reduced salary for several years as a key manager.




On August
29, 2008, we issued Bruce Phillips 283,000 shares of our common stock at $.02
per share based on the last trading closing price of the Company’s common stock
as of August 29, 2008 to compensate him for working with the Company at a
reduced salary for several years as a key manager.




On
September 2, 2008, we cancelled Minesh Patel’s Option & Warrant Agreements
that represented 717,000 shares of our common stock since he was issued the
stock bonus as described above, and to reduce the total number of shares
outstanding on a fully-diluted basis.





On
September 2, 2008, we removed performance criteria that is not time based
criteria in all previously issued Option & Warrant Agreements that included
applicable performance criteria for Baruh Hayut, Paul W. Harrison, Bruce
Phillips, John Lentini, and Elli Pittas.This action was taken since
the hurdle of meeting an exercise price that is much higher price than the
common share price as of September 02, 2008 requires substantial positive
performance, and to provide incentives to fundamentally increase the value of
the company.


F-16


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 5 -
EMPLOYEE STOCK OPTIONS AND RELATED BONUS PLANS continued:





There are
no other material relationships between the Company or its affiliates and any of
the parties that were granted the Performance Based Stock Options, Three-Year
Stock Options and Cash Performance Bonus other than those described
herein.





A summary
of stock option activity as of December 31, 2008 and 2007 and changes during the
years ended on those dates is presented below:





2008
                                  
                                  
                                  2007Weighted
                                  
                                  
                                  
                                  
                                  
                                  WeightedAverage
                                  
                                  
                                  
                                  
                                  
                                  AverageExercise
                                  
                                  
                                  
                                  
                                  
                                  ExerciseStock
      Options
                                  
                                  Shares
                                  
                                  
                                  Price
                                  
                                  
                                  Shares
                                  
                                  
                                  PriceOutstanding
      at beginning of year
                                  
                                  
                                  1,558,000
                                  
                                  
                                  $
                                  0.4841
                                  
                                  
                                  
                                  1,368,000
                                  
                                  
                                  $
                                  0.5000Granted
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.0000
                                  
                                  
                                  
                                  190,000
                                  
                                  
                                  $
                                  0.3700Exercised
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.0000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.0000Forfeited
      or expired
                                  
                                  
                                  (317,000
                                  )
                                  
                                  $
                                  0.5000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.0000Outstanding
      at end of year
                                  
                                  
                                  1,241,000
                                  
                                  
                                  $
                                  0.4801
                                  
                                  
                                  
                                  1,558,000
                                  
                                  
                                  $
                                  0.4841





The
following table summarizes the status of non-vested shares of stock options as
of December 31,




2008 .
                      
                      
                      
                      
                      
                      2007 .Weighted
                      
                      
                      
                      
                      
                      WeightedAverage
                      
                      
                      
                      
                      
                      AverageGrant
      Date
                      
                      
                      
                      
                      
                      Grant
      DateNon-vested
      Shares
                      
                      Shares
                      
                      
                      Fair
      Value
                      
                      
                      Shares
                      
                      
                      Fair
      ValueNon-vested
      at beginning of year
                      
                      
                      1,291,335
                      
                      
                      $
                      0.3435
                      
                      
                      
                      1,268,000
                      
                      
                      $
                      0.3108Grant
                      
                      
                      0
                      
                      
                      $
                      0.0000
                      
                      
                      
                      190,000
                      
                      
                      $
                      0.5473Vested
                      
                      
                      (289,595
                      )
                      
                      $
                      0.3327
                      
                      
                      
                      (166,665
                      )
                      
                      $
                      0.3274Forfeited
      or expired
                      
                      
                      (317,000
                      )
                      
                      $
                      0.3000
                      
                      
                      
                      0
                      
                      
                      $
                      0.0000Non-vested
      at end of year
                      
                      
                      684,740
                      
                      
                      $
                      0.3716
                      
                      
                      
                      1,291,335
                      
                      
                      $
                      0.3435





The
following table summarizes information about stock options outstanding at
December 31, 2008:





WeightedAverage
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedRemaining
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageExercise
                    
                    Number
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    Number
                    
                    
                    ExercisePrices
                    
                    Outstanding
                    
                    
                    Life in Years
                    
                    
                    Price
                    
                    
                    Exercisable
                    
                    
                    Price$0.5000
                    
                    
                    851,000
                    
                    
                    
                    2.7
                    
                    
                    $
                    0.5000
                    
                    
                    
                    445,460
                    
                    
                    $
                    0.5000$0.5000
                    
                    
                    200,000
                    
                    
                    
                    2.8
                    
                    
                    $
                    0.5000
                    
                    
                    
                    88,000
                    
                    
                    $
                    0.5000$0.3700
                    
                    
                    190,000
                    
                    
                    
                    8.8
                    
                    
                    $
                    0.3700
                    
                    
                    
                    22,800
                    
                    
                    $
                    0.37001,241,000
                    
                    
                    
                    3.7
                    
                    
                    $
                    0.4801
                    
                    
                    
                    556,260
                    
                    
                    $
                    0.4947


F-17


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





Note 6 -
SHARE-BASED PAYMENTS IN ACCORDANCE WITH SFAS 123(R):





On
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which
requires companies to expense the grant date fair value of employee stock
options and other forms of share-based awards. SFAS 123(R) addresses
accounting for share-based awards, including shares issued under employee stock
purchase plans, stock options, and share-based awards, with compensation expense
measured using the fair value, for financial reporting purposes, and recorded
over the requisite service period of the award. In accordance with
SFAS 123(R), we recognize compensation expense for awards granted and
awards modified, repurchased, or cancelled after the adoption date. Under
SFAS 123(R), we estimate the fair value of stock options and share-based
awards using the Simple Black-Scholes European Option Pricing
Model.





For the
twelve month periods ended December 31, 2008 and 2007, we conducted an outside
independent analysis and our own review, and based on the results, we recognized
$1,599,528 and $1,802,395, respectively, in share-based payments related to
warrants and stock options issued with the rights to exercise 4,494,000 shares
in 2008 and 6,215,198 shares in 2007 of our common stock.





At
December 31, 2008, the Company had approximately $96,000 of total unrecognized
compensation cost related to unvested stock options. This cost is expected to be
recognized over a weighted-average period of approximately 1.6
years.





The fair
value of our options issued during the years ended December 31, 2008 and
2007, was determined using the Simple Black-Scholes European Option Pricing
Model with the following range of assumptions:





Year Ended December 31,2008
                  
                  
                  2007Risk-free
      interest rate
                  
                  
                  3.5%
      - 3.9
                  %
                  
                  
                  4.8-5.3%
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Option
      remaining term (in years)
                  
                  
                  5.0
                  
                  
                  
                  5.0Expected
      stock volatility
                  
                  
                  134%-327
                  %
                  
                  
                  27%-124
                  %





NOTE 7 -
LONG-TERM DEBT:





Long-term
debt consists of the following:


December 31, 2008Notes
      payable
                  
                  $
                  1,315,649Capitalized
      lease obligations
                  
                  
                  438,477Less
      current portion
                  
                  
                  ( 1,306,840
                  )Long-term
      debt, net of current portion
                  
                  $
                  447,286





Notes
Payable:





The
future principal payments for long-term notes payable obligations are as
follows:





December 31, 20082009
                  
                  $
                  986,3962010
                  
                  
                  318,8832011
                  
                  
                  10,370$
                  1,315,649





F-18


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 7 -
LONG-TERM DEBT, continued:





On March
18, 2005 Modern Medical entered into an unsecured loan agreement with Dr. Howard
Kessler MD PA, in the amount of $300,000 payable in 12 monthly payments of
$8,333 with a lump sum due on the 13th month in the amount of $221,826.71 and
bears an interest rate of 8% per annum. In March 2006, this note was extended
under the same terms as the first 12 months and is currently payable through
February 2010. This loan funded the settlement of the DVI/US Bank loan
settlement.





Commencing
March 20, 2003 through April 11, 2004, the Company acquired an additional 70%
interest in Union Imaging Associates, JV. This additional 70% brought the
Company's ownership of Union Imaging Associates, JV to 80%.  It was
acquired for varying prices totaling $1,525,000, payable in monthly installments
over approximately 36 months. On September 1, 2006, we purchased Dr. Wolkstein's
share of his ownership interest in Union Imaging Associates, Inc. ("UIA, Inc.")
in exchange for 350,000 shares of the Company's common stock with a valuation of
$154,000 at the time of purchase, and a note for $27,000 to be paid in 18
payments of $1,500.00 per month. The 350,000 shares of common stock were issued
on October 20, 2006. As a condition of the purchase, the Company agreed to
re-purchase the 350,000 shares from Dr. Wolkstein for $75,000 if for any
consecutive 20 day period commencing September 1, 2008 through the last day of
February 2009, the stock price was below $1.00 per share.





On June
20, 2008, we purchased Dr. Haidri’s share of his ownership interest in Union
Imaging Associates, Inc. ("UIA, Inc.") in exchange for 150,000 shares, of the
Company's common stock with a valuation of $15,000 at the time of purchase, and
a note for $36,000 to be paid in 18 payments of $2,000.00 per month. The 150,000
shares of common stock were issued on August 28, 2008. As a condition of the
purchase, the Company agreed to re-purchase the 150,000 shares from Dr. Haidri
for $45,000 if for any consecutive 20 day period during the first 90 day period
commencing at the end of the fifteenth month subsequent to June 20, 2008, if the
stock price was below $0.30 per share. The purchase of Dr. Haidri’s ownership
interest brings the Company's total ownership in UIA, Inc. to 100%.





In
February 2006, the Company entered into an unsecured note with Jacov Hayut in
the amount of $150,000. The loan was for 12 months with interest at 15%, monthly
payments are interest only with lump sum payment of $150,000 February 2007. This
note was extended for 36 months under the same terms and conditions, except that
the Company agreed to pay the note in full or in part at the lenders option upon
the first equity capital raise or February 2010, which ever comes first. On June
13, 2007 we paid $50,000 on the unsecured note, and on June 20, 2007 we paid
$25,000 on the unsecured note.  On October 9, 2007, we issued Jacov
Hayut a warrant for 150,000 shares with an exercise price of $0.75 per share as
part of the February 2006 unsecured note which was due in February
2007.





On
October 25, 2006, we entered into an unsecured promissory note with Complete
Flooring and Renovation, Inc. in the principal amount of $65,000. The loan is
for a period of 24 months with an annual interest rate of 15%. The payments are
to be made on the 26th of each month in 23 equal installments of $3,151.63 and 1
final installment of $3,151.67. The payments commenced on November 26, 2006 and
goes through November 10, 2008.  On October 9, 2007, we issued
Complete Flooring and Renovation, Inc. a warrant for 65,000 shares with an
exercise price of $0.75 per share as part of this promissory.





On
December 6, 2006, we entered into an unsecured promissory note with Complete
Flooring and Renovation, Inc. in the principal amount of $150,000. The loan is
for a period of 48 months with an annual interest rate of 12%. The payments are
to be made on the 6th of each month in 48 equal installments of $3,950.08. The
payments commenced on January 6, 2006 and goes through December
2010.  On December 6, 2006, we issued Complete Flooring and
Renovation, Inc. a warrant for 150,000 shares with an exercise price of $0.75
per share as part of this promissory.





F-19


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 7 -
LONG-TERM DEBT, continued:





On
November 9, 2006, we entered into a Loan Agreement with Irit and Yosef Azoulai
for $50,000. The terms of the Agreement include an annual interest rate of 20%
and the loan is to be paid, in a lump sum with accrued interest, at the earlier
of 6 months from the effective date of the Agreement, or the closing date of an
equity based financing by the Company. In addition, the Company issued a Warrant
for the rights to 50,000 shares of the Company's common stock with an exercise
price $0.70, the closing market price of the Company's common stock on November
10, 2006. Irit and Yosef Azoulai have waived the 6 month payment terms and
effective January have changed the interest rate from 20% to 10%
annually.





On March
6, 2007, we entered into a Loan Agreement with Irit and Yosef Azoulai for
$100,000. The terms of the Agreement include an annual interest rate of 20% and
the loan is to be paid, in a lump sum with accrued interest, at the earlier of 6
months from the effective date of the Agreement, or the closing date of an
equity based financing by the Company. In addition, the Company issued a Warrant
for the rights to 100,000 shares of the Company's common stock with an exercise
price $0.82 based on the closing market price of the Company's common stock as
March 6, 2007.  Irit and Yosef Azoulai have waived the 6 month payment
terms and effective January have changed the interest rate from 20% to 10%
annually.





On June
11, 2007, we purchased an automobile from Medical Equipment Solutions, Inc. for
$57,200. The terms were a $19,200 down payment, $10,000 in cash and $9,200 by
issuing a warrant valued at $9,200 with five-year duration for 50,000 shares at
an exercise price of $0.75 per share. The balance is being paid in 36 equal
monthly payments of $1,226 per month with a 10% annual interest
rate.





On
February 11, 2008, Union Imaging Associates entered into a financing lease
agreement with AEL Financial, LLC to fund the purchase of a structured speech
reporting system. The amount financed was $26,853.44, payable in 36 equal
installments of $1,001.85, commencing March 11, 2008, at the end of the lease
the Company can purchase the system for $1.





On
October 3, 2008, we entered into a Loan Agreement with Moseh & Aliza
Lazarian for $100,000. The terms of the Agreement include an annual interest
rate of 12% and the loan is to be paid in amounts of $50,000 on or before
February 1, 2009 and $50,000 on or before October 1, 2009. In addition, the
Company issued a Warrant for the rights to 500,000 shares of the Company’s
common stock with a term of 5 years and an exercise price of $0.10 per
share.





On
November 6, 2008, we entered into a Loan Agreement with Issak Hayut for
$100,000. The terms of the Agreement include an annual interest rate of 12% and
the loan is to be paid in full on or before November 5, 2009. In addition, the
Company issued a Warrant for the rights to 500,000 shares of the Company’s
common stock with a term of 5 years and an exercise price of $0.10 per
share.





On
December 8, 2008, we entered into a Loan Agreement with Union Imaging
Associates, P.A., for $71,834.24. The terms of the Agreement include monthly
interest payments of $718.34 (12% per annum) starting January 9, 2009, and the
loan is to be paid in full March 6, 2009.  The note maybe extended by
mutual written agreement of the Note Holder and the Borrower.





On
December 8, 2008, we entered into a Loan Agreement with Union Imaging
Associates, P.A., for $100,000.00. The terms of the Agreement include monthly
interest payments of $1,000.00 (12% per annum) starting January 9, 2009, and the
loan is to be paid in full March 6, 2009.  The note maybe extended by
mutual written agreement of the Note Holder and the Borrower.


F-20


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 7 -
LONG-TERM DEBT, continued:





Capitalized
Lease Obligations:





The Company entered into certain leases
for the rental of equipment, which have been recorded as capital leases for
financial statement reporting purposes and are included in equipment. The assets
and liabilities under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair market value of the asset.
Accumulated depreciation of assets under capital lease at December 31, 2008
aggregated $885,299. The interest rates on these capital leases vary between
4.0% and 15.0% per annum. Monthly payments for these leases are approximately
$39,000 for interest and principal.





The
future principal payments for capital lease obligations are as
follows:





December 31, 20082009
                  
                  $
                  320,4442010
                  
                  
                  53,6222011
                  
                  
                  33,5632012
                  
                  
                  30,8482013
      & Beyond
                  
                  
                  0$
                  438,477





NOTE 8 -
RESTRUCTURING OF LONG-TERM DEBT:





In April
2005 the Company completed buyout of the balance of CitiCorp lease for a lump
sum payment of $175,000 made on April 15, 2005 plus 25 equal monthly
installments of $1,000, which were completed in April 2007.  As a
result of this negotiated settlement the Company recorded a gain of $211,171 on
the settlement of this debt as of December 31, 2004.  We have a
contingent liability of $130,000 with CitiCorp who has notified us of past due
late fees on this note. The Company is currently disputing this charge with
CitiCorp and believes it was forgiven as part of the overall
settlement.





NOTE 9 -
INCOME TAXES:





The
Company recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
carrying amounts and tax basis of assets and liabilities using enacted rates in
effect in the years in which the differences are expected to
reverse.





The
Company has recorded an income tax provision (credit) at December 31, 2008 and
2007 of $145,336 and $51,193, respectively. The Company has a net operating loss
carry-forward for federal income tax purposes of approximately $14,879,500,
available to offset income taxes through 2016 - 2023.





The
components of the Company's provision (benefit) for income taxes, for the fiscal
years ended 2008 and 2007 are as follows:


2008
                  
                  
                  2007Current:Federal
                  
                  $
                  -
                  
                  
                  $
                  -State
      and local
                  
                  
                  145,336
                  
                  
                  
                  51,193Deferred:Federal
                  
                  
                  -
                  
                  
                  
                  -State
      and local
                  
                  
                  -
                  
                  
                  
                  -Provision
      for income taxes
                  
                  $
                  145,336
                  
                  
                  $
                  51,193





F-21


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 9 -
INCOME TAXES, continued:





A
reconciliation of income tax computed at the federal and state statutory rates
of 35% and 9%, respectively to income tax expense (benefit) is as
follows:





2008
                  
                  
                  2007U.S.
      Federal statutory rate
                  
                  $
                  (5,207,800
                  )
                  
                  $
                  (4,527,797
                  )State
      taxes
                  
                  
                  (1,339,200
                  )
                  
                  
                  (388,097
                  )Effective
      tax rate
                  
                  $
                  (6,547,000
                  )
                  
                  $
                  (4,915,894
                  )





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
are presented below:





2008
                  
                  
                  2007Deferred
      tax assets:Net
      operating loss carry forward
                  
                  $
                  (6,547,000
                  )
                  
                  $
                  (4,915,894
                  )Less
      valuation allowance
                  
                  
                  6,547,000
                  
                  
                  
                  4,915,894Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -





The
valuation reserve increased by $1,631,106.





Based on
the Company's continued historical losses and going concern uncertainties, the
net deferred tax assets are fully offset by valuation allowances.





In
assessing the ability to realize the deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of tax liabilities, projected future taxable income and tax
planning strategies in making this assessment.





Under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the
utilization of net operating loss carry forwards is limited under the change in
stock ownership rules of the Code. As a result of ownership changes, which
occurred in June 2002, the Company's operating loss carry forwards are subject
to these limitations. Future ownership changes could also further limit the
utilization of any net operating loss carry forwards as of that
date.





On May
10, 2007, we offered and the State of New Jersey accepted an agreement to settle
past due taxes for the Company in the amount of $97,116.61. On April 24, 2007,
we paid a down payment of $31,027.50. The balance of $66,089.11 is to be paid
over 36 equal installments of $2,381.00 beginning June 27, 2007.





On
October 29, 2007, we offered and the State of New Jersey accepted an agreement
to settle past due taxes for Union Imaging Associates, Inc. in the amount of
$103,854.43. The terms of the agreement include payments of $3,935.94 paid
October 23, 2007 and $1,410.91 due November 15, 2007, a payment of $10,000 paid
on October 31, 2007, four $5,000 payments due on November 7, 2007, November 14,
2007, November 21, 2007, and November 28, 2007. The balance of $68,507.58 is to
be paid in 36 equal monthly installments due on the 20th of each
month starting December 20, 2007.  A Judgment has been entered in the
Superior Court of New Jersey in the amount of $91,136.62 pending final
settlement of these taxes.





On April
23, 2008, we offered and the State of New Jersey accepted an agreement to settle
past due taxes for Union Imaging Center, LLC in the amount of $35,794. The terms
of the agreement include payments of $2,000 paid on each of May 2, 9 and 16,
2008 and 36 equal installments of $1,040 commencing June 23, 2008. As of
September 30, 2008, the company is current on all payments related to this
agreement.


F-22


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 10 -
Equity Compensation Plan Information





Plan
category Number of Securities to Weighted-average Number of securities be issued
upon exercise price of remaining available for of outstanding options,
outstanding options, future issuance under warrants and rights warrants and
rights equity compensation plans (excluding securities reflected in column
(a))





Equity
Compensation Plan Information





Weighted-averageexercise price ofoutstanding options,warrants and rights
                                  
                                  
                                  Number of SecuritiesNumber of Securities to be
                                  
                                  
                                  plans (excluding
                                  
                                  
                                  remaining available forissued upon exercise of
                                  
                                  
                                  securities reflected in
                                  
                                  
                                  future issuance underPlan Category
                                  
                                  outstanding options
                                  
                                  
                                  column (a))
                                  
                                  
                                  equity compensationEquity compensation
      plans approved by security holders
                                  
                                  
                                  1,241,000
                                  
                                  
                                  $
                                  0.4801
                                  
                                  
                                  
                                  1,259,000Equity
      compensation plans not approved by security holders
                                  
                                  
                                  7,640,198
                                  
                                  
                                  $
                                  0.5804
                                  
                                  
                                  
                                  -0-





NOTE 11 -
RELATED PARTY TRANSACTIONS:





Modern
Medical believes that the transactions set forth below were made on terms no
less favorable to it than could have been obtained from unaffiliated third
parties. All future transactions, including any loans between Modern Medical and
any of its officers, directors, principal stockholders and their affiliates will
be approved by a majority of Modern Medicals board of directors and will
continue to be on terms no less favorable to Modern Medical than could be
obtained from unaffiliated third parties.





Medical
Equipment Solutions, which is controlled by Ronnie Antebi and Yosef Azoulai, has
a management agreement with the company and also are investors in the company
either individually or collectively. MES provides services in selecting,
providing, and installing medical equipment. For these services, they are
compensated 5% of Union Imaging Centers' site collections.  Union
Imaging Associates leases a Nuclear Camera from MES for 50% of monthly cash
receipts associated directly with the use of this Nuclear Camera.  The
Company charged operations $203,289 in 2008 and $184,140 in 2007 under these
agreements.  Ronnie Antebi and Yosef Azoulai have jointly and
individually provided term financing for various loan restructurings, of which
approximately $127,000 remains outstanding at December 31, 2008.





On August
23, 2006, we issued a Warrant for the right to buy 100,000 shares of the
Company's common stock to Paul W. Harrison in connection with his appointment as
a director of the Company. The Warrant Agreement terms include an exercise price
of $0.18 per share, which was above market price at the time of the execution of
the Warrant Agreement. The exercise date is August 23, 2006 and the expiration
date is August 22, 2011. On August 24, 2006, Paul W. Harrison exercised his
rights under the August 23, 2006 Warrant Agreement and bought 45,000 shares of
the Company's common stock for $8,100. The 45,000 shares were issued on October
20, 2006.


F-23


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 11 -
RELATED PARTY TRANSACTIONS, continued:





On
February 28, 2007 we entered into an Asset Purchase Agreement (the "Agreement")
with MTI Partners II, L.P. ("MTI-II") to acquire MTI-II's Medical Software
Assets (the "Assets") in exchange for 1 million shares of our common stock
("Common Stock") valued at $730,000 based on $0.73 per share. The transaction
closed in March of 2007. The Assets consist of medical computer software that
organizes, manages, and maintains patient scheduling, registration, medical
records, billing, and includes other customized components. The shares of Common
stock were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended. Paul Harrison, a member of our Board of Directors, is the President of
INEX Group, Inc., which serves as the General Partner of MTI-II. Mr. Harrison
received 562,500 shares of our Common Stock of the total 1 million shares issued
to MTI-II pursuant to this Agreement.





On
September 14, 2007 we entered into an Asset Purchase Agreement (the "Agreement")
with MTI Partners II, L.P.("MTI-II") to acquire MTI-II's Healthcare Payer Admin
Software Asset (the "Asset") in exchange for 500,000 shares of our common stock
("Common Stock"), warrants ("Warrants") for 900,000 shares of our common stock
with an exercise price of $0.70 per share, and $250,000 to be paid within 12
months from the date of the Agreement. The transaction is expected to close by
the end of September 2007. The Asset consists of healthcare payer admin computer
software that helps organize, manage, and maintain health plans, membership,
eligibility, claims administration, and includes other customized components.
The shares of Common stock were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended. Paul Harrison, a member of the Board of
Directors of MODM, is the President of INEX Group, Inc., which serves as the
General Partner of MTI-II. Mr. Harrison will be entitled to receive 281,250
shares of our Common Stock, and a Warrant for 506,250 of our Common Stock with
an exercise price of $0.70 per share issuable to MTI-II pursuant to this
Agreement.





NOTE 12 -
CHANGES IN DIRECTORS AND OFFICERS :





On
February 23, 2007 our board of directors established a Lead Director position,
and approved Paul W. Harrison to fill the position, and provided a stock bonus
of 360,000 shares of our common stock, valued at $284,400 based on $0.79 per
share, to Paul W. Harrison for taking on additional responsibilities of the Lead
Director position and other relevant activities as designated by our board of
directors. Our board of directors has determined that the Lead Director should
have the following duties and responsibilities: advise the Chairman in
scheduling board meetings and setting agendas involving the independent
directors; convene meetings and lead executive sessions of the Company's
independent directors, promote dialogue between directors; facilitate
information flow and communications to the Company's shareholders and other
related pertinent matters; assist the Board in fulfilling its responsibilities
by meeting with the CEO to review and give input to the Company's strategic
plan; perform other duties as specified by the board. On October 9, 2007, Paul
Harrison returned the 360,000 shares of common stock to us, and we issued him a
warrant for 540,000 shares with an exercise price of $0.65 per share for taking
on additional responsibilities as the Lead Director.





NOTE 13 -
COMMITMENTS AND CONTINGENCIES:.





(a)
Employment Agreements:





The
Company has no employment agreements.





(b)
Properties:





In April
2005 Modern Medical entered into a five (5) year lease agreement for
approximately 7,150 square feet on 441-445 Chestnut St. in Union, NJ for
approximately $15,000 per month. This lease is renewable for an additional
5-year term at no more than $17,875 per month, which term expires on April 1,
2015.  On March 19, 2008, Modern Medical exercised its lease option
through March 31, 2015 at $17,875 per month and obtained an additional 5 year
option through March 31, 2020 at $19,067 per month.


F-24


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 13 -
COMMITMENTS AND CONTINGENCIES, continued:





In April
2005 Modern Medical entered into a five (5) year lease agreement for
approximately 2,250 square feet on 439 Chestnut St. in Union, NJ for
approximately $3,844 per month. This lease is renewable for an additional 5-year
term at no more than $4,500 per month, which term expires on April 1,
2015.  On March 19, 2008, Modern Medical exercised its lease option
through March 31, 2015 at $4,500 per month and obtained an additional 5 year
option through March 31, 2020 at $4,875 per month.





In
February 2001 Modern Medical and Union Imaging Associates, JV entered into a
five (5) year lease agreement for approximately 960 square feet on 418 Chestnut
St. in Union, NJ for approximately $1,760 per month. Effective September 1,
2004, Union Imaging Associates, JV and Modern Medical took an additional 600
square feet for an additional $1,000 per month and extending the lease to
February 1, 2007 and obtained an option to renew the lease for an additional 3
years upon 180 days prior written notice of the Company's intent to exercise its
option. The Company exercised its option to extend the lease for 3 years,
extending the lease through February 1, 2010.





Table of
future rent payments under non-cancelable property leases:





YEAR
                    
                    Amount2009
                    
                    $
                    262,2152010
                    
                    $
                    265,0092011
                    
                    $
                    268,5002012
                    
                    $
                    268,5002013
                    
                    $
                    268,500Thereafter
                    
                    $
                    335,625





Facility
rental expense charged to operations in 2008, 2007 and 2006 was $291,196,
$297,071 and $438,446, respectively.





Modern
Medical believes that its current facilities are adequate to operate its
business.





NOTE 14 –
LITIGATION:





On
September 29, 2008, we were served with a legal complaint and summons by Burgio
Enterprises, Ltd. (“Burgio”) for breach of contract and other related claims.
Burgio is seeking a judgment, and awards for contract damages in an amount in
excess of $10,000, compensatory damages in an amount in excess of $10,000,
punitive damages in an amount in excess of $10,000, and recovery of attorney
fees and costs of court and other expenses. We are defending against any claims
being made.





On July
9, 2008, we received copies of a lawsuit from Antoinette Gregoire. The lawsuit
claims that on or about July 11, 2006, Plaintiff Antoinette Gregoire underwent a
mammography at the facilities of Park Imaging Associates, P.A. and Union Imaging
Associates P.A. and that at such time, a suspicious abnormality of the left
breast was noted, consisting of a nodule requiring biopsy and it was later
determined that such nodule constituted ductal carcinoma. We are defending
against any claims being made.


F-25


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 14 –
LITIGATION, continued:





On April
9, 2008, a complaint was filed by Spur Imaging Service, L.L.C. against Modern
Medical and Union Imaging Associates for breach of contract and other related
matters. The complaint was related to a Sub-Lease Agreement that we entered into
with Spur on or about May 18, 2005 for using certain MRI equipment that was
leased from Siemens Medical Solutions, USA, Inc. by Spur Imaging Service, LLC.
We agreed to make 63 payments of $21,400 totaling $1,348,200. We also entered
into a Forbearance Agreement with Spur that modified the Sub-Lease Agreement
payment terms. Spur filed the complaint claiming we owe them for payments not
made per the Sub-Lease and Forbearance Agreements, and for other costs, fees,
and expenses, and declared that we should return the MRI equipment. On September
16, 2008, we negotiated a settlement whereby Parent agreed to pay Siemens
Medical Solutions, USA, Inc. $525,000 and Spur Imaging Service, LLC $25,000, in
exchange for full settlement of the sub-lease. In October 2008, in exchange for
Siemens Medical Solutions, USA, Inc. (“Siemens Medical”) and Spur Imaging
Service, LLC (“Spur”) agreeing to forbear from exercising their enforcement
rights under the Consent Judgment through February 15, 2009. We paid Siemens
Medical $525,000 between October 6, 2008 and February 15, 2009 and paid Spur
$25,000 between October 6, 2008 and February 28, 2009 in full payment of the
$550,000 settlement of a sub-lease involving Siemens Medical and
Spur.




NOTE 15 -
INFORMATION TECHNOLOGY LEASE AGREEMENTS WITH IBM:





In July
2006, we signed a Lease Agreement with IBM for financing and providing
information technology. The various contracts signed under the Agreement total
$320,000. The terms of the Agreements include 48 months at approximately
$9,200.00 per month. Each component of the information technology is billed and
paid for separately. These leases are being accounted for as operating
leases.





NOTE 16 –
INVESTMENT BANKING AGREEMENTS AND SERVICES:





On
November 23, 2006, we entered into a Consulting Agreement with John McAuliffe to
provide financial public relations services. Pursuant to the terms of the
Agreement, on February 28, 2007, the Board of Directors approved the issuance of
200,000 shares of its restricted common stock with an estimated value of
$120,000 based on a November 23, 2006 price per share of $0.60, in lieu of cash
payments, to John McAuliffe for financial public relations
services.





On
January 1, 2007 we entered into an Investor Relations Agreement with R.J. Aubrey
IR Services to provide financial public relations services. The Company agreed
to the issuance of 100,000 shares of its restricted common stock with an
estimated value of $80,000 based on a price per share of $0.80 in lieu of cash
payments and 50,000 common stock warrants convertible into an equal number of
shares at an exercise price of seventy-five cents ($0.75) per share and have a
36 month term to R.J. Aubrey IR Services, LLC for financial public relations
services. On July 27, 2007 we entered into a Investor Relations Agreement with
R.J. Aubrey IR Services to provide financial public relations services. The
Company agreed to the issuance of 125,000 shares of its restricted common stock
with an estimated value of $68,750 based on a price per share of $0.55 in lieu
of cash payments and 75,000 common stock warrants convertible into an equal
number of shares at an exercise price of seventy-five cents ($0.75) per share
and have a 6 month term to R.J. Aubrey IR Services, LLC for financial public
relations services.




F-26


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 16 –
INVESTMENT BANKING AGREEMENTS AND SERVICES, continued:





On
February 27, 2007 we entered into a consulting agreement with Strategic Growth
International, Inc. (SGI) to provide financial public relations services. The
Company agreed to pay a monthly retainer of $8,000 per month for six months and
$9,000 per month after the Company completes its contemplated capital raise with
provisions to extend the agreement based on the mutual agreement of the parties.
In addition and pursuant to the terms of the agreement, on February 27, 2007,
the Board of Directors approved the issuance of 250,000 shares of the Company’s
restricted common stock and option for 400,000 shares of the Company's common
stock to SGI for financial public relations services. The options will have a
five-year duration and are exercisable at $0.80 per share. At the option of SGI,
such options may be exercised on a cashless basis. The Company shall have the
right to terminate the agreement on August 27, 2007 upon 10 days prior written
notice. Upon such termination on August 27, 2007, the Company will have the
right to rescind 125,000 shares of common stock and 200,000 options. On April 5,
2007, upon mutual agreement, the Company and SGI agreed to suspend the
agreement. There are no further fees due SGI unless the agreement is reinstated.
In consideration of the suspension of the agreement, the parties agreed to a
payment of 1/12 of the option for 400,000 common shares (equal to an option for
33,200 shares), as well as a payment of 1/12 of the 250,000 common shares, or
20,750 shares with an estimated value of $14,733 based on a per share price of
$0.71 on April 5, 2007, which payment was being made as additional consideration
to secure a more favorable and fixed monthly fee.





On April
13, 2007, we entered into an Agreement with Newbridge Securities Corporation, a
Virginia corporation with offices in Ft. Lauderdale, Florida (the "Advisor").
The Company engaged the Advisor to render financial and business advisory
consulting advice to the Company as an investment banker relating to financial
and similar matters. In consideration of the services to be rendered and
performed by Newbridge during the term of this Agreement, the Company paid to
the Advisor 250,000 shares of its restricted common stock ("Restricted Shares"),
and will pay an additional 83,333 Restricted Shares on each of the three, six
and nine month anniversaries of the date of the agreement, unless this Agreement
has otherwise been terminated in accordance with Section 15 hereof. The
Restricted Shares will be subject to standard piggyback registration rights. If
this Agreement is terminated by the Advisor in accordance with Section 15 for
any reason prior to the date that is three (3) months from the date hereof,
Advisor shall return a prorated amount, prorated on a daily basis, of the
initial 250,000 Restricted Shares to the Company for cancellation. Additionally,
in the event that this Agreement is terminated as a result of Advisor no longer
being a member in good standing of the NASD, Advisor shall return the initial
250,000 Restricted Shares to the Company for cancellation. As of October 13,
2007, we have an obligation to issue Newbridge Securities Corporation 166,666
shares of our restricted common stock, and have been in discussions with
Newbridge Securities Corporation to rescind the Agreement.





On April
1, 2007, we entered into an agreement with Cohen Consulting (payable to Mark
Cohen), for consulting services and agreed to pay $5,000 per month for a period
of six months. The first month was paid immediately upon execution of this
agreement. We also agreed to issue to Cohen Consulting (Mark Cohen) warrants to
purchase 100,000 shares of our common stock, exercisable at a price of $0.75 per
share. The warrants are to be issued in installments: 5 warrants to purchase
16,666 common shares each for the first five months and 1 warrant to purchase
16,670 common shares in the last month. The warrants will be of a five-year
duration and will have piggy-back registration rights. It is understood that the
warrants may be exercised on a cashless basis at the option of Cohen Consulting
(Mark Cohen). We made 3 payments totaling $15,000.00 for Cohen’s consulting
services, and on June 20, 2007, we terminated the agreement with Cohen
Consulting and made the final cash payment. At the time of the termination,
Cohen Consulting (Mark Cohen) was entitled to warrants for 49,998 common shares
at an exercise price of $0.75 per share under the terms of the
agreement.





On May
16, 2007, we entered into an agreement with Ocean Avenue for consulting services
for a period of two months, and agreed to pay $2,500 for the first month (due
upon execution of the agreement) and $5,000 for the second month. We also agreed
to issue 30,000 shares of our common stock, and warrants to purchase 30,000
common shares, exercisable at a price of $0.75 per share. The warrants will be
of a five-year duration, and will have piggy-back registration rights. We made
both cash payments, the final payment being made on June 20, 2007. The Ocean
Avenue agreement has expired.


F-27


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006





NOTE 16 –
INVESTMENT BANKING AGREEMENTS AND SERVICES, continued:





On May
10, 2007, we entered into a Consulting Agreement with Southern Advisory
Services, Inc. for them to provide merger and acquisition services on a
non-exclusive basis, and introduce us to related opportunities. We agreed to pay
Southern Advisory Services a performance fee equal to 4.25% of the total value
of the transaction, payable in cash.





On August
26, 2007 we entered into a Letter of Intent for a Consulting Services Agreement
with Strategic Corporate Initiatives, Ltd. While negotiating the Letter of
Intent, we engaged the Consultant to develop key financial and business
relationships, and paid $2,500 in cash and issued 15,000 shares of our common
stock for services rendered through September 26, 2007 and paid $2,500 in cash
and issued 15,000 shares of our common stock for services rendered through
October 26, 2007.





In
August, 2007, we entered into a contract with Nu Mark Capital Corp. to provide
financial and other related services for 2 months for the time period August 15,
2007 through October 15, 2007. In consideration of providing the services, we
agreed to pay Nu mark $5,000 in cash and issue 20,000 shares of our common
stock. The shares of our common stock are to be issued on August 15, 2007 and
September 15, 2007. On August 15, 2007 we paid Nu mark $5,000 in cash and
are obligated to issue them 20,000 shares of our common stock.





On May
23, 2007, we received an invoice for investor relations and financial conference
services performed by Flaherty Financial News, Inc. and Wall Street Research
(Alan Stone and Company, LLC.).  We paid $1,500 on June 04, 2007, and
$1,500 on August 29, 2007. For the balance of the invoice for services rendered,
we issued 3,750 shares of our common stock to Flaherty Financial News, Inc. and
issued 3,750 shares of our common stock to Alan Stone and Company,
LLC.





On
October 9, 2007, we signed an Investment Banking and Financial Advisor Agreement
with Capitol Securities Management, Inc. (the "Advisor") as its exclusive
investment banker and financial advisor. During the Term of this Agreement, the
Advisor, shall provide advice to, and consult with, us concerning financial
planning, corporate organization and structure, public stock relations,
financial matters in connection with the operation of the business of the
Company, private and public equity and debt financing, acquisitions, mergers and
other similar business combinations and shall review and advise us regarding its
overall progress, needs and financial condition. The Advisor is not obligated to
devote any specific amount of time to providing advice and consultation to us.
This Agreement shall remain in full force and effect for a period of thirty-six
(36) months after the date hereof; provided, however, that it may be terminated
at any time by either the Advisor or us with or without cause upon thirty (30)
days prior written notice to the other party (the "Term"). We agreed to pay fees
based on individuals or entities introduced to us by Advisor and which have been
submitted in writing by Advisor and approved by us, and lead to a completed
transaction. We also agreed to pay Advisor a monthly Investment Banking retainer
fee of $2,500 starting upon the closing of any equity financing by the Company.
Within 30 days from the execution of this Agreement, we also agreed to issue to
Advisor 250,000 shares of our restricted common stock with standard piggyback
registration rights upon execution of this agreement and an additional 3 equal
installment of 83,333 shares to be paid quarterly following the initial
payment.  Effective October 20, 2008, we mutually agreed with the
Advisor to terminate the October 9, 2007 investment banking and financial
advisory agreement. The termination agreement required the Company to pay $3,000
to the Advisor to compensate the Advisor for advisor fees and other obligations
that may be due or outstanding. As part of the termination agreement, we are no
longer obligated to issue 500,000 shares of our common
stock.


F-28


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





Note 17 -
CLAIM RELATED TO REIMBURSEMENT OF ACQUISITION EXPENSES:





On or
about May 4, 2007, we received a letter claiming that we owe another
organization for outside accounting preparation expenses that they incurred in
connection with a due diligence that was performed by us and as part of a
potential acquisition. The acquisition did not progress to a definitive
agreement and the associated letter of intent has expired. We are reviewing the
terms and conditions of the letter of intent, and are reviewing our records
related to the due diligence in order to evaluate and respond to this matter. We
determined that a commitment was made by us to contribute to certain accounting
expenses that were incurred by other parties to prepare for an audit as part of
a potential acquisition that was not consummated. On September 4, we reached a
settlement agreement to pay $20,000 with a down payment of $5,000 and three
payments of $5,000 each. On September 11, 2007 we paid the first payment of
$5,000. On October 10, 2007 we paid the second payment of $5,000.





Note 18 -
CONVERSION OF DEBT AGREEMENT WITH MARVIN TEITELBAUM:





On May 9,
2007 we entered into an agreement with Marvin Teitelbaum. We agreed to pay him
50,000 shares of our restricted common stock in connection with for construction
services provided to us.





Note 19 -
PRIVATE PLACEMENT OF OUR COMMON STOCK:





On June
8, 2007, we entered into an agreement to sell an aggregate of 770,000 shares of
the Company’s restricted common stock to two accredited investors in exchange
for gross proceeds of $500,500. In connection with the sale of the common stock,
we also issued warrants to the investors to purchase an aggregate of 462,000
common shares. The warrants are exercisable for a period of five years from the
date of issuance at an exercise price of $0.85 per share. The securities were
sold pursuant to Section 4(2) of the Securities Act of 1933, as amended. There
were no commissions paid in connection with the sale of the securities. The
securities were subsequently paid for and purchased on June 11, 2007. The gross
proceeds from the sale of the securities will be used for working capital and
general corporate purposes.





Note 20 -
FILING OF S-8 REGISTRATION STATEMENT FOR 2003 STOCK OPTION PLAN:





On June
11, 2007, we filed an S-8 registration statement for securities related to our
2003 Stock Option Plan. Descriptions of our 2003 Stock Option Plan and the
securities are contained in our filing of the S-8 registration statement, which
includes 2,000,000 shares of common stock to cover stock options for up to
2,000,000 shares with a proposed maximum offering price of $0.67 per share and a
proposed maximum aggregate offering price of $1,340,000. On November 6, 2007, we
entered into incentive stock option agreements with employees of the Company to
provide incentives for remaining with the Company and to encourage extra efforts
and increased performance. We issued stock options for 190,000 shares of our
common stock at an exercise price of $0.37 per share. The stock options have a
10 year term and the vesting criteria is based on a 3 year period, whereby 1/3
of the shares are vested each year for the periods November 5, 2008, November 5,
2009, and November 5, 2010.





NOTE 21 -
ISSUANCE OF ADDITIONAL WARRANTS TO INVESTORS:





On
February 13, 2008 and in connection with the June 8, 2007 sale of our common
stock, we issued additional warrants to the investors to purchase an aggregate
of 385,000 common shares. The warrants are exercisable for a period of five
years from the date of issuance at an exercise price of $0.25 per
share.


F-29


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 22 -
CERTIFICATE OF INCORPORATION FOR HEALTHIXS CORPORATION:





On
February 28, 2008, we filed a Certificate of Incorporation for HealthIXS
Corporation, a newly formed subsidiary of Modern Medical Corporation. HealthIXS
was formed to focus on using our health information system to provide
information and administrative services to healthcare organizations. Our health
information system is based on the integration of the software assets acquired
on February 28, 2007 and September 14, 2007 and value-added customizations that
has culminated into a health common system platform with a comprehensive array
of software applications that can be used to provide web-based information and
administrative services.





NOTE 23 -
SPUR IMAGING SERVICE, LLC:





On April
9, 2008, a complaint was filed by Spur Imaging Service, L.L.C. against the
Company and Union Imaging Associates for breach of contract and other related
matters. The complaint is related to a Sub-Lease Agreement that the Company
entered into with Spur on or about May 18, 2005 for using certain MRI equipment
that was leased from Siemens Medical Solutions, USA, Inc. by Spur Imaging
Service, LLC. We agreed to make 63 payments of $21,400 totaling $1,348,200. We
also entered into a Forbearance Agreement with Spur that modified the Sub-Lease
Agreement payment terms. Spur filed the complaint claiming we owe them for
payments not made per the Sub-Lease and Forbearance Agreements, and for other
costs, fees, and expenses, and declared that we should return the MRI equipment.
On September 16, 2008, we negotiated a settlement whereby the Company agreed to
pay Siemens Medical Solutions, USA, Inc. $525,000 and Spur Imaging Service, LLC
$25,000, in exchange for full settlement of the sub-lease, and have subsequently
made payments towards the $550,000.  In October 2008, in exchange for
Siemens Medical Solutions, USA, Inc. (“Siemens Medical”) and Spur Imaging
Service, LLC (“Spur”) agreeing to forbear from exercising their enforcement
rights under the Consent Judgment through February 15, 2009. We paid Siemens
Medical $525,000 between October 6, 2008 and February 15, 2009 and paid Spur
$25,000 between October 6, 2008 and February 28, 2009 in full payment of the
$550,000 settlement of a sub-lease involving Siemens Medical and
Spur.




In 2008
the Company recorded a gain from restructured debt of $529,293 consisting of
$404,773 in debt principal and $124,520 in accrued interest.




NOTE 24 -
CONVERSION OF DEBT AGREEMENT WITH MARVIN TEITELBAUM:




On
December 20, 2006, we entered into an agreement with Marvin Teitelbaum,
restructuring the various construction loans with him. As part of the
restructuring he agreed to convert $50,000 of the debt to 77,000 shares of the
Company’s $0.0002 par value restricted common stock. As a condition to this
conversion the Company agreed that if the average price of its $0.0002 par value
common stock was less than $0.65 for any consecutive 20 day period during the
first calendar quarter of 2008, Mr. Teitlebaum had the right to put the 77,000
shares to the Company for $50,000. Effective April 1, 2008, Mr. Teitelbaum put
the shares to the Company. These shares are being recorded as Treasury shares
effective April 1, 2008, in the accompanying balance sheet.


F-30


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 25 -
GENERAL ELECTRIC CAPITAL CORPORATION:




In July
2008, General Electric Capital Corporation (“GECC”) sent us a notice of default
and a proposal to resolve the defaults and past due contracts related to Union
Imaging Associates, Inc. and Modern Medical Modalities Corporation as
co-debtors. The proposal offered to cure the defaults with the conditions set
forth that we pay $67,326.83 to GECC by July 28, 2008, we resolve accrued late
fees of $38,440.86, and we resume making regular monthly payments in August of
2008. The regular monthly payments were adjusted from $40,515.47 to $44,220.25
to include interest and related costs. In addition, GECC offered to defer 3 past
due payments to the end of the respective contracts and in order to resolve the
$37,046.38 in adjusted accrued late fees, GECC will accept 12 monthly payments
of $3,087.20. In response and based on the GECC proposal, we made payments to
GECC totaling $67,326.83 and have resumed making regular payments in August,
2008 to cure the defaults. We finalized amendments to the GECC contracts to be
in compliance with the agreements, and started making the additional 12 payments
of $3,087.20 to resolve the adjusted accrued late fees.




NOTE 26 -
NAFTALI SIANI STOCK PURCHASE AGREEMENT:




On August
25, 2008, we entered into a stock subscription agreement with Naftali Siani for
500,000 shares of our common stock in exchange for a $50,000 investment into the
Company.





NOTE 27 -
SUBSEQUENT EVENTS:





On
January 30, 2009, we and our wholly-owned subsidiaries, Union Imaging
Associates, Inc., a New Jersey corporation, Union Imaging Center, LLC, a New
Jersey limited liability company, and PET Scan at Union Imaging, LLC, a New
Jersey limited liability company, entered into an Asset Purchase Agreement (the
“Agreement”) with Health Diagnostics of New Jersey, L.L.C (“HD”), a New Jersey
limited liability company, pursuant to which HD agreed to purchase substantially
all of the assets used by or in connection with the Seller Companies’ Imaging
Centers, for cash consideration in the amount of $8,800,000 (the “Purchase
Price”) minus (a) any liabilities paid off or assumed by HD on the Closing Date
of the Asset Sale, not to exceed $1,600,000 in the aggregate, (b) a $1,200,000
credit to HD for capital expenditures and leasehold improvements, and (c) the
amount, if any, by which the Closing Date working capital (the “Closing Date
Working Capital”) of the Seller Companies falls short of $525,000 in the
aggregate (a “Closing Date Working Capital Shortfall”).  If the
Closing Date Working Capital exceeds $525,000 then HD will pay us such excess
amount.  HD will determine the Closing Date Working Capital within 90
days of the Closing Date.  We will have the right to dispute and
propose adjustments to HD’s calculation of the Closing Date Working Capital in
accordance with the procedures set forth in the Agreement. Assuming we satisfy
the conditions to completing the Asset Sale, the Closing Date is estimated to be
on or before March 31, 2009.  If the Closing Date does not occur on or
prior to that date or if any of the conditions to the closing are not satisfied
on or prior to that date, we, the Seller Companies and HD shall each have the
right to terminate the Agreement. If the Closing does occur, we intend to focus
on providing more outsourced information and administrative services through our
wholly-owned subsidiary HealthIXS, in order to expand into the more profitable
information and administrative services markets.  In addition, we may
invest the proceeds of the Asset Sale in businesses or ventures that may or may
not be synergistic with our past operations or our remaining information and
administrative services business operated by HealthIXS.  HealthIXS has
not generated any revenues thus far.  We have not identified any
proposed investments at this time.


F-31


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 27 -
SUBSEQUENT EVENTS, continued:





The
following pro-forma consolidated financial statements give effect to the
proposed sale to Health Diagnostics of New Jersey, L.L.C. of substantially all
of the assets of our Union, NJ imaging centers as if the transaction had been
completed at December 31, 2008.  See Company’s 8-K filed January 27,
2009 (incorporated by reference) for additional information.





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDARIES


PRO FORMA
CONSOLIDATED BALANCE SHEET


December 31,
                    2008
                    (as reported)
                  
                  
                  Pro Forma
                    Adjustments
                  
                  
                  Pro Forma As
                    AdjustedASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  46,518
                  
                  
                  
                  5,695,986
                  
                  
                  $
                  5,740,104Accounts
      receivable, less contractual allowances
                  
                  
                  989,544
                  
                  
                  
                  (989,544
                  )
                  
                  
                  -Prepaid
      expenses
                  
                  
                  41,808
                  
                  
                  
                  (4,255
                  )
                  
                  
                  37,553Total
      current assets
                  
                  
                  1,077,870
                  
                  
                  
                  
                  
                  
                  
                  5,777,657Property
      and equipment, net of accumulated depreciation
                  
                  
                  1,088,894
                  
                  
                  
                  (1,064,325
                  )
                  
                  
                  24,569Other
      assets:Purchased
      software
                  
                  
                  1,287,917
                  
                  
                  
                  -
                  
                  
                  
                  1,287,917Deposits
                  
                  
                  37,670
                  
                  
                  
                  (20,778
                  )
                  
                  
                  16,892Escrow
                  
                  
                  -
                  
                  
                  
                  650,000
                  
                  
                  
                  650,000Total
      other assets
                  
                  
                  1,325,587
                  
                  
                  
                  
                  
                  
                  
                  1,954,809TOTAL
      ASSETS
                  
                  $
                  3,492,351
                  
                  
                  
                  
                  
                  
                  $
                  7,757,035LIABILITIES
      AND STOCKHOLDERS’ (DEFICIENCY)Current
      liabilities:Accounts
      payable
                  
                  $
                  708,911
                  
                  
                  
                  (563,292
                  )
                  
                  $
                  145,620Accrued
      expenses
                  
                  
                  1,302,839
                  
                  
                  
                  (560,839
                  )
                  
                  
                  742,157Current
      portion long term debt
                  
                  
                  1,406,840
                  
                  
                  
                  (81,059
                  )
                  
                  
                  1,325,781Total
      current liabilities
                  
                  
                  3,418,590
                  
                  
                  
                  
                  
                  
                  
                  2,213,558Other
      liabilities:Long
      term debt, net of current portion
                  
                  
                  211,387
                  
                  
                  
                  (50,182
                  )
                  
                  
                  161,205Loans
      payable shareholders
                  
                  
                  235,899
                  
                  
                  
                  
                  
                  
                  
                  235,899Total
      other liabilities
                  
                  
                  447,286
                  
                  
                  
                  
                  
                  
                  
                  397,104TOTAL
      LIABILITIES
                  
                  
                  3,865,876
                  
                  
                  
                  
                  
                  
                  
                  2,610,662Minority
      interest
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $0.0002 par value, authorized - 1,000,000 shares, issued and
      outstanding - 0 shares
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Common
      stock, $0.0002 par value, authorized - 99,000,000 shares, issued –
      26,527,051 shares and outstanding – 25,673,385 shares
                  
                  
                  5,305
                  
                  
                  
                  
                  
                  
                  
                  5,305Additional
      paid-in capital
                  
                  
                  11,799,216
                  
                  
                  
                  
                  
                  
                  
                  11,799,216Accumulated
      (deficit)
                  
                  
                  (12,115,546
                  )
                  
                  
                  5,519,898
                  
                  
                  
                  (6,595,648
                  )Treasury
      common stock, $0.0002 par value, 853,666 shares at cost
                  
                  
                  (62,500
                  )
                  
                  
                  
                  
                  
                  
                  (62,500
                  )Total
      stockholders’ (deficiency)
                  
                  
                  (373,525
                  )
                  
                  
                  
                  
                  
                  
                  5,146,373TOTAL
      LIABILITIES AND STOCKHOLDERS’ (DECICIENCY)
                  
                  $
                  3,492,351
                  
                  
                  
                  
                  
                  
                  $
                  7,757,035




F-32


MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2008 AND 2007





NOTE 27 -
SUBSEQUENT EVENTS, continued:





MODERN
MEDICAL MODALITIES CORPORATION AND SUBSIDARIES


PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS


As Reported
                
                
                Pro Forma
                  Adjustments
                
                
                Pro FormaAs
                  AdjustedOperating
      income (loss):Net
      revenues from services
                
                $
                7,333,904
                
                
                
                7,268,770
                
                
                $
                65,134Cost
      of services provided
                
                
                5,773,937
                
                
                
                5,236,805
                
                
                
                537,132Total
      operating income (loss)
                
                
                1,559,967
                
                
                
                
                
                
                
                (471,998
                )Operating
      Expenses:Selling,
      general and administrative
                
                
                2,750,368
                
                
                
                704,476
                
                
                
                2,045,892Depreciation
      and amortization
                
                
                269,379
                
                
                
                (249,612
                )
                
                
                19,767Total
      operating expenses
                
                
                3,019,747
                
                
                
                
                
                
                
                2,065,659(Loss)
      from operations
                
                
                (1,459,780
                )
                
                
                
                
                
                
                (2,537,657
                )Other
      (expenses) income:Interest
      expense
                
                
                (141,930
                )
                
                
                (51,709
                )
                
                
                (90,221
                )Gain
      from renegotiation of debt
                
                
                529,293
                
                
                
                
                
                
                
                529,293Net
      other income
                
                
                387,363
                
                
                
                
                
                
                
                439,072(Loss)
      before income taxes and minority interests
                
                
                (1,072,417
                )
                
                
                1,026,168
                
                
                
                (2,098,585
                )Provision
      for income taxes
                
                
                145,336
                
                
                
                115,561
                
                
                
                29,775(Loss)
      before minority interests
                
                
                (1,217,273
                )
                
                
                
                
                
                
                (2,128,360
                )Minority
      interests
                
                
                -
                
                
                
                
                
                
                
                -Net
      loss
                
                $
                (1,217,273
                )
                
                
                
                
                
                $
                (2,128,360
                )(Loss)
      per share, basic and diluted
                
                $
                (0.05
                )
                
                
                
                
                
                $
                (0.09
                )Number
      of weighted average shares outstanding
                
                
                24,737,648
                
                
                
                
                
                
                
                24,737,648





On
September 1, 2006, we purchased Dr. Wolkstein's share of his ownership interest
in Union Imaging Associates, Inc. ("UIA, Inc.") in exchange for 350,000 shares
of the Company's common stock with a valuation of $154,000 at the time of
purchase, and a note for $27,000 to be paid in 18 payments of $1,500.00 per
month. The 350,000 shares of common stock were issued on October 20, 2006. As a
condition of the purchase, the Company agreed to re-purchase the 350,000 shares
from Dr. Wolkstein for $75,000 if for any consecutive 20 day period commencing
September 1, 2008 through the last day of February 2009, the stock price was
below $1.00 per share.  On January 22, 2009, Dr. Wolkstein put the
350,000 shares to the Company in accordance with the purchase
agreement.





On
January 15, 2009, we entered into a Loan Agreement with Issak Hayut for
$112,500. The terms of the Agreement include interest payments of $10,000 per
month for 3 months and the loan is to be paid in full on or before April 15,
2009. In addition, the Company issued a Warrant for the rights to buy 500,000
shares of the Company’s common stock with a term of 5 years and an exercise
price of $0.10 per share. The loan agreement was entered into in order to have
sufficient funds to meet a deadline on a debt settlement payment due and to help
realize a gain on the restructured debt with Siemens Medical Solutions, USA,
Inc. (see Note 23 above).





On
February 15, 2009, we entered into a Loan Agreement with Issak Hayut for
$112,500. The terms of the Agreement include interest payments of $10,000 per
month for 3 months and the loan is to be paid in full on or before May 15, 2009.
In addition, the Company issued a Warrant for the rights to buy 500,000 shares
of the Company’s common stock with a term of 5 years and an exercise price of
$0.10 per share. The loan agreement was entered into in order to have sufficient
funds to meet a deadline on a debt settlement payment due and to help realize a
gain on the restructured debt with Siemens Medical Solutions, USA, Inc. (see
Note 23 above).


F-33