UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K/A





(Amendment
No. 1)





x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from                        to





Commission
File Number: 333-132056





HUIHENG
MEDICAL INC.


(Exact
name of registrant as specified in its charter)





Nevada
                    20-4078899(State
      or other jurisdiction of
                    (I.R.S.
      Employerincorporation
      or organization)
                    Identification
      No.)Huiheng Building, Gaoxin 7 Street
      South
                      Keyuannan Road, Nanshan District,
      Shenzhen Guangdong, P.R. China 518057
                      (Address of principal executive
      offices)





86-755-25331366


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Act:


None





Securities
registered under Section 12(g) of the Act:


None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈
Yes   x
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


x
Yes    ̈
No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


 ̈Yes    x
No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes    ̈
No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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.


 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated fileror 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.  (Check one):




Large accelerated filer   ̈
                Accelerated filer   ̈Non-accelerated filer  ̈
      (Do not check if a smaller
      reporting
      company)
                Smaller reporting
      companyx






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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009 was approximately
$1,082,141 based upon the closing price reported for such date on the
Over-the-Counter Bulletin Board maintained by the NASD.  Shares of
common stock held by each officer and director and by each person who is known
to own 10% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates of the Company.  This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.




As of
March 31, 2010, there were 13,935,290 shares of the registrant’s $0.001 par
value common stock issued and outstanding.


EXPLANATORY
NOTE





Huiheng Medical, Inc. (the “Company,”
“we,” “our,” or “us”) is filing this Amendment No. 1 on Form 10-K/A (this
“Amendment”) to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 (the “Original Filing”), filed with the Securities and
Exchange Commission (the “SEC”) on April 15, 2010, in response to comments
received from the SEC.  We are filing this Amendment to revise
disclosure in Item 1. Business; Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations; Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters; Item
13. Certain Relationships and Related Transactions, and Director Independence;
and the Signatures.





Except as set forth above, the Original
Filing has not been amended, updated or otherwise modified.  Other
events occurring after the filing of the Amendment or other disclosures
necessary to reflect subsequent events have been addressed in our reports filed
with the Securities and Exchange Commission subsequent to the filing of this
Amendment.  Pursuant to Rule 12b-15 under the Securities Exchange Act
of 1934, as amended, new certifications of our principal executive officer and
principal financial officer are also being filed and/or furnished as exhibits to
this Form 10-K/A.





2





TABLE OF
CONTENTS





PagePART
      IITEM
      1.
                                        BUSINESS
                                        4ITEM
      1A.
                                        RISK
      FACTORS
                                        11ITEM
      1B.
                                        UNRESOLVED
      STAFF COMMENTS
                                        24ITEM
      2.
                                        PROPERTIES
                                        24ITEM
      3.
                                        LEGAL
      PROCEEDINGS
                                        24PART
      IIITEM
      5.
                                        MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER
      PURCHASES OF EQUITY SECURITIES
                                        25ITEM
      6.
                                        SELECTED
      FINANCIAL DATA
                                        27ITEM
      7.
                                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                        27ITEM
      7A.
                                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                        39ITEM
      8.
                                        FINANCIAL
      STATEMENTS
                                        39ITEM
      9.
                                        CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL  DISCLOSURE
                                        39ITEM
      9A(T).
                                        CONTROLS
      AND PROCEDURES
                                        39ITEM
      9B.
                                        OTHER
      INFORMATION
                                        40PART
      IIIITEM
      10.
                                        DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                        41ITEM
      11.
                                        EXECUTIVE
      COMPENSATION
                                        43ITEM
      12.
                                        SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                        44ITEM
      13.
                                        CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                        46ITEM
      14.
                                        PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                        47PART
      IVITEM
      15.
                                        EXHIBITS
                                        47SIGNATURES
                                        50





3





PART
I




Item
1.  Business.




In
this Annual Report on Form 10-K, references to “dollars” and “$” are to United
States dollars and, unless the context otherwise requires, references to “we,”
“us” and “our” refer to Huiheng Medical, Inc. and its consolidated
subsidiaries.




This
Annual Report contains certain forward-looking statements.  When used
in this Annual Report, statements which are not historical in nature, including
the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend”
“may,” “project,” “plan” or “continue,” and similar expressions are intended to
identify forward-looking statements.  They also include statements
containing anticipated business developments, a projection of revenues, earnings
or losses, capital expenditures, dividends, capital structure or other financial
terms.




The
forward-looking statements in this Annual Report are based upon our management’s
beliefs, assumptions and expectations of our future operations and economic
performance, taking into account the information currently available to
them.  These statements are not statements of historical
fact.  Forward-looking statements involve risks and uncertainties,
some of which are not currently known to us that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements.  These forward-looking
statements are based on our current plans and expectations and are subject to a
number of uncertainties and risks that could significantly affect current plans
and expectations and our future financial condition and results.




We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.  In light of these risks, uncertainties and assumptions,
the forward-looking events discussed in this filing might not
occur.  We qualify any and all of our forward-looking statements
entirely by these cautionary factors.  As a consequence, current
plans, anticipated actions and future financial conditions and results may
differ from those expressed in any forward-looking statements made by or on our
behalf.  You are cautioned not to unduly rely on such forward-looking
statements when evaluating the information presented herein.




Our
Business





We design
and sell precision radiotherapy equipment used for the treatment of cancerous
tumors in the People’s Republic of China (“PRC” or “China”). Our products
include a patented line of gamma treatment systems (“GTS”) that accurately
deliver well-defined conforming doses of radiation to the target tissue and a
multileaf collimator (“MLC”) used in conjunction with a linear accelerator for
radiation therapy applications.  We currently have 29 patents issued
in the PRC, one patent issued in the U.S., one patent issued in the European
Union, and additional patent applications pending.





Our
primary customers are a limited number of hospital equipment investors, with
hospitals and clinics as end users.  In addition to providing
precision radiotherapy equipment, we also offer our customers comprehensive
post-sale services for our products as well as products manufactured by
others.  These services include radioactive cobalt source replacement
and disposal, medical expert training, clinical trial analysis, patient tumor
treatment analysis, software upgrades and patient care consulting.





Our
revenues decreased from $12.3 million in 2008 to $10.6 million in
2009.  Our net income decreased from $4.01 million in 2008 to $3.64
million in 2009.





Our
operating subsidiaries were founded in 2001 by Mr. Hui Xiaobing, our Chairman
and a pioneer in the GTS industry in the PRC.  Mr. Hui served as
president and Chairman of Shenzhen OUR Technology, Co., Ltd., the first PRC
company to develop a gamma treatment system.  Mr. Hui is also the
former CEO of Everbright Securities, a major Chinese financial
institution.





The
majority of our product sales in the PRC are made through Shenzhen Jiancheng
Investment Co, Ltd. (“Jiancheng”).  During the fiscal year ended
December 31, 2009, Jiancheng accounted for 63.38% of our revenue.





Our
Strategies





Our goal
is to gain greater market share for our GTS products, by pursuing the following
strategies:





·
            continuing
      to offer high quality, competitively priced products and
      services;




4




·
            broadening
      our product offering and improving our existing
    technologies;





·
            expanding
      our sales and distribution force in the
PRC;





·
            exploring
      opportunities to develop international markets in South America, Eastern
      Europe and Southeast Asia; and





·
            expanding
      our product portfolio through relationships with foreign medical equipment
      technology leaders.





Our
Strengths





We
believe, based solely on management’s knowledge of our industry, that we are a
leader in the GTS market in the PRC.  We consider our core competitive
strengths to be:




·
            experienced
      leadership;





·
            strong
      customer relationships and
networks;





·
            proprietary
      technology with patent protection;





·
            high
      quality product line;





·
            strong
      gross margins and pricing
flexibility;





·
            consistent,
      high quality post-sale customer service and
  support;





·
            experienced
      research and development team; and





·
            strong
      R&D partnerships with Beijing University, China Science &
      Technology University and Public Healthcare Institute
      of Jilin University.





Our
Industry





The
market for medical equipment and supplies in the PRC is segmented into
geographical regions.  Hospitals with greater spending power tend to
be located in large towns and cities in the eastern part of the PRC, where rapid
economic growth has taken place during the last two decades and where the
population tends to have higher income.  Medical equipment and
supplies distribution is a very specialized and localized business sector in the
PRC.  Distributors of medical equipment and supplies operate in the
PRC within relatively small and geographically dispersed markets, each based in
a wealthy eastern city to cover the surrounding areas, with few distributors
willing or able to cover the entire country.  Most distributors focus
on the PRC’s eastern cities, where the bulk of purchasing power is concentrated,
while the western part of the PRC has very limited coverage.  The fact
that different areas of the PRC have their own medical and insurance practices,
purchasing policies and regulatory issues further increases the complexity of
medical equipment and supplies distribution in the PRC.





Some of
the key factors contributing to the growth of the medical equipment market in
the country include the PRC’s aging population, the popularization of private
hospitals and clinics and the growing demand for high-quality medical equipment
and efficient healthcare services.  Additionally, initiatives by the
government, such as reforms in the national healthcare system, are also fueling
growth in the industry.





The
PRC Radiotherapy Market





The
Ministry of Health identified cancer as the leading cause of death in the PRC
for the years 2007, 2008 and 2009.  Further, the presence of both
cancer related illnesses and deaths is expected to increase in the future due to
certain environmental factors, such as air and water pollution, associated with
the PRC’s rapid industrial expansion.  As a result, effective
treatment of cancer is a high priority for the PRC healthcare
system.





5


Radiotherapy
is used in approximately 50% of all cancer treatments
worldwide.  Based on information most recently available to the
Company, it is estimated that the United States has 13 radiotherapy units per
million people.  The World Health Organization has previously
recommended 6 radiotherapy units per million people for “developed”
countries.  The PRC remains well below the recommended
threshold.  In 2007, there was less than one radiotherapy unit per
million people in the PRC.




The PRC
radiotherapy industry has the following characteristics:





·
            consolidation
      of the market as small suppliers find it difficult to
    compete;





·
            high
      degree of government regulation with respect to unit
    pricing;





·
            large
      discrepancy between the need for and access to radiation oncology systems;
      and





·
            high
      barriers to entry due to both high technology requirements and established
      relationships.





Trends in
the radiotherapy market in the PRC include:





·
            increasing
      ability of the PRC medical community to detect cancer at treatable
      stages;





·
            increasing
      acceptance of the use of Western style medicine and treatment
      approaches;





·
            emerging
      middle class with increased financial ability to pay for medical
      procedures and improved cancer care;
and





·
            government
      indications to increase permissible spending on medical equipment
      procurement.





Our
Corporate History





We were
incorporated as a limited liability company in November 2002 under the name of
Pinewood Imports, Ltd. and converted into a corporation under the laws of the
State of Nevada on August 29, 2005. The Company was originally engaged in the
business of importing molding and door component products, such as framing
materials, made from pine wood from Brazil for resale and distribution. On
September 6, 2006, we change our name to Mill Basin Technologies, Ltd. and
became an inactive company that was in pursuit of merger opportunities or
business operations.





On May
15, 2007, we entered into a Share Exchange Agreement to acquire all of the
outstanding shares of Allied Moral Holdings Limited, a company with limited
liability incorporated in the British Virgin Islands on July 26, 2006, with
operating subsidiaries in the PRC.  Allied Moral Holdings Limited
became our wholly owned subsidiary and we changed our name to Huiheng Medical,
Inc.  At the time we acquired Allied Moral Holdings Limited, it,
through its operating subsidiaries in the PRC, designed, developed and
manufactured, and provided sales and services in connection with, radiation
therapy medical equipment used for the treatment of cancer.





We
operate as a Nevada holding company and we conduct all of our business through
our operating subsidiaries as described in the chart below.  As
described above, we own 100% of the equity interest of Allied Moral Holdings,
Ltd. (“Allied Moral”), a British Virgin Islands company that, in turn, owns 100%
of the equity interest of Tibet Changdu Huiheng Development Company, Ltd., a
Tibetan holding company (“Changdu Huiheng”) that, in turn, directly owns 100%,
75% and 50%, respectively, of our operating subsidiaries Wuhan Kangqiao Medical
New Technology Company, Ltd., a PRC company (“Wuhan Kangqiao”), Shenzhen Hyper
Technology Company, Ltd., a PRC company (“Shenzhen Hyper”), and Beijing Yuankang
Kbeta Nuclear Technology Co., Ltd., a PRC company (“Beijing
Kbeta”).




6










Wuhan
Kangqiao focuses on research and development and production management of the
Head Gamma Treatment System and Body Gamma Treatment System.  Shenzhen
Hyper focuses on research and development and production management of the Super
Gamma System and our multileaf collimator product that is used in conjunction
with a linear accelerator for cancer treatment.  Beijing Kbeta focuses
on installation and replacement of the Cobalt 60 radioactive sources used in our
gamma treatment systems products.  The remaining equity interests in
Shenzhen Hyper and Beijing Kbeta are owned by unrelated, unaffiliated
parties.





In June
2010, the Company acquired Portola Medical, Inc., whose primary asset consists
of its rights to develop, manufacture and sell an adjustable Multi-Catheter
Source Applicator which is intended to provide brachytherapy when a physician
chooses to deliver intracavitary radiation to the surgical margins following
lumpectomy of breast cancer.  We plan to market and sell this product
in the United States and in Asia.





Government
Regulation





The sale
and marketing of our products are subject to regulation in the PRC and in most
other countries where we intend to conduct business.  For a
significant portion of our products, we need to obtain and renew licenses and
registrations with the PRC State Food and Drug Administration (“SFDA”) and its
equivalent in other markets.





Regulation





Our
products are subject to regulatory controls governing medical devices. Our SGS,
BGTS and GTS products are authorized by the State Food and Drug Administration
(SFDA), which is the regulatory institution for medical devices in the PRC. As a
developer of medical equipment, we are subject to regulation and oversight by
different levels of the SFDA. We are also subject to other government laws and
regulations which are applicable to developers in general. SFDA requirements
include obtaining production permits, compliance with clinical testing
standards, development practices, quality standards, applicable industry and
adverse reporting, and advertising and packing standards.





7


On April
1, 2000, SFDA formulated a set of regulations for the medical device market -
“Regulations for the Supervision and Administration of Medical Devices” - which
included general provisions, administration of medical devices, administration
of production, distribution and use of medical devices, supervision of medical
devices, penalties, and supplementary provisions. Recent regulatory changes in
the PRC include improvements in the supervision and efficiency of medical
devices testing, introduction of a new pricing policy for medical devices, and
introduction of a new regulation - “Provisions on Daily Supervision and
Administration of Medical Devices Manufacturing Enterprises,” by SFDA in
2006.  In addition, among other recently issued regulations, “Measure
for the Examination of Medical Apparatus Advertisements” came into effect on May
20, 2009.  Also on May 20, 2009, the “Standard for the Examination of
Medical Apparatus Advertisements” came into force.





Classification
of medical devices





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





Class I
devices are those with low risk to the human body and are subject to “general
controls.” Class I devices are regulated by the local food and drug
administration of the city where the manufacturer is located. Class II devices
are those with medium risk to the human body and are subject to “special
controls.” Class II devices require product certification, usually through a
quality system assessment, and are regulated by the food and drug administration
of the province where the manufacturer is located. Class III devices are those
with high risk to the human body, such as life-sustaining, life-supporting or
implantable devices, and are regulated by the SFDA under the strictest
regulatory control.





Our
products are classified as Class III devices, and are therefore subject to all
regulatory controls governing Class III medical devices.





Production
permit for medical devices





A
developer  must obtain a production permit from the provincial food
and drug administration before commencing the development of Class II or Class
III medical devices. A production permit, once obtained, is valid for four years
and is renewable upon expiration. To renew a production permit, a
developer   must submit to the provincial food and drug
administration an application to renew the permit, along with required
information six months before the expiration date of the permit. In September
2007 we applied for a renewal of our production permit, which was promptly
renewed in December 2007.





Registration
requirements of medical devices





In
accordance with the “Administration Measures Regarding Medical Device
Registration” implemented on August 9, 2004, before a medical device can be
developed for commercial distribution, a developer must obtain medical device
registration by establishing, to the satisfaction of respective levels of the
food and drug administration, the safety and effectiveness of the medical
device. In addition, in order to conduct a clinical trial on a Class II or Class
III medical device, the SFDA requires developers to apply and to obtain in
advance a favorable inspection result for the device from a third party
inspection center approved by the SFDA. The application to the inspection center
must be supported by required data, such as animal and laboratory testing
results, as well as certain pre-clinical and clinical trial data. If approved,
the medical device registration is valid for four years.





The SFDA
occasionally changes its policies, adopts additional regulations, revises
existing regulations or tightens enforcement, each of which could block or delay
the approval process for a medical device.





All of
the products that we currently sell, including the OPEN Stereotactic Gamma-ray
Radiotherapy System, Stereotactic Gamma-ray Whole Body Therapeutic System
(SGS-1), Multi-leaf Collimator, TOP Stereotactic Gamma-ray Radiotherapy System,
Whole Body Sterotactic Gamma System (SGS-1+), Head Gamma Treatment System (HGTS)
and Body Gamma Treatment System (BGTS) have obtained SFDA
approval.  The Medical Linear Accelerator (LINAC) we currently sell is
manufactured by Shinwa.  As of February 8, 2010, we filed an
application with the SFDA seeking approval of a LINAC product manufactured by
the Company.  We will sell our own LINAC product once we obtain SFDA
approval.





8


Continuing
SFDA regulations





We are
subject to continuing regulation by the SFDA. In the event of significant
modification to an approved medical device, its labeling or its manufacturing
process, a new pre-market approval or pre-market approval supplement may be
required. Our GTS products are subject to, among others, the following
regulations:





·
            SFDA’s
      quality system regulations, which require developers to create, implement
      and follow certain design, testing, control, documentation and other
      quality assurance procedures;





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





·
            SFDA’s
      general prohibition against promoting products for unapproved
      uses.





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





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





·
            fines,
      injunctions and civil penalties;





·
            recall
      or seizure of our products;





·
            the
      imposition of operating restrictions, partial suspension or complete
      shutdown of production; and





·
            criminal
      prosecution.





Regulatory
requirements for developing international markets





We
believe that the regulatory requirements of some international markets we are
targeting will be satisfied at least in part by the regulatory approvals granted
by the SFDA. We believe that compliance with regulatory requirements in the
international markets that we are targeting in the near term will ultimately be
the responsibility of the local distributor, especially in markets where
regulators will rely on the SFDA approval process. We have not fully evaluated
the regulatory requirements of these markets and our ability to comply with the
requirements of a jurisdiction will be a factor in our expansion plans. These
requirements may include: the need for additional clinical trials; compliance
with labeling, advertising and promotion restrictions; manufacturing and quality
control obligations; and post-market reporting and record keeping
obligations.





Customers





The end
users of our products are hospitals and clinics that treat various types of
tumors, although our equipment is generally purchased by third party hospital
equipment investors that place our units in the hospital or clinic under a
financing arrangement.  We have a limited number of customers in the
PRC (with one customer accounting for approximately 64% of our sales for the
year ending December 31, 2009) and the health care institutions that are the end
users of our products are located in most of the provinces in
China.  While we are expanding our own sales and marketing
capabilities and developing an internal distribution network to facilitate
direct sales, we will still need to cooperate with third party investors who
provide lease financing for the health care institutions.





9


In an
effort to expand our customer base outside of China, we have entered into
distribution agreements with companies located in India, Argentina, Ukraine,
Chile, Russia, Hungary, South Korea and Peru.  These agreements were
entered into from September 2005 through October 2007.  Based on our
experience with our distributor in India (where obtaining regulatory approval
took more than two years from the execution of the agreement in January 2006),
we expect that it will take at least two years from commencement of a
distribution agreement before sales commence in those countries, and
substantially longer if the applicable regulatory authorities require clinical
trials or additional data beyond what was required to obtain SFDA
approval.  In addition, we understand that in several countries the
local distributors have delayed filing for regulatory approval until they have
reasonable assurance that there is a hospital or treatment center in the country
that wants to acquire the equipment and there is a feasible source of
financing.  In general, regulatory approval delays concerning client
facility preparation needed to install our products often delay the sale and
installation of our products.  In certain instances, such as in Peru,
the distributor has obtained regulatory approval, but shipment of our products
has been delayed as a result of delays in completion of the treatment center
where our products will be installed.





Materials
and Components





Our
manufacturing activities are outsourced and performed by others. We obtain
components for our products and assembly services from a network of third party
suppliers located in Shenzhen, Beijing, Wuhan and Chengdu, which are considered
some of the industrialized areas of China. We obtain our Cobalt 60 sources from
Beijing Shuangyuan Isotope Co. Ltd. and Chengdu Zhonghe Isotope Co. Ltd.;
electrical cabinets from Wuhan Shankuo Mechanical & Electrical Equipment Co.
Ltd; main engines from Jiangsu Duoling Numerical Control Machine Tool Co. Ltd
and Chengdu Aviation Plastic Modeling Co. Ltd; and positioning beds from
Shenzhen Tianda High-Tech Material Co. Ltd. Although we work closely with these
organizations, component shortages may occur from time to time. We do not have
long-term agreements with our suppliers. Instead, we obtain these products and
services on a purchase order basis. Because of the knowledge of our suppliers
concerning our requirements, we would have some difficulties, in the short run,
replacing a supplier.





Our major
assembly processes are “dry,” meaning that they do not involve significant
quantities of solvents, plating solutions or other types of materials that lead
to the generation of large amounts of hazardous wastes, process wastewater
discharges or air pollutant emissions. Our GTS devices use radioactive isotopes,
and the proper handling of this material, both prior to installation and after
removing it from a device for replacement, which must occur periodically, is
initially our responsibility. However, under current Chinese law and the
arrangements that we have with our waste handler, the responsibility and
liability for management of that waste transfers to the waste handler with the
waste itself.





We
periodically review the performance of our suppliers and manufacturers, which
includes an evaluation of any quality issues and corrective
actions.





Intellectual
Property





We have
been issued 29 patents in China covering radiotherapy devices, switching
devices, and various other aspects of the Gamma Treatment System. The first such
Chinese patent will expire in 2010, with the remainder expiring at various times
from 2013 through 2027. We have also been issued one patent in the United States
and one patent in the European Union. These foreign patents expire between 2020
and 2027. We intend to patent our new inventions both in China and
internationally and have filed a total of approximately 15 patent applications
in the PRC, U.S. and EU.





In
addition, pursuant to our acquisition of Portola Medical, Inc. in June of 2010,
we acquired one additional U.S. patent and eight pending U.S. patent
applications (“Portola Patents”).  The Portola Patents relate to
anadjustable
Multi-Catheter Source Applicator which is intended to provide brachytherapy when
a physician chooses to deliver intracavitary radiation to the surgical margins
following lumpectomy of breast cancer.





Our
patents cover the intellectual property we use in our products; we do not
license patent rights from others for our products. Management is not aware of
any current or previous infringement of the existing patents. If any
infringement occurs, our management intends to vigorously prosecute actions to
halt the infringement and recover damages if the value of the patent is judged
at the time to be sufficient to justify that effort.





Employees





As of
December 31, 2009, we had 96 employees, of which 81 were full-time employees and
15 were part-time employees. Of such employees, 52 were in research and
development, 21 were in sales and customer support, and 23 were in finance and
administration. We consider our relations with our employees to be
good.





10





Corporate
Information





Our
principal executive office is located at: Huiheng Building, Gaoxin 7 Street
South, Keyuannan Road, Nanshan District, Shenzhen Guangdong, P.R. China
518057.  Our telephone number at that address is
86-755-25331366.  Our website address is
www.huihengmedical.com.  The information on our website is not a part
of this Annual Report.





Item
1A.  Risk
Factors.





Risks
Related to our Business





Adverse
trends in the medical equipment industry, such as an overall decline in sales or
a shift away from the therapies that our products support, may reduce our
revenues and profitability.





Our
business depends on the continued growth of the radiotherapy equipment industry
in the PRC.  We operate in an industry characterized by technological
change, short product life cycles and margin pressures.  It is
possible that innovations in the treatment of tumors or improvements in
radiotherapy equipment developed by others will make our products uncompetitive,
reducing our revenues and profits.





We
do not have long-term purchase commitments from our customers and we have to
rely on obtaining orders from new customers for our products.





Our
medical equipment is generally sold one unit at a time through a limited number
of hospital equipment investors to a particular hospital or clinic, and they
generally do not reorder our products.  As a result, the continued
growth of our business involves making sales to an increasing number of new
hospitals and clinics each year.  The failure to find and sell to a
significant number of new end users each year would limit our revenues and
profits.





We also
make significant decisions related to production schedules, component
procurement commitments, facility requirements, personnel needs and other
resource requirements, based upon our estimates of future
sales.  Because many of our costs and operating expenses are fixed, a
reduction in customer demand would reduce our gross margins and operating
results.  Additionally, from time to time, we may purchase quantities
of supplies and materials greater than the amount that is required to fulfill
our customer orders in an attempt to secure more favorable pricing, delivery or
credit terms.  These purchases could expose us to losses from
cancellation costs, inventory carrying costs or inventory obsolescence if the
expected demand does not materialize, and hence, adversely affect our business
and operating results.





Today,
the majority of our product sales in the PRC are made through one
entity.





The
majority of our product sales in the PRC are made through
Jiancheng.  During the fiscal year ended December 31, 2009, Jiancheng
accounted for 63.38% of our revenue.  Any loss of significant revenue
from Jiancheng could negatively impact our results of operations and could harm
our business.





We
extend credit to our customers and often do not collect outstanding receivables
on a timely basis.  Our inability to collect such receivables has had
an adverse effect on our immediate and long-term liquidity.





The
contracts covering the sale of our products provide for the customer to make a
deposit at the time that the order is placed and to make progress payments at
various stages of the manufacturing, shipping, installation and testing process,
typically with the final 10% payment due 12 months after the customer accepts
the product as meeting the specifications.  However, in the PRC we
have rarely collected payments under those stated terms and our customers have
historically made most of their payments following the installation of our
units.  Our largest customer had an outstanding account receivable
balance owed to us of $10.46 million as of December 31, 2009.  The
delay in receipt of customer payments places pressure on our working capital
requirements.  Legal action is available, but the duration and outcome
of litigation is inherently uncertain, particularly in the PRC, where the civil
justice system continues to evolve.  If we are unable to collect on
these accounts, our liquidity and profitability will be reduced.





We
need additional capital, and we may be unable to obtain such capital in a timely
manner or on acceptable terms, or at all.





In order
to grow, remain competitive, develop new products and expand distribution, we
require additional capital.  Our ability to obtain additional capital
will be subject to a variety of uncertainties, including:




11




·
            our
      future financial condition, results of operations and cash
      flows;





·
            general
      market conditions for capital raising activities by medical equipment and
      related companies;





·
            investor
      demand for new offerings by issuers with small market capitalizations;
      and





·
            economic,
      political and other conditions in China and
  elsewhere.





As a
result of such uncertainties, we may be unable to obtain additional capital in a
timely manner, or on acceptable terms or at all.  Furthermore, the
terms and amount of any additional capital raised through issuances of equity
securities may result in significant stockholder dilution.





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





Treatment
fees for our radiotherapy systems are subject to prices set by provincial
governments in China, and these prices can be adjusted downward or upward from
time to time.  If the treatment fees for our products are reduced by
the government, some customers may be discouraged from buying our products,
which would reduce our sales.  We may need to decrease the price of
our products to provide our customers with acceptable financial returns on their
purchases.  Our business or results of operations may be adversely
affected by a reduction in treatment fees for our products in the
future.





Failure
to optimize our sourcing activities and cost structure could materially increase
our expenses, causing a decline in our margins and profitability.





We strive
to utilize our parts suppliers and manufacturing services in an efficient
manner.  The efficiency of our operations depends in part on our
success in accurately forecasting demand for our products and planning component
parts and outsourced manufacturing services for new products that we intend to
produce.  Failure to optimize our sourcing activities and cost
structure could materially and adversely affect our business and operating
results.





Moreover,
our cost structure is subject to fluctuations from inflationary
pressures.  Recently, China has experienced dramatic growth in its
economy.  Future instances of similar growth may lead to pressure on
wages and salaries that may exceed increases in productivity.  In
addition, these pressures may be exacerbated by exchange rate
movements.





Our
business is subject to intense competition, which may reduce demand for our
products and materially and adversely affect our business, financial condition,
results of operations and prospects.





The
medical equipment market is highly competitive, and we expect the level of
competition to remain at its current level or intensify.  We face
direct competition in China and will do so in other markets should we expand
internationally.  This competition is across all product lines and at
all price points.  Our competitors also vary significantly according
to business segment.  For domestic sales, our competitors include
publicly-traded and privately-held multinational companies, as well as domestic
Chinese companies.  To date, our international sales have been very
limited (one unit sold in India in 2008 and zero international sales in 2009)
and while we are planning to engage in additional international sales in Latin
American and Eastern Europe in the near future, there is no guarantee that we
will meet with success.  Our competitors are primarily publicly-traded
and privately-held multinational companies.  We also face competition
in international sales from companies that have local operations in the markets
in which we sell our products.




Some of
our larger competitors, especially the multinational companies, have, among
them:





·
            greater
      financial and other resources;





·
            a
      larger variety of products that have received regulatory
      approvals;





·
            more
      extensive research and development and technical
    capabilities;





·
            patent
      portfolios that may present an obstacle to our conduct of
      business;




12




·
            greater
      knowledge of local market conditions where we seek to increase our
      international sales;





·
            stronger
      brand recognition; and





·
            larger
      sales and distribution networks.





As a
result, we may be unable to offer products similar to, or more desirable than,
those offered by our competitors, and/or market our products as effectively as
our competitors or otherwise respond successfully to competitive
pressures.  In addition, our competitors may be able to offer
discounts on competing products as part of a “bundle” of non-competing products,
systems and services that they sell to our customers, and we may not be able to
match those discounts while remaining profitable.  Furthermore, our
competitors may develop technologies and products that are more effective than
ours or that render our products obsolete or uncompetitive.  In
addition, the timing of the introduction of competing products into the market
could affect the market acceptance and market share of our
products.  Our failure to compete successfully could materially and
adversely affect our business, financial condition, results of operation and
prospects.





Moreover,
some of our internationally-based competitors have established or are in the
process of establishing production and research and development facilities in
China, while others have entered into cooperative business arrangements with
Chinese manufacturers.  If we are unable to develop competitive
products, obtain regulatory approval or clearance and supply sufficient
quantities to the market as quickly and effectively as our competitors, market
acceptance of our products may be limited, which could result in decreased
sales.  In addition, we may not be able to maintain our outsourced
manufacturing cost advantage.





In
addition, we believe that corrupt practices in the medical equipment industry in
China still occur, although it is difficult to quantify.  To increase
sales, certain manufacturers or distributors of medical equipment may pay
kickbacks or provide other benefits to hospital personnel who make procurement
decisions.  Our company policy prohibits these
practices.  As a result, as competition intensifies in the medical
equipment industry in China, we may lose sales, customers or contracts to
competitors who engage in these practices, and there may be no remedy we can
pursue to prevent this.





We
may fail to effectively develop and commercialize new products, which would
materially and adversely affect our business, financial condition, results of
operations and prospects.





Our
success depends on our ability to anticipate technology development trends and
to identify, develop and commercialize in a timely and cost-effective manner new
and advanced products that our customers demand.  Moreover, it may
take an extended period of time for our new products to gain market acceptance,
if at all.  Furthermore, as the life cycle for a product matures, the
average selling price generally decreases.  Although we have
previously offset the effect of declining average sales prices through increased
sales volumes and reductions in outsourced manufacturing costs, we may be unable
to continue to do so.  Lastly, during a product’s life cycle, problems
may arise regarding regulatory, intellectual property, product liability or
other issues which may affect its continued commercial viability.




Whether
we will be successful in developing and commercializing new products will depend
on our ability to:





·
            obtain
      regulatory clearances or approvals in a timely and cost efficient
      manner;





·
            optimize
      our procurement processes to control
costs;





·
            manufacture
      and deliver quality products in a timely
manner;





·
            increase
      customer awareness and acceptance of our new
  products;





·
            compete
      effectively with other medical equipment
  companies;





·
            price
      our products competitively; and





·
            effectively
      integrate customer feedback into our research and development
      planning.





13


If
we fail to obtain or maintain applicable regulatory clearances or approvals for
our products, or if such clearances or approvals are delayed, we will be unable
to distribute our products in a timely manner, or at all, which could
significantly disrupt our business and materially and adversely affect our sales
and profitability.





The sale
and marketing of our products are subject to regulation in the PRC and in most
other countries where we intend to conduct business.  For a
significant portion of our products, we need to obtain and renew licenses and
registrations with the PRC State Food and Drug Administration, or SFDA, and its
equivalent in other markets.  The processes for obtaining regulatory
clearances or approvals can be lengthy and expensive, and the results are
unpredictable.  All of the products that we currently sell, including
the OPEN Stereotactic Gamma-ray Radiotherapy System, Stereotactic Gamma-ray
Whole Body Therapeutic System (SGS-1), Multi-leaf Collimator, TOP Stereotactic
Gamma-ray Radiotherapy System, and Whole Body Sterotactic Gamma System (SGS-1+)
have obtained SFDA approval.  The Medical Linear Accelerator (LINAC)
we currently sell is manufactured by Shinwa.  As of February 8, 2010,
we filed an application with SFDA seeking approval of a LINAC product
manufactured by the Company.  We will sell our own LINAC product once
we obtain the SFDA approval.  However, we cannot be certain how long
such an approval process may take.  In addition, relevant regulatory
authorities may introduce additional requirements or procedures that could have
the effect of delaying or prolonging the approval for our existing or new
products.  For example, in 2007 the SFDA introduced a new safety
standard to its approval process for new medical equipment which we believe has
increased the typical time period required to obtain approval by approximately
three months.  If we are unable to obtain approvals needed to market
existing or new products, or obtain such approvals in a timely fashion, our
business would be significantly disrupted, and our sales and profitability could
be materially and adversely affected.





In
particular, as we enter foreign markets, we lack the experience and familiarity
with both the regulators and the regulatory systems, which could make the
process more difficult, more costly, more time consuming and less likely to
succeed.





Failure
to manage our growth could strain our management, operational and other
resources, which could materially and adversely affect our business and
prospects.





Our
growth strategy includes building our brand, increasing market penetration of
our existing products, developing new products, increasing our targeting of
hospitals in the PRC, and expanding internationally.  Pursuing these
strategies has resulted in, and will continue to result in, substantial demands
on management resources.





In
addition, the management of our growth will require, among other
things:





·
            enhancement
      of our research and development
capabilities;





·
            stringent
      cost controls;





·
            adequate
      working capital and financial
resources;





·
            strengthening
      of financial and management controls and information technology
      systems;





·
            increased
      marketing, sales and sales support activities;
  and





·
            hiring
      and training of new personnel.





If we are
not able to manage our growth successfully, our business and prospects would be
materially and adversely affected.





If
we are unable to effectively and efficiently improve and maintain our controls
and procedures, there could be a material adverse effect on our operations or
financial results.





As a
public company, we are subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and the Sarbanes-Oxley Act
of 2002 (“SOX”).  These requirements may place a strain on our systems
and resources, especially as we grow into other markets and develop our own
manufacturing capabilities.  The Exchange Act requires, among other
things, that we file annual, quarterly and current reports with respect to our
business and financial condition.  SOX requires, among other things,
that we maintain effective disclosure controls and procedures and internal
control over financial reporting.  We are currently reviewing and
further documenting our internal control procedures.  We expect to
devote significant resources to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over financial
reporting.





14


Effective
internal controls are necessary for us to provide reliable financial
reports.  If we cannot provide reliable financial reports, our
business and operating results could be harmed.  Last year, we noted
that we (1) lacked sufficient staff with appropriate knowledge, experience, and
training in the application of U.S. generally accepted accounting principles
(“U.S. GAAP”), and (2) needed improvement in our enterprise risk management
system to address enterprise risk and internal policies over enterprise level
controls.  Because of these deficiencies in our controls and
procedures, we have undertaken the following remedial measures: (1) we have
hired an outside consultant to help us improve internal procedures; (2) we have
hired a new accountant with significant international auditing and GAAP
experience; and (3) we are working with professional advisors to analyze,
re-design and remediate key internal controls over financial reporting in order
to standardize internal policies and procedures.





Any
failure to implement and maintain the improvements in the controls over our
financial reporting, or difficulties encountered in the implementation of these
improvements in our controls, could cause us to fail to meet our reporting
obligations.  Any failure to improve our internal controls to address
these identified deficiencies could also cause investors to lose confidence in
our reported financial information, which could have a negative impact on the
trading price of our stock.





Compliance
with rules and regulations concerning corporate governance may be costly, which
could harm our business.





We will
continue to incur significant legal, accounting and other expenses to comply
with regulatory requirements.  SOX, together with rules implemented by
the Securities and Exchange Commission (“SEC”), has required and will require us
to make changes in our corporate governance, public disclosure and compliance
practices.  In addition, we have incurred significant costs and will
continue to incur costs in connection with ensuring that we are in compliance
with rules promulgated by the SEC regarding internal controls over financial
reporting pursuant to Section 404 of SOX.  Compliance with these rules
and regulations has increased our legal and financial compliance costs, which
have had, and may continue to have, an adverse effect on our
profitability.





We
generate a significant portion of our revenues from a small number of products,
and a reduction in demand for any of these products could materially and
adversely affect our financial condition and results of operations.





We derive
a substantial percentage of our revenues from a small number of
products.  We currently have just five in our portfolio, and we only
recently both launched the fifth product, the SGS-I+, and updated our Medical
Linear Accelerator, in 2009.  As a result, continued market acceptance
and popularity of these products are critical to our success.  A
reduction in demand due to, among other factors, the introduction of competing
products, the entry of new competitors, or customer dissatisfaction with the
quality of our products, could materially and adversely affect our financial
condition and results of operations.





If
we experience a significant number of warranty claims, our costs could
substantially increase and our reputation and brand could suffer.





We
typically sell our products with warranty terms covering 12 months after
purchase.  Our product warranty requires us to repair all mechanical
malfunctions and, if necessary, replace defective components.  If we
experience an increase in warranty claims or if our repair and replacement costs
associated with warranty claims increase significantly, we may have to accrue a
greater liability for potential warranty claims.  Moreover, an
increase in the frequency of warranty claims could substantially increase our
costs and harm our reputation and brand.  Our business, financial
condition, results of operations and prospects may suffer materially if we
experience a significant increase in warranty claims on our
products.





Products
we develop may contain design or manufacturing defects, which could result in
reduced demand for our products and services and increased customer claims
against us, causing us to sustain additional costs, loss of business reputation
and legal liability.





Our
products are highly complex and may at times contain design or manufacturing
errors or failures.  Any defects in the products we develop, whether
caused by a design, manufacturing or component failure or error, may result in
claims, delayed shipments to customers or reduced or cancelled customer
orders.  If these defects occur, we will incur additional costs, and
if they occur in large quantity or frequently, we may sustain additional costs,
loss of business reputation and legal liability.




15





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





Complex
medical equipment, such as our radiotherapy systems, can experience performance
problems that require review and possible corrective action by the
manufacturer.  From time to time, we receive reports from users of our
products relating to performance problems they have encountered.  We
expect that we will continue to receive customer reports regarding performance
problems they encounter through the use of our products.  Furthermore,
component failures, manufacturing errors or design defects could result in an
unsafe condition or injury to the patient.  Any serious failures or
defects could cause us to withdraw or recall products, which could result in
significant costs such as repair and product replacement costs.  We
cannot assure investors that market withdrawals or product recalls will not
occur in the future.  The occurrence of such events could have a
material adverse effect on our business, financial condition and results of
operations.  We are currently unable to insure against this type of
liability in China.





We
could become involved in intellectual property disputes, resulting in
substantial costs and diversion of our management resources.  Such
disputes could materially and adversely affect our business by increasing our
expenses and limiting the resources devoted to expansion of our business, even
if we ultimately prevail.





We
currently possess 29 patents issued in the PRC, one in the U.S. and one in the
European Union.  If one of our patents is infringed upon by a third
party, we may need to devote significant time and financial resources to attempt
to halt the infringement.  We may not be successful in defending the
patents involved in such a dispute.  Similarly, while we do not
knowingly infringe on patents, copyrights or other intellectual property rights
owned by other parties, we may be required to spend a significant amount of time
and financial resources to resolve any infringement claims against
us.  We may not be successful in defending our position or negotiating
an alternative remedy.  Any litigation could result in substantial
costs and diversion of our management resources and could reduce our revenues
and profits and harm our financial condition.





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





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





We
may develop new products that do not gain market acceptance, and the significant
costs in designing and manufacturing such product solutions could hurt our
profitability and operations.





We
operate in an industry characterized by frequent technological advances, the
introduction of new products and new design and manufacturing
technologies.  We expect to introduce two new products over the next
several years.  As a result, we are expending funds and committing
resources to research and development activities, possibly requiring additional
engineering and other technical personnel; purchasing new design, production,
and test equipment; expanding our manufacturing capabilities and continually
enhancing design processes and techniques.  Delays in product approval
by regulatory authorities could further increase our costs.  We may
invest in equipment employing new production techniques for existing products
and new equipment in support of new technologies that fail to generate adequate
returns on the investment due to insufficient productivity, functionality or
market acceptance of the products for which the equipment may be
used.  We could, therefore, incur significant costs in design and
manufacturing services for new products that do not result in sufficient revenue
to make those investments profitable, or in any revenue at all.





16


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





Shenzhen
Hyper commenced operations in September 2001, and we installed our first Super
Gamma System (“SGS”) in that year and installed our first MLC in March
2007.  Wuhan Kangqiao also commenced operations in September 2001, and
we installed our first Body Gamma Treatment System (“BGTS”) in 2003 and our
first HGTS in 2004.  As a result, we have a limited operating history
which may not provide a meaningful basis for investors to evaluate our business,
financial performance and prospects.  We may not have sufficient
experience to address the risks frequently encountered by early-stage companies,
and as a result we may not be able to:





·
            maintain
      profitability;





·
            preserve
      what we believe (based solely on management’s knowledge of the industry)
      is our leading position in the GTS market in
  China;





·
            acquire
      and retain customers;





·
            attract,
      train, motivate and retain qualified
personnel;





·
            keep
      up with evolving industry standards and market
    developments;





·
            increase
      the market awareness of our
products;





·
            respond
      to competitive market conditions;





·
            maintain
      adequate control of our expenses;





·
            manage
      our relationships with our suppliers and hospital equipment investors;
      or





·
            protect
      our proprietary technologies.





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





Our
component and materials suppliers may fail to meet our needs and quality
standards, causing us to experience outsourced manufacturing delays, which may
harm our relationships with current or prospective customers and reduce
sales.





We
acquire the components of our equipment from third parties.  This
exposes us to supply risk and to price increases that we may not be able to pass
on to our customers.  There may be shortages of some of the materials
and components that we use.  If we are unable to obtain sufficient
amounts of components or materials on a timely and cost effective basis, we may
experience outsourced manufacturing delays, which could harm our relationships
with current or prospective customers and reduce sales.





We
are subject to product liability exposure and have no product liability
insurance coverage.





As our
main products are medical equipment used for the treatment of patients, we are
exposed to potential product liability claims in the event that the use of our
products causes or is alleged to have caused personal injuries or other adverse
effects.  A successful product liability claim against us could
require us to pay substantial damages.  Product liability claims,
whether or not successful, are often costly and time-consuming to
defend.  Also, in the event that our products prove to be defective,
we may be required to recall or redesign such products.  As the
insurance industry in China is still in an early stage of development, we do not
have any product liability insurance.  A product liability claim, with
or without merit, could result in significant adverse publicity against us, and
could have a material adverse effect on the marketability of our products and
our reputation, which in turn, could have a material adverse effect on our
business, financial condition and results of operations.  In addition,
we do not have any business interruption insurance coverage for our
operations.  Any business disruption or natural disaster could result
in substantial costs and diversion of resources.





17




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





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





·
            our
      product or technology development will be successfully
      completed;





·
            necessary
      regulatory clearances or approvals will be granted by the SFDA or other
      regulatory bodies as required on a timely basis, or at all;
    or





·
            any
      product or technology we develop can be commercialized or will achieve
      market acceptance.





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





Potential
strategic alliances may not achieve their objectives, which could lead to wasted
effort or involvement in ventures that are not profitable and could harm our
company’s reputation.





We are
currently exploring strategic alliances intended to enhance or complement our
technology, to provide additional know-how, components or supplies, and to
introduce and distribute products and services utilizing our technology and
know-how.  Any strategic alliances entered into may not achieve their
strategic objectives, and parties to our strategic alliances may not perform as
contemplated.  As a result, the alliances themselves may run at a
loss, which would reduce our profitability, and if the products or customer
service provided by such alliances were of inferior quality, our reputation in
the marketplace could be harmed, affecting our existing and future customer
relationships.





We
may not be able to retain, recruit and train adequate management and production
personnel.  We rely heavily on those personnel to help develop and
execute our business plans and strategies, and if we lose such personnel, it
would reduce our ability to operate effectively.





Our
success is dependent, to a large extent, on our ability to retain the services
of our executive management, who have contributed to our growth and expansion to
date.  Our Chairman, Mr. Hui Xiaobing, has been, and will continue to
be, instrumental to our success.  In addition, the executive directors
play an important role in our operations and the development of our new
products.  Accordingly, the loss of their services, without suitable
replacements, will have an adverse effect on our business generally, operating
results and future prospects.





In
addition, our continued operations are dependent upon our ability to identify
and recruit adequate management and production personnel in China.  We
require trained graduates of varying levels and experience and a flexible work
force of semi-skilled operators.  Many of our current employees come
from the more remote regions of China as they are attracted by the wage
differential and prospects afforded by Shenzhen, Beijing and our
operations.  With the economic growth currently being experienced in
China, competition for qualified personnel will be substantial, and there can be
no guarantee that a favorable employment climate will continue and that wage
rates we must offer to attract qualified personnel will enable us to remain
competitive.  The inability to attract such personnel or the increased
cost of doing so could reduce our competitive advantage relative to our
competitors, reducing or eliminating our growth in revenues and
profits.





18


Risks
Related to our Activities in China





The
Chinese legal system may have inherent uncertainties that could materially and
adversely impact our ability to enforce the agreements governing our
operations.





We are
subject to oversight at the provincial and local levels of government in
China.  Our operations and prospects would be materially and adversely
affected by the failure of the local government to honor our agreements or an
adverse change in the laws governing them.  In the event of a dispute,
enforcement of these agreements could be difficult in China.  China
tends to issue legislation, which is followed by implementing regulations,
interpretations and guidelines that can render immediate compliance
difficult.  Similarly, on occasion, conflicts arise between national
legislation and implementation by the provinces that take time to
reconcile.  These factors can present difficulties in our ability to
achieve compliance.  Unlike the United States, China has a civil law
system based on written statutes in which judicial decisions have limited
precedential value.  The Chinese government has enacted laws and
regulations to deal with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and
trade.  However, our experience in interpreting and enforcing our
rights under these laws and regulations is limited, and our future ability to
enforce commercial claims or to resolve commercial disputes in China is
therefore unpredictable.  These matters may be subject to the exercise
of considerable discretion by agencies of the Chinese government, and forces and
factors unrelated to the legal merits of a particular matter or dispute may
influence their determination.





It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.





Substantially
all of our assets are located outside of the United States and most of our
officers and directors reside outside of the United States.  As a
result, it may not be possible for United States investors to enforce their
legal rights, to effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil liabilities and
criminal penalties of our directors and officers under Federal securities laws
of the United States.  Moreover, we have been advised that the PRC
does not have treaties providing for the reciprocal recognition and enforcement
of judgments of courts with the United States.  Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement of criminal penalties of the Federal
securities laws of the United States.





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, which could impair our planning processes and make it
difficult to provide accurate reports of our operating results.





The PRC
historically has not followed Western style management and financial reporting
concepts and practices, and access to modern banking, computer and other control
systems has been limited.  We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC in these
areas.  As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards, making it difficult
for management to forecast its needs and to present the results of our
operations accurately at all times.





Our
management may fail to meet the obligations under Chinese law that enable the
distribution of profits earned in the PRC to entities outside of the
PRC.





A
circular promulgated by the State Administration for Foreign Exchange (“SAFE”),
which is the PRC governmental body that regulates the conversion of RMB into
foreign currencies, has increased the ability of foreign holding companies to
receive distributions of profits earned by Chinese operating
subsidiaries.  We qualify for this treatment, but remaining qualified
for it will require the Chinese principals involved in our business to meet
annual filing obligations.  While they have agreed to meet those
annual requirements, it is possible that they will fail to do so, which could
limit our ability to gain access to the profits earned by Allied
Moral.  The result could be the inability to pay dividends to our
stockholders or to deploy capital outside of the PRC in a manner that would be
beneficial to our business as a whole.





The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could leave us unable to use the assets we have
accumulated for the purpose of generating profits for the benefit of our
stockholders.





Over the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation.  The Chinese government may not continue to
pursue these policies or may significantly alter them to our detriment without
notice.  Changes in policies by the Chinese government that result in
a change of laws, regulations, their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion or imports and
sources of supply could materially reduce the value of our business by making us
uncompetitive or, for example, by reducing our after-tax profits.  The
nationalization or other expropriation of private enterprises by the Chinese
government could result in the total loss of our investment in China, where a
significant portion of our profits are generated.





19


National,
provincial and local governments have established many regulations governing our
business operations.





We are
also subject to numerous national, provincial and local governmental
regulations, including environmental, labor, waste management, health and safety
matters and product specifications and regulatory approvals from healthcare
agencies.  We are subject to laws and regulations governing our
relationship with our employees including: wage requirements, limitations on
hours worked, working and safety conditions, citizenship requirements, work
permits and travel restrictions.  These local labor laws and
regulations may require substantial resources for compliance.  We are
subject to significant government regulation with regard to property ownership
and use in connection with our facilities in the PRC, import restrictions,
currency restrictions and restrictions on the volume of domestic sales and other
areas of regulation.  These regulations can limit our ability to react
to market pressures in a timely or effective way, thus causing us to lose
business or miss opportunities to expand our business.





Risks
Related to International Operations





We
currently conduct most of our business in the PRC.  However, we have
plans to expand internationally, and the rate and degree of that expansion could
be substantial.  For that reason, risks related to international
operations may be relevant to an investment decision.





The
failure of China to continue its policy of economic reforms could, among other
things, result in an increase in tariffs and trade restrictions on our products,
making our products less attractive in international markets and potentially
reducing our future revenues and profits.





China’s
government has been reforming its economic system since the late
1970s.  The economy of China has historically been a nationalistic,
“planned economy,” meaning it has functioned according to governmental plans and
pre-set targets or quotas.





However,
in recent years, the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reform and the reduction of state
ownership in business enterprises.  Although we believe that the
changes adopted by the government of China have had a positive effect on the
economic development of China, additional changes still need to be
made.  For example, a substantial portion of productive assets in
China are still owned by the Chinese government.  Additionally, the
government continues to play a significant role in regulating industrial
development.  We cannot predict the timing or extent of any future
economic reforms that may be proposed, but should they occur, they could reduce
our operating flexibility or require us to divert our efforts to products or
ventures that are less profitable than those we would elect to pursue on our
own.





A recent
positive economic change has been China’s entry into the World Trade
Organization, the global international organization dealing with the rules of
trade between nations.  It is believed that China’s entry will
ultimately result in a reduction of tariffs for industrial products, a reduction
in trade restrictions and an increase in trading with the United States and
other western countries.  However, China has not fully complied with
all of its WTO obligations to date, including fully opening its markets to
American goods and easing the current trade imbalance between the two
countries.  If actions are not taken to rectify these problems, trade
relations between the United States and China may be strained, and this may have
a negative impact on China’s economy and our business by leading to the
imposition of trade barriers on items that incorporate our products, which would
reduce the revenues and profits we might otherwise generate from international
sales.





In
order to market our products internationally, we will be required to obtain
relevant regulatory approvals for our products in the countries in which we
intend to sell.





Our
products will be subject to review by governmental agencies prior to being
eligible for sale in new markets.  We lack the expertise to navigate
such approval processes outside of China and we will be required to rely on our
distributors and advisors to obtain such approvals.  We will have very
little influence over their activities.  The failure of our partners
to obtain and maintain required approvals will limit our ability to sell our
products internationally and harm our prospects for future revenues and
profitability.





20


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





Our
success depends to a significant degree upon our ability to expand into
international markets.  In expanding our business internationally, we
intend to enter markets in which we have limited or no experience and in which
our brand is not recognized.  To promote our brand and generate demand
for our products so as to attract distributors in international markets, we
expect to spend significantly more on marketing and promotion than we do in our
existing markets.  We may be unable to attract a sufficient number of
distributors, and our selected distributors may not be suitable for selling our
products.  Furthermore, in new markets we may fail to anticipate
competitive conditions that are different from those in China.  These
competitive conditions may make it difficult or impossible for us to effectively
operate in these markets.  If our expansion efforts in existing and
new markets are unsuccessful, our profitability and prospects would be
materially and adversely affected.





As
we begin to do business internationally, we will be subject to significant
worldwide political, economic, legal and other uncertainties.





Today,
substantially all of our assets are located in the PRC.  As we begin
selling our products to customers worldwide, we will have receivables from, and
goods in transit, to those locations.





In
addition, international operations will expose us to other risks,
including:





·
            political
      instability;





·
            economic
      instability and recessions;





·
            changes
      in tariffs;





·
            difficulties
      of administering foreign operations
generally;





·
            limited
      protection for intellectual property
rights;





·
            obligations
      to comply with a wide variety of foreign laws and other regulatory
      requirements;





·
            increased
      risk of exposure to terrorist
activities;





·
            reliance
      on our international distributors for compliance with foreign regulatory
      approvals and sales;





·
            export
      license requirements;





·
            unauthorized
      re-export of our products;





·
            potentially
      adverse tax consequences; and





·
            the
      inability to effectively enforce contractual or legal
    rights.





The
additional risks and costs of our intended international expansion could harm
our profitability and financial condition.





Fluctuation
of the Renminbi could make our pricing less attractive, causing us to lose
sales, or could reduce our profitability when stated in terms of another
currency, such as the U.S. dollar.





The value
of the Renminbi, or RMB, the main currency used in China, fluctuates and is
affected by, among other things, changes in the PRC’s political and economic
conditions.  The conversion of RMB into foreign currencies such as the
U.S. dollar has been generally based on rates set by the People’s Bank of China,
which are set daily based on the previous day’s interbank foreign exchange
market rates and current exchange rates on the world financial
markets.  The official exchange rate had remained stable over the past
several years.  However, the PRC recently adopted a floating rate with
respect to the RMB.  As a result, the average
monthly  exchange rate of the RMB to the U.S. dollar was about RMB
$6.8303 to one U.S. dollar for the year ended December 31, 2009 as compared to
an average of approximately RMB $6.9351 during 2008.  This floating
exchange rate, and any appreciation of the RMB that may result from such rate,
could have various effects on our international business, which include making
our products more expensive relative to those of our competitors.  It
is not possible to predict if the net effects of the appreciation of the RMB, to
whatever extent it occurs, would be positive or negative for our
business.





21


Changes
in foreign exchange regulations in China may affect our ability to pay dividends
in foreign currency or conduct other business for which we would need access to
foreign currency exchange.





The
Renminbi is not currently a freely convertible currency, and the restrictions on
currency exchanges may limit our ability to use revenues generated in RMB to
fund business activities outside the PRC or to make dividends or other payments
in United States dollars.  The Chinese government strictly regulates
conversion of RMB into foreign currencies.  For example, RMB cannot be
converted into foreign currencies for the purpose of expatriating the foreign
currency, except for purposes such as payment of debts lawfully owed to parties
outside of the PRC.  Over the years, foreign exchange regulations in
the PRC have significantly reduced the government’s control over routine foreign
exchange transactions under current accounts.





We cannot
provide any assurance that Chinese regulatory authorities will not impose
further restrictions on the convertibility of the RMB.  Since one of
our PRC subsidiaries currently generates virtually all of our revenues and these
revenues are denominated mainly in RMB, any future restrictions on currency
exchanges may limit our ability to repatriate such revenues for the distribution
of dividends to our stockholders or for funding our other business activities
outside the PRC.





We
are subject to various tax regimes, which may adversely affect our profitability
and tax liabilities in the future.





Huiheng
is incorporated in the U.S. and has subsidiaries and other operations in the PRC
and the British Virgin Islands.  We are subject to the tax regimes of
these countries.  Although virtually all of Huiheng’s profits will be
earned outside of the U.S., under U.S. tax laws Huiheng’s earnings generally
will be subject to U.S. taxation, because U.S. companies are generally taxed on
their world-wide income.  This may be true even if Huiheng does not
repatriate any of its foreign earnings to the U.S.  For certain types
of income (generally, income from an active trade or business), U.S. companies
are not required to pay tax on that income until they repatriate those earnings
to the U.S. (such as for use in paying dividends or repurchasing
shares).  As a result, repatriation of earnings would trigger more
immediate tax obligations.  As a result of the imposition of U.S.
taxes, Huiheng’s after-tax profits could decrease and could be below the level
that would have been obtained if Huiheng were incorporated outside the
U.S.  The amount of taxes payable in the U.S. generally depends on the
profitability of our various operations and the application of available tax
credits and tax treaties.  We are not currently receiving the benefit
of any U.S. tax credit, and we are not currently conducting a material amount of
business in a country with an advantageous tax treaty.  Since the
effect of tax credits and tax treaties depends on the profitability of
operations in various jurisdictions, the amount of our tax will vary over time
as we change the geographic scope of our activities.  However, for the
near term we expect that our total tax rate will be significantly influenced by
the taxes we pay in China, so that our total tax obligation might decrease as a
result of favorable tax treatment in China even though we were subject to
additional U.S. taxes.  In the future, Huiheng may pay significantly
higher taxes than we have paid historically.  In addition, any change
in tax laws and regulations or the interpretation or application thereof, either
internally in one of those jurisdictions or as between those jurisdictions, may
adversely affect Huiheng’s profitability and tax liabilities in the
future.





Because
Chinese law will govern almost all of our material agreements, we may not be
able to enforce our legal rights internationally, which could result in a
significant loss of business, business opportunities, or capital.





Chinese
law will govern almost all of our material agreements.  We cannot
assure investors that we will be able to enforce any of our material agreements
or that remedies will be available outside of the PRC.  The system of
laws and the enforcement of existing laws in the PRC may not be as certain in
implementation and interpretation as in the United States.  The
Chinese judiciary is relatively inexperienced in enforcing corporate and
commercial law, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation.  The inability to enforce or obtain a
remedy under any of our future agreements could result in a significant loss of
business, business opportunities or capital.





Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our
profitability.





We may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and
tariffs.  In addition, we may be subject to repatriation taxes levied
upon the exchange of income from local currency into foreign currency,
substantial taxes of profits, revenues, assets and payroll, as well as
value-added tax.  Further obstacles still may arise in obtaining the
approval for the use of our equipment in the health care systems of various
countries.  The markets in which we plan to operate may impose onerous
and unpredictable duties, tariffs and taxes on our business and products, and
there can be no assurance that this will not reduce the level of sales that we
achieve in such markets, which would reduce our revenues and
profits.





22


The PRC
has agreed that foreign companies will be allowed to import most products into
any part of the PRC.  In the sensitive area of intellectual property
rights, the PRC has agreed to implement the trade-related intellectual property
agreement of the Uruguay Round.  There can be no assurances that the
PRC will implement any or all of the requirements of its membership in the World
Trade Organization in a timely manner, if at all.  If the PRC does not
fulfill its obligations to the World Trade Organization, we may be subject to
retaliatory actions by the governments of the countries into which we sell our
products, which could render our products less attractive, thus reducing our
revenues and profits.





Risks
Related to our Securities





The
market price of our shares is subject to significant price and volume
fluctuations.





The price
of our common shares may be subject to wide fluctuations due to variations in
our operating results, news announcements, our limited trading volume, general
market trends both domestically and internationally, currency movements, sales
of common shares by our officers, directors and our principal stockholders, and
sales of common shares by existing investors.  Certain events, such as
the issuance of common shares upon the exercise of our outstanding stock
options, could also materially and adversely affect the prevailing market price
of our common shares.  Further, the stock markets in general have
recently experienced extreme price and volume fluctuations that have affected
the market prices of equity securities of many companies and that have been
unrelated or disproportionate to the operating performance of such
companies.  In addition, a change in sentiment by U.S. investors for
China-based companies could have a negative impact on the stock
price.  These fluctuations may materially and adversely affect the
market price of our common shares and the ability to resell shares at or above
the price paid, or at any price.





One
of our stockholders, which is controlled by our Chief Executive Officer,
currently owns approximately 85% of our common stock and has the ability to
prevent certain types of corporate actions, to the detriment of other
stockholders.





Clear
Honest International Limited, a company controlled by Mr. Hui Xiaobing (our
Chief Executive Officer) owns 11,750,000 shares of our common stock, which
represents approximately 84% of our outstanding shares of common
stock.  Mr. Hui is able to exercise significant influence over all
matters requiring stockholder approval, including the election of a majority of
the directors and determination of significant corporate
actions.  This ownership percentage and level of influence will
increase if the earnout shares are issued.  If all 928,575 of the
earnout shares are issued as additional consideration under the Allied Moral
share exchange (which would occur from 2009 through 2011) and assuming that
there are no other issuances of shares, Clear Honest would own approximately 86%
of our issued and outstanding common stock.  This concentration of
ownership could also have the effect of delaying or preventing a change in
control that could otherwise be beneficial to our stockholders.





Future
sales of our common stock may depress our stock price.





The
13,935,290 shares of common stock outstanding, and an additional 2,315,785
shares of common stock issuable upon conversion of our Series A Preferred Stock,
will be available for sale in the public market at various times after we
register our stock under the Securities Exchange Act.  If our
stockholders sell substantial amounts of shares in the public market, or if the
market perceives that these sales may occur, the market price of our common
stock may decline.





Our
Articles of Incorporation authorize our board of directors to issue new series
of preferred stock that may have the effect of delaying or preventing a change
of control, which could adversely affect the value of your shares.





Our
articles of incorporation provide that our board of directors will be authorized
to issue from time to time, without further stockholder approval, up to 700,000
additional shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each series, including the dividend rights,
dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series.  Such shares of preferred stock could have preferences
over our common stock with respect to dividends and liquidation
rights.  We may issue additional preferred stock in ways which may
delay, defer or prevent a change of control of our company without further
action by our stockholders.  Such shares of preferred stock may be
issued with voting rights that may adversely affect the voting power of the
holders of our common stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting
rights.





23


Our
common stock has been thinly traded and we cannot predict the extent to which a
trading market will develop.





Our
common stock is quoted on the Over-the-Counter Bulletin Board.  Our
common stock is thinly traded compared to larger, more widely known
companies.  Thinly traded common stock can be more volatile than
common stock trading in an active public market.  We cannot predict
the extent to which an active public market for our common stock will develop or
be sustained.





We
do not expect to pay dividends.





We expect
to apply our future earnings, if any, toward the further expansion and
development of our business.  The likelihood of paying dividends is
further reduced by the fact that, in order to pay dividends, we would need to
repatriate profits earned outside of the U.S., and in doing so those profits
generally would become subject to U.S. taxation.  Thus, the liquidity
of an investment in our Company is dependent upon the investor’s ability to sell
their shares at an acceptable price, rather than receiving an income stream from
their investment.  The price of our stock may decline and fluctuations
in market price coupled with limited trading volume in our shares may limit your
ability to realize any value from your investment, including recovering the
initial purchase price.




Item
1B.Unresolved
Staff Comments.




Not
applicable.





Item
2.     Properties.





We
currently operate our business out of two properties located in the
PRC.  Wuhan Kangqiao is headquartered in Wuhan, China where it owns a
287 square meter office building that houses management, research and
development personnel, marketing, finance and administrative support
staff.





Shenzhen
Hyper is headquartered in Shenzhen, China, where it leases office space of 4,000
square meters, with a monthly rental of RMB $160,000 (USD 23,452) per
month.  The property houses management, research and development
personnel, marketing, finance and administrative support staff.  The
lease will expire at the end of December 2027.  We relocated to this
space at the beginning of 2008.





Neither
facility contains equipment or specialized improvements that would be difficult
to move to a new location.  If we decided to relocate, we believe that
there are many facilities in these locations that would be suitable for our
needs.





Item
3.     Legal
Proceedings.





As
previously disclosed, on July 30, 2009, DLA Piper LLP (“DLA”) brought suit
against us in the District Court of Clark County, Nevada, alleging that we
failed to pay $233,645.47 due under the terms of our contract for legal services
with DLA.  On December 18, 2009, we reached an agreement with DLA to
settle all legal fees and costs incurred by DLA and its member firms and to
dismiss the lawsuit.





As
previously reported, on October 29, 2009, Harborview Master Fund, LP, Diverse
Trading, Ltd., and Monarch Capital Fund (the “Plaintiffs”) brought suit against
us and several other defendants in the Supreme Court of the State of New York,
County of New York, alleging that we, in addition to the other defendants, made
fraudulent misrepresentations and omissions to the Plaintiffs which caused the
Plaintiffs to invest in the Company in 2007 (the “Lawsuit”).  On
January 7, 2010, we, along with several other defendants (the “Settling
Parties”), without any admission of liability, reached a settlement agreement
(“Settlement”) with the Plaintiffs to settle the Lawsuit.  Pursuant to
the Settlement, the Settling Parties, individually and not jointly, agreed to
purchase a certain number of the issuer’s shares (“Shares”) held by the
Plaintiffs (“Purchase Obligation”) in exchange for the dismissal of the Lawsuit
and mutual releases.  In connection with the Settlement, our portion
of the Purchase Obligation was assigned to an investor introduced by Mr. Hui
Xiaobing, our Chairman (the “Assignee”).  The Assignee is not an
affiliate of ours and is purchasing the Shares for his own account and without
compensation from us or our affiliates.  As such, our only expense
under the Settlement is our attorneys’ fees.




24




PART
II





Item
5.Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.





Market
for Registrant’s Common Equity





Our
common stock is currently listed for trading in the Over-the-Counter Bulletin
Board maintained by the Financial Industry Regulatory Authority (“FINRA”) under
the Symbol: “HHGM.”  The table below lists the high and low closing
prices per share of our common stock for each quarterly period during the past
two fiscal years as quoted on the Over-the-Counter Bulletin
Board.





Fiscal
      2008
                        
                        High
                        
                        
                        LowFirst
      Quarter
                        
                        $
                        10.00
                        
                        
                        $
                        7.20Second
      Quarter
                        
                        $
                        9.00
                        
                        
                        $
                        5.00Third
      Quarter
                        
                        $
                        13.10
                        
                        
                        $
                        6.75Fourth
      Quarter
                        
                        $
                        13.10
                        
                        
                        $
                        6.75





Fiscal
      2009
                        
                        High
                        
                        
                        LowFirst
      Quarter
                        
                        $
                        5.50
                        
                        
                        $
                        1.00Second
      Quarter
                        
                        $
                        1.95
                        
                        
                        $
                        0.30Third
      Quarter
                        
                        $
                        2.00
                        
                        
                        $
                        0.50Fourth
      Quarter
                        
                        $
                        3.00
                        
                        
                        $
                        1.00





Trading
in our common stock has been sporadic and the quotations set forth above are not
necessarily indicative of actual market conditions.  All prices
reflect inter-dealer prices without retail mark-up, mark-down, or commission and
may not necessarily reflect actual transactions.





Holders





At March
31, 2010 there were 13,935,290 shares of common stock issued and
outstanding that were held by approximately 38 shareholders of
record.





Dividends





The
Company has not declared any cash dividends in the two most recent fiscal
years.  We have no intention of issuing cash dividends in the
foreseeable future.





China’s
SAFE and Foreign Acquisition Regulation – All of our business is conducted
through our subsidiaries based in China.  Renminbi, or RMB, is not a
freely convertible currency currently, and the restrictions on currency
exchanges may limit our ability to make dividends or other payments in United
States dollars.  However, in accordance with the existing foreign
exchange regulations in China, Allied Moral is able to pay dividends in foreign
currencies, without prior approval from the SAFE, by complying with certain
procedural requirements.  The current foreign exchange measures may be
changed in a way that will make payment of dividends and other distributions
outside of China more difficult or unlawful.  As a result, if we
intend to distribute profits outside of China, we may not be able to obtain
sufficient foreign exchange to do so.  Additionally, China regulatory
authorities may impose further restrictions on the convertibility of the
RMB.  Since our subsidiaries in China, both direct and indirect,
generate virtually all of our revenue, and these revenues are currently
denominated in RMB, any future restrictions on currency exchanges may limit our
ability to repatriate such revenues for the distribution of dividends to our
stockholders.




SAFE
regulates the conversion of the RMB into foreign
currencies.  Currently, Foreign Invested Enterprises (“FIE”) are
required to apply for “Foreign Exchange Registration Certificates,” which permit
the conversion of RMB into foreign exchange for the purpose of expatriating
profits earned in the PRC to a foreign country.  Our PRC subsidiary,
Changdu Huiheng, is a FIE that has obtained the registration certifications, and
with such registration certifications, which need to be renewed annually,
Changdu Huiheng is allowed to open foreign currency accounts including a
“current account” and “capital account.”  Currently, conversion within
the scope of the “current account,” such as remittance of foreign currencies for
payment of dividends, can be effected without the approval of
SAFE.  However, conversion of currency in the “capital account,” for
capital items such as direct investments, loans, and securities, still requires
the approval of SAFE.  In accordance with the existing foreign
exchange regulations in the PRC, Changdu Huiheng is able to pay dividends in
foreign currencies, without prior approval from SAFE, by complying with certain
procedural requirements.




25




SAFE
regulations have required extensive documentation and reporting, some of which
was burdensome and slowed payments.  If there is a return to
burdensome payment restrictions and reporting, the ability of a company with its
principal operations in China to attract investors will be
reduced.  Also, current investors may not be able to obtain the
profits of the business in which they own for other reasons.  Relevant
Chinese law and regulation permit payment of dividends only from retained
earnings, if any, determined in accordance with Chinese accounting standards and
regulations.  It is possible that Chinese tax authorities may require
changes in our reported income that would limit our ability to pay dividends and
other distributions.  Chinese law requires companies to set aside a
portion of net income to fund certain reserves, which amounts are distributable
as dividends.  These rules and possible changes could restrict a
company in China from repatriating funds to us and our stockholders as
dividends.





In
addition, on October 21, 2005, SAFE promulgated Notice 75, Notice on Issues
concerning Foreign Exchange Management in People’s Republic of the PRC
Residents’ Financing and Return investments through Offshore Special Purpose
Vehicle (“OSPV”).  Notice 75 provides that Chinese residents shall
apply for foreign investment exchange registration before establishing or
controlling an OSPV, which is defined by Notice 75 as a foreign enterprise
directly established or indirectly controlled by Chinese residents for foreign
equity capital financing with their domestic enterprise assets and
interests.  Notice 75 further requires that an amendment to the
registration of these Chinese residents be made upon the occurrence of any of
the following: (i) when any of these Chinese residents contributes equity
interests or assets of a Chinese company to the OSPV, (ii) when the OSPV
completes an offshore equity financing, or (iii) when there is a material change
involving a change in the capital of the OSPV, such as any increase or decrease
in its capital, a share swap, a merger or division, or the creation of any
security interests over the relevant assets located in
China.  Pursuant to Notice 75, Chinese residents are prohibited, among
other things, from distributing profits or proceeds from a liquidation, paying
bonuses, or transferring shares of the OSPV outside of the PRC if Chinese
residents have not completed or do not maintain the foreign investment exchange
registration.





Hui
Xiaobing, our principal executive officer and director, has filed the requisite
application for foreign investment exchange registration under the relevant laws
of the PRC and the regulations of Notice 75, and his registration application
has been approved by SAFE.  His foreign investment exchange
registration is valid, legal and effective for the purpose of Notice
75.





Securities
authorized for issuance under equity compensation plans





On June
6, 2009, the Board of Directors and the shareholders of the Company approved the
Huiheng Medical, Inc. 2009 Share Plan (the “Plan”), under which employees and
directors of the Company are eligible to receive direct awards of shares or
grants of stock options (either Incentive Stock Options or Nonstatutory Stock
Options, as determined by the administrator of the Plan at the time of
grant).  The Plan replaces the Company’s 2007 Share Plan which expired
under its terms since the 2007 Share Plan was never approved by the Company’s
shareholders.  Under the Plan, 1,566,666 shares have been reserved,
which is the same number of shares that was reserved under the Company’s 2007
Share Plan.  No awards were ever issued under the 2007 Share Plan
prior to its expiration.  The following equity compensation table
summarizes the foregoing:





Plan category
                
                Number of securities to be issued
                  upon exercise of outstanding
                  options, warrants and rights
                  
                  (a)
                
                
                Weighted-averageexercise price
                  ofoutstanding options, warrants
                  andrights
                  
                  (b)
                
                
                Number of securities remaining
                  available for future issuance
                  underequity compensation
                  plans(excluding securities
                  reflected incolumn (a))
                  
                  (c)Equity
      compensation plans approved by security holders
                
                
                30,000
                
                
                $
                5.00
                
                
                
                1,536,666Equity
      compensation plans not approved by security holders
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                30,000
                
                
                $
                5.00
                
                
                
                1,536,666





26





Issuance
of Unregistered Shares





During
fiscal year ended December 31, 2009, we granted options to purchase an aggregate
of 30,000 shares of common stock to one of our directors under the Plan at an
exercise price of $5.00 per share for an aggregate purchase price of $150,000.
The options were issued under exemptions from registration pursuant to
Regulation D of the Securities Act of 1933, as amended (“1933
Act”).





Item
6.Selected
Financial Data.





Not
applicable.





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





In
addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and
uncertainties.  Actual results may differ substantially from those
referred to herein due to a number of factors, including but not limited to
risks described in the section entitled Risks Related to Our Business and
elsewhere in this Annual Report.




OVERVIEW





We are a
China-based medical equipment company that develops, designs and markets
radiation therapy systems used for the treatment of cancer.  We
currently have five products: the Super Gamma System (“SGS”), the Body Gamma
Treatment System (“BGTS”), OPEN Stereotactic Gamma-ray Radiotherapy System, the
Head Gamma Treatment System (“HGTS”) and a multileaf collimator device (“MLC”)
used in conjunction with a linear accelerator.





In 2005,
the ownership interests of Shenzhen Hyper, Wuhan Kangqiao and Beijing Kbeta were
reorganized under Changdu Huiheng.  Upon the completion of the
reorganization, Changdu Huiheng owned 75% of the equity interest in Shenzhen
Hyper, 100% of the equity interest of Wuhan Kangqiao and 50% of the equity
interest of Beijing Kbeta.





In 2006,
we established Allied Moral Holdings, Ltd. in the British Virgin Islands as a
holding company and Allied Moral acquired 100% of the ownership interests of
Changdu Huiheng as part of an ownership restructuring to facilitate investments
by foreign investors.  As discussed below in “Business - Huiheng
Medical’s Background,” the stockholders of Allied Moral engaged in a share
exchange transaction with our company in May 2007.





Our
company is led by Mr. Hui Xiaobing, a pioneer in the GTS industry in the
PRC.  Through his experience and relationships, Mr. Hui maintains
access to China’s hospitals and our company’s principal customers.  As
a result of his leadership, we have successfully developed a strong sales and
marketing force, which covers the entire country and maintains relationships
with China’s top medical institutions.





Our
expansion plans include broadening our product offering.  Our research
and development team is focused on developing and producing technologically
advanced radiotherapy and GTS products.  We currently have 29 patents
issued in the PRC, one patent in the U.S., one patent in the European Union, and
additional patent applications pending.  Our SGS, BGTS and GTS
products are approved for use in China by the State Food and Drug Administration
(“SFDA”), an agency of the Ministry of Healthcare of the PRC.





Our
future research and development efforts will focus on developing an advanced
magnetic resonance imaging (“MRI”) device and an industrial linear accelerator
(“LINAC”) unit used for, among other things, preserving food through
irradiation.  We will pursue these projects pending the availability
of funds for future research and development.





We
currently sell our products primarily to a small number of hospital equipment
investors in China, who install our systems in hospitals or
clinics.  We also offer comprehensive post-sales services for our
medical equipment to our customers.  The service contracts are
negotiated and signed independently and separately from the sales of medical
equipment.  Our post-sales services include radioactive cobalt source
replacement and disposal, medical expert training, clinical trial analysis,
patient tumor treatment analysis, product maintenance, software upgrades, and
consulting.





Many of
the key research and development personnel who developed our products are
currently employed by our company.





We will
continue to pursue relationships with foreign medical equipment technology
leaders to provide high quality, low cost manufacturing services and China-based
distribution for their products.





27




Our
Operating Subsidiaries





Shenzhen
Hyper.  Shenzhen Hyper was established in September of 2001 as
a domestic Chinese company based in Shenzhen, China.  From inception,
it has been engaged in designing, developing and servicing radiotherapy medical
equipment used for the treatment of cancerous tumors for customers throughout
China.  Shenzhen Hyper developed the SGS, our most advanced and
versatile technology, in 2001.  The SGS is a radiotherapy device that
uses gamma radiation to non-invasively treat tumors located in the head and the
body and to treat certain functional disorders of the head and neck
areas.  It utilizes stereotactic, or three-dimensional imaging,
principles to enhance the accuracy of the targeting of the radiation
beams.  Shenzhen Hyper has also developed a MLC device that is used in
conjunction with a LINAC to provide conformal shaping of radiotherapy treatment
beams, which increases the precision of the beam and reduces the damage caused
to surrounding tissues.  We are currently developing our own LINAC
with which we will integrate our MLC.





Shenzhen
Hyper is currently working on the development of additional radiotherapy and
diagnostic equipment that will be sold in China and abroad, including the
next-generation SGS unit, capable of treating cancerous tumors in the head and
body by advanced radiotherapy functions.





Wuhan
Kangqiao.  Wuhan Kangqiao was established in September of 2001
as a domestic Chinese company based in Wuhan, China.  From inception,
it has been engaged in designing, developing and servicing radiotherapy medical
equipment for customers throughout China.  Wuhan Kangqiao developed
the BGTS in 2003 and the HGTS in 2004 and currently designs, markets and
services these products.  The BGTS is a stereotactic radiotherapy
device that uses gamma sourced radiation to non-invasively treat tumors located
in the body.  The HGTS is a stereotactic radiotherapy device that uses
gamma sourced radiation to non-invasively treat tumors in the head and to treat
other functional disorders of the head and neck area.





Beijing
Kbeta.  Beijing Kbeta was established in December 2004 and
supplies the Cobalt-60 radioactive material used as the radioactive source in
the SGS, BGTS and HGTS.





PRICING





Treatment
fees for radiotherapy are set by provincial governments in China, a factor we
consider when pricing our systems.  To gain market penetration, we
price our radiotherapy treatment systems at levels that we believe offer
attractive economic returns to our customers, taking into account the prices of
competing products in the market.  We believe that our products offer
quality features at a competitive price in China.





If the
provincial governments in China reduce the treatment fee rates for radiotherapy,
some hospitals and hospital equipment investors may be discouraged from
purchasing our products, which would reduce our sales.  In that event,
we may need to decrease the price of our systems to provide our customers
acceptable returns on their purchases.  We cannot assure you that our
business, financial condition and results of operations will not be adversely
affected by any reduction in treatment fees for radiotherapy in the
future.





Under
existing regulations, we are permitted to install a limited number of units, and
to be reimbursed for the equipment and installation costs, prior to the receipt
of the regulatory registration for that equipment.  Those
installations frequently are used to conduct clinical trials or for other
research purposes.  Our installations of the HGTS units and the MLC
units have been made under this exemption.  While those limited
installations are not considered “sales” or commercial distribution for
regulatory purposes, they do result in revenues to us as a result of the cost
reimbursements.  However, this cost reimbursement is below the price
at which we intend to sell our products following regulatory
approval.





REVENUES





We
primarily derive our revenues from selling our products to third party hospital
equipment investors and from selling service contracts to the buyers of our
products.





Our revenues
are net of Value Added Tax (“VAT”), but include VAT refunds on the sales of
self-developed software embedded in our medical equipment
products.  In addition, our revenues include regional VAT and Business
tax subsidies.





28





The sales
price of our devices includes basic training and installation
services.  These services are ancillary to the purchase of medical
equipment by our customers and are normally considered by the customers to be an
integral part of the acquired equipment.  As the delivered items
(training and installation services) do not have determinable fair values,
revenues for the entire arrangement is recognized upon customer acceptance,
which occurs after delivery and installation.





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





Our sales
have historically been achieved on a unit-by-unit basis.  We expect
that in any given period a relatively small, and changing, number of third party
investors will continue to account for a significant portion of our
revenues.  For the fiscal year ended December 31, 2006, sales to our
top three customers (all of whom were hospital equipment investors) accounted
for 89% of our revenues.  For the year ended December 31, 2007, two
customers (both of whom were hospital equipment investors) accounted for 76% of
our revenues.  For the year ended December 31, 2008, three customers
accounted for 84% of our revenues. For the year ended December 31, 2009,
three customers accounted for 90% of our revenues.





We extend
credit to our customers and often do not collect outstanding receivables on a
timely basis.  The contracts covering the sale of our products provide
for the customer to make a deposit at the time that the order is placed and to
make progress payments at various stages of the manufacturing, shipping,
installation and testing process, typically with the final 10% payment due 12
months after the customer accepts the product as meeting the
specifications.  However, in the PRC we have rarely collected payments
under those stated terms and our customers have historically made most of their
payments following the installation of our units.  Our largest
customer had an outstanding accounts receivable balance of $10.5 million as of
December 31, 2009.  The delay in receipt of customer payments places
pressure on our working capital requirements.  Legal action is
available, but the time it takes and the outcome of any litigation is inherently
uncertain, particularly in the PRC, where the civil justice system continues to
evolve.  Should we be unable to collect on these accounts, it would
reduce our liquidity and profitability.





COSTS





Cost
of revenues





Our cost
of revenues primarily consists of material and component costs.  It
also includes amortization of intangible assets and direct costs incurred in the
assembly, installation and service of our products, such as salaries and related
personnel expenses and depreciation costs of plant and equipment used for
production purposes.  Depreciation of property, plant and equipment
attributable to manufacturing activities is capitalized and expensed as cost of
revenues when product is sold.





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





Operating
expenses





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





Research and
development.  Research and development expenses primarily
consist of costs associated with the design, development, testing and
enhancement of both our existing products and our new products under
development.  These costs consist of expenditures for purchases of
supplies, clinical trials, salaries and related personnel expenses, and other
relevant costs.  Going forward, we expect to increase our research and
development expenses, both on an absolute basis and as a percentage of revenues,
to develop new products and applications and to improve the designs of our
existing products.





29





Sales and
marketing.  Sales and marketing expenses consist primarily of
salaries and related expenses for personnel engaged in sales, marketing and
customer support functions and costs associated with advertising and other
marketing activities.  Our sales are currently made primarily to
hospital equipment investors, rather than directly to hospitals or
clinics.  As a result, our sales and marketing expenses as a
percentage of revenues are significantly lower than medical equipment companies
that operate their own marketing and distribution networks and sell directly to
hospitals.  Going forward, we expect to increase our expenditures on
sales and marketing, both on an absolute basis and as a percentage of revenues,
to promote our products in China.  Furthermore, we anticipate
aggressively pursuing new markets outside the PRC and expect to increase our
expenditures on sales and marketing for this purpose as well.





General and
administrative.  General and administrative expenses consist
primarily of salaries and benefits and related costs for our administrative
personnel and management, fees and expenses of our outside advisers, including
legal, audit and valuation expenses, expenses associated with our administrative
offices and the depreciation of equipment used for administrative
purposes.  We expect that our general and administrative expenses will
increase, both on an absolute basis and as a percentage of revenues, as we hire
additional personnel and incur costs related to the anticipated growth of our
business and ongoing expenses associated with being a publicly listed company in
the U.S.





TAXES
AND INCENTIVES





The
discussion of taxes that follows denotes financial obligations and thresholds in
RMB, since that is the currency in which those amounts are
measured.  These amounts have been translated into U.S. dollars using
the exchange rate in effect on December 31, 2009.  The actual future
value of taxes expressed in USD will vary depending upon future rates of
exchange.





Allied
Moral Holdings





Under the
current laws of the British Virgin Islands, we are not subject to tax on our
income or capital gains.  In addition, no British Virgin Islands
withholding tax would be imposed on payments of dividends.





Changdu
Huiheng





Under the
current PRC laws, Changdu Huiheng is subject to the Enterprise Income Tax
(“EIT”) and the Value Added Tax (“VAT”).  Changdu Huiheng is
established in the western region of the PRC and, as such, it is currently
subject to an EIT rate of 12%, compared to a statutory rate of 25% for most
companies in China.  However, pursuant to an agreement with the Tibet
Finance Bureau, Changdu Huiheng will be refunded any amounts of its annual EIT
payment that exceed RMB$900,000 (US$131,916).  In addition, the Tibet
Finance Bureau will refund Changdu Huiheng’s annual 31% business tax payment and
its 38.75% VAT payment under the condition that the total annual business tax
and the annual VAT owed exceed RMB$1 million (US$146,574) and RMB$1.5 million
(US$ 219,861), respectively.  This tax incentive policy will be valid
for 5 years from the commencement of the tax refund, which began in fiscal
2006.





Shenzhen
Hyper





Shenzhen
Hyper is classified as a high technology company and currently operates in an
approved economic-technological development area.  As such, it is
currently subject to an EIT rate of 18%, compared to a statutory rate of 25% for
most companies in China.  Furthermore, this classification, according
to local tax regulations, entitles Shenzhen Hyper to a tax-free period for two
years, commencing on its first profitable year, and a 50% reduction in EIT for
the following six years.  Although Shenzhen Hyper was profitable in
2007, accumulated losses from prior years eliminated its tax liability for
2007.  As a result, 2007 does not qualify as the first year of its
tax-free period according to local tax regulations.  Shenzhen Hyper
began the first year of its tax-free period in 2008.





The VAT
is charged based on the selling price of products at a general rate of 17% and
our revenues are recorded net of this VAT.  Shenzhen Hyper, however,
is entitled to a 14% refund of VAT on the sales of self-developed software
embedded in device systems.  This is a result of a PRC government
program to promote the development of the high technology sector of China’s
economy.  The program phases out for companies after five years of
profitable operations.





The VAT
refund is recorded as part of revenues under U.S. GAAP.  For the
fiscal year ended December 31, 2009, the VAT refunds that we applied for in 2008
were booked as revenue.





30





Wuhan
Kangqiao





Wuhan
Kangqiao is classified as a high technology company in Wuhan, and currently
operates in an approved economic-technological development area.  As
such, it was subject to an EIT rate of 15% before 2009, compared to a statutory
rate of 25% for most companies in China; however, the local tax regulation is
revised this year and Wuhan Kangqiao has to apply for high technology company of
China as to obtain the new tax preference.  For the application result
is still unknown, the tax rate of Wuhan Kangqiao comes back to 25% in
2009.





The PRC
tax system is subject to uncertainties and has been subject to recently enacted
changes, the interpretation and enforcement of which are also
uncertain.  There can be no assurance that changes in PRC tax laws or
their interpretation or their application will not subject us to tax increases
in the future.





SIGNIFICANT
ACCOUNTING POLICIES





Significant
Accounting Policies and Estimates





The
discussion and analysis of our financial condition presented in this section are
based upon our financial statements, which have been prepared in accordance with
the generally accepted accounting principles in the United
States.  During the preparation of our financial statements we are
required to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities.  On an ongoing basis, we evaluate our
estimates and judgments, including those related to sales, returns, pricing
concessions, bad debts, inventories, investments, fixed assets, intangible
assets, income taxes and other contingencies.  We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable under current conditions.  Actual results may differ from
these estimates under different assumptions or conditions.





In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure About Critical Accounting Policy,” we identified the most critical
accounting principles upon which our financial status depends.  We
determined that those critical accounting principles are related to the use of
estimates, inventory valuation, revenue recognition, income tax and impairment
of intangibles and other long-lived assets.  We present these
accounting policies in the relevant sections in this management’s discussion and
analysis, including the Significant Accounting Policies discussed
below.





(a)
            Principles
      of Consolidation





The
consolidated financial statements include the Company and its
subsidiaries.  All significant intercompany balances and transactions
have been eliminated in consolidation.





(b)
            Cash





Cash
consists of cash on hand and in the bank.




(c)
            Accounts
      Receivable





Accounts
receivable are recorded at the invoiced amount, net of allowances for doubtful
accounts, sales returns, trade discounts and value added tax.  The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts
receivable.  The Company performs ongoing credit evaluations of its
customers’ financial conditions.





Outstanding
account balances are reviewed individually for
collectability.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.





(d)
            Inventories





The
Company values inventories, consisting of work in process and raw materials, at
the lower of cost or market.  Cost of material is determined on the
weighted average cost method.  Cost of work in progress includes
direct materials, direct production cost and an allocated portion of production
overhead.





31





The final
steps of assembly of our products, including installation of radioactive service
materials, are completed at customer locations.  Accordingly, the
Company generally does not carry finished goods (inventory held for sale in the
ordinary course of business) inventory.





(e)
            Property,
      Plant, and Equipment





Property,
plant and equipment are recorded at cost less accumulated
depreciation.  Expenditures for major additions and betterments are
capitalized.  Maintenance and repairs are charged to general and
administrative expenses as incurred.  Depreciation of property, plant
and equipment is computed by the straight-line method (after taking into account
their respective estimated residual values) over the assets estimated useful
lives ranging from three to twenty years.  Building improvements are
amortized on a straight-line basis over the estimated useful
life.  Depreciation of property, plant and equipment are stated at
cost less accumulated depreciation.  Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
operations.  Construction in progress represents the costs of
property, plant and equipment under construction or installation.  The
accumulated costs are reclassified as property, plant and equipment when
installation or construction is completed.  All borrowing costs, which
include interest and foreign exchange differences incurred that are attributable
to qualifying assets, are capitalized as cost of construction in
progress.  Capitalization of borrowing costs ceases when the
construction is completed and the constructed or installed asset is ready for
its intended use.





(f)
            Intangible
      Assets





Intangible
assets are stated at cost, representing the fair value at the time such
intangibles were contributed to the Company by the minority owner of a
subsidiary in exchange for equity interests.  Fair value was supported
by cash contributed contemporaneously by another investor.  Intangible
assets are carried net of accumulated amortization and impairment
losses.  Amortization expense is recognized on the straight-line basis
over the estimated respective useful lives of these intangible
assets.





(g)
            Investment
      in Affiliated Company





The
company owns a 50% equity interest of Beijing Kbeta and accounts for the
investment using the equity method of accounting.  The equity method
is utilized as the Company has the ability to exercise significant influence
over the investee, but does not have a controlling financial
interest.





If
circumstances indicate that the carrying value of the Company’s investment in
Beijing Kbeta may not be recoverable, the Company would recognize an impairment
loss by writing down its investment to its estimated net realizable value if
management concludes such impairment is other than temporary.





(h)
            Impairment
      of Long-Lived Assets





Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.





Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows
expected to be generated by the asset.  If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset.  Assets to be disposed of, if any, are
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer
depreciated.





(i)
            Fair
      Value of Financial Instruments





The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The
carrying amounts of financial assets and liabilities, such as cash, accounts
receivable, current income tax assets, prepayments and other current assets,
accounts payable, income taxes payable, accrued expenses and other current
liabilities, approximate their fair values because of the short maturity of
these instruments and market rates of interest.





32





(j)
            Revenue
      Recognition





The
Company generates revenue primarily from sales of medical equipment and
provision of maintenance and support services.  Revenue is recognized
as follows:





Sales
of medical equipment





The
Company recognizes revenue when products are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.  The sales price of the medical equipment
includes the training services, which generally take about 1
month.  These services are ancillary to the purchase of medical
equipment by customers and are normally considered by the customers to be an
integral part of the acquired equipment.  As training services do not
have separately determinable fair values, the Company recognizes revenue for the
entire arrangement upon customer acceptance, which occurs after delivery and
installation.





In the
PRC, value added tax (“VAT”) of 17% on invoice amount is collected in respect of
the sales of goods on behalf of tax authorities.  The VAT collected is
not revenue of the Company; instead, the amount is recorded as a liability on
the balance sheet until such VAT is paid to the authorities.





The
medical equipment sold by the Company has embedded self-developed software which
can also be sold on a standalone basis.





Provision
of maintenance and support services





The
Company also provides comprehensive post-sales services to certain distributors
for medical equipment used by hospitals.  These contracts are
negotiated and signed independently and separately from the sales of medical
equipment.  Under existing service agreements, the Company provides
the exchange of cobalt sources, training to users of the medical equipment,
maintenance of medical equipment, upgraded software and
consulting.  Fees for the services are recognized over by the life of
the contract on a monthly basis.





(k)
            Research
      and Development Costs





Research
and development costs are charged to expense as incurred.  Research
and development costs mainly consist of remuneration for the research and
development staff and material costs for research and
development.  The Company incurred $485,290 and $472,919 for the years
ended December 31, 2009 and 2008, respectively.





(l)
            Income
      Taxes





The
Company accounts for income taxes under ASC 740 “Income
Taxes.”  Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.  Deferred
tax assets are reduced by a valuation allowance to the extent management
concludes it is more likely than not that the assets will not be
realized.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statements of operations in the year
that includes the enactment date.





During
2008, the Company adopted ASC740 “Income Taxes,” which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return.  This
interpretation also provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures.





33





(m)
            Retirement
      and Other Postretirement Benefits





Contributions
to retirement schemes are compulsory and are charged to consolidated statements
of operations as general and administrative expenses when the related employee
service is provided.  The Company does not have a separate retirement
benefit scheme for any employees.





(n)
            Warranty





The
Company provides a product warranty to its customers to repair any product
defects that occur generally within twelve months from the date of
sale.  The Company’s purchase contracts generally allow the customer
to withhold up to 10% of the total purchase price for the duration of the
warranty period.  Based on the limited number of actual warranty
claims and the historically low cost of such repairs, the Company has not
recognized a liability for warranty claims, but rather recognizes such cost when
product repairs are made.





(o)
            Foreign
      Currency Translation





Assets
and liabilities of foreign subsidiaries are translated at the rate of exchange
in effect on the balance sheet date; income and expenses are translated at the
average rate of exchange prevailing during the year.  The related
transaction adjustments are reflected in “Accumulated other comprehensive
income/(loss)” in the stockholders’ equity section of the Company consolidated
balance sheet.





The
average monthly exchange rates for year ended December 31, 2009 and the closing
rate as of December 31, 2009 were RMB$6.8303 and RMB$6.8270 to one USD,
respectively.  The average monthly exchange rates for year ended
December 31, 2008 and the closing rate as of December 31, 2008 were RMB$6.9351
and RMB$6.8225 to one USD, respectively.





(p)
            Deferred
      Offering Costs





Deferred
offering costs are those costs directly attributable to the Company’s proposed
public offering.  Such costs consist principally of professional
fees.  Deferred costs accumulated through December 31, 2008 were
charged to operations in 2009 as the Company’s proposed offering was deemed
unsuccessful.





(q)
            Comprehensive
      Income





The
Company has adopted ASC 220 “Comprehensive Income.”  This statement
establishes rules for the reporting of comprehensive income and its
components.  Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statements
of Income and the Consolidated Statement of Stockholders’ Equity.





(r)
            Financial
      Instruments with Characteristics of both Liabilities and
      Equity





The
Company accounts for its Series A Preferred Stock in accordance with ASC 480
“Distinguishing Liabilities from Equity” and ASC 815 “Derivatives and
Hedging.”  We have determined that our Series A Preferred Stock is not
mandatorily redeemable.  Accordingly, the Company accounts for the
Preferred stock as permanent equity.





(s)
            Non-controlling
      interest in consolidated financial
statements





In
December 2007, the FASB issued authoritative guidance related to noncontrolling
interests in consolidated financial statements, which was an amendment of ARB
No. 51.  This guidance is set forth in Topic 810 in the Accounting
Standards Codification (ASC 810).  ASC 810 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This accounting standard is
effective for fiscal years beginning after December 15, 2008.  The
Company adopted the presentation and disclosure requirements of ASC 810
retrospectively to the December 31, 2008 financial statements.





34








(t)
            Impact
      of New Accounting Standards





We
describe below recent pronouncements that have had or may have a significant
effect on our financial statements.  We do not discuss recent
pronouncements that are not anticipated to have an impact on or are unrelated to
our financial condition, results of operations, or disclosures.





In June
2009, the FASB issued Updates No. 2009-01, which establishes the FASB Accounting
Standards Codification TM (the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with generally
accepted accounting principles (GAAP).  The Codification is effective
for interim and annual periods ending after September 15, 2009.  We
adopted the Codification when referring to GAAP in this report on Form 10-K for
the fiscal period ending December 31, 2009.  The adoption of the
Codification did not have an impact on our consolidated results.





The FASB
issued authoritative guidance related to subsequent events in May 2009, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued.  This guidance is set forth in
Topic 855 in the Accounting Standards Codification (ASC 855).  ASC 855
provides guidance on the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.  We adopted ASC 855 and its
application had no impact on our consolidated financial statements.





The FASB
issued authoritative guidance for fair value measurements in September 2006,
which defines fair value, establishes a framework of measuring fair value, and
expands disclosures assets and liabilities measured at fair value in financial
statements.  This guidance is set forth in Topic 820 in the Accounting
Standards Codification (ASC 820).  ASC 820 does not require any new
fair value measurements but rather eliminates inconsistencies in guidance found
in various prior accounting pronouncements.  ASC 820 is effective for
fiscal years beginning after November 15, 2007.  However, on February
6, 2008, the FASB issued authoritative guidance which deferred the effective
date of ASC 820 for one year for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis.  The adoption of ASC 820 did not have
a material impact on our consolidated financial position, results of operations
or cash flows.





In
December 2007, the FASB issued revised authoritative guidance for business
combinations, which establishes principles and requirements for how the acquirer
in a business combination: i) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, an any
noncontrolling interest in the acquiree, ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  This guidance is set forth in Topic 805 in the
Accounting Standards Codification (ASC 805).  This accounting standard
is effective for fiscal years beginning after December 15, 2008.  We
adopted ASC 805 and the adoption of ASC 805 did not have a material impact on
our consolidated financial position, results of operations or cash flows as of
the date of adoption.  ASC 805 will be applied to any future business
combinations.





In
December 2008, ASC 715 “Retirement Benefits” was issued.  This
statement amends SFAS No. 132(R), Employers’ Disclosures about Pensions and
Other Postretirement Benefits, to require additional disclosure in sponsor’s
financial statements about pension plan assets, obligations, benefit payments,
contributions and net benefit cost and other postretirement
benefits.  The requirements of this statement are effective for the
Company for the fiscal year ending January 31, 2010.  Since this
statement only pertains to disclosures in the notes to consolidated financial
statements, it will not impact the Company’s consolidated financial position and
results of operations.





35





In June
2009, the FASB issued ASC 105 “Generally Accepted Accounting
Principles.”  ASC 105 establishes the FASB Accounting Standards
Codification TM (Codification) as the single source of authoritative U.S.
generally accepted accounting principles (U.S. GAAP) recognized by the FASB to
be applied by nongovernmental entities.  Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.  ASC 105 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009, which corresponds to the
Company’s second quarter of fiscal 2010.  When effective, the
Codification will supersede all existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become
non-authoritative.  Following ASC 105, the FASB will not issue new
standards in the form of Statements, FASB Staff  Positions, or
Emerging Issues Task Force Abstracts.  Instead, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts.  Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: (a) update the Codification; (b)
provide background information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification.  The adoption of ASC
105 will not have an impact on the Company’s consolidated financial
statements.





In
October 2009, the FASB issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a `-generating transaction
where multiple deliverables exist, and provides guidance for allocating and
recognizing revenue based on those separate deliverables.  The
guidance is expected to result in more multiple-deliverable arrangements being
separable than under current guidance and is required to be applied
prospectively to new or significantly modified revenue
arrangements.  This guidance, for which the Company is currently
assessing the impact on its financial condition and results of operations, will
become effective for the Company on January 1, 2011.





In
January 2010, the FASB issued authoritative guidance intended to improve
disclosures about fair value measurements.  The guidance requires
entities to disclose significant transfers in and out of fair value hierarchy
levels and the reasons for the transfers and to present information about
purchases, sales, issuances and settlements separately in the reconciliation of
fair value measurements using significant unobservable inputs (Level
3).  Additionally, the guidance clarifies that a reporting entity
should provide fair value measurements for each class of assets and liabilities
and disclose the inputs and valuation techniques used for fair value
measurements using significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3).  This guidance is effective for interim
and annual periods beginning after December 15, 2009 except for the disclosures
about purchases, sales, issuances and settlements in the Level 3 reconciliation,
which will be effective for interim and annual periods beginning after December
15, 2010.  As this guidance provides only disclosure requirements, the
adoption of this guidance will not impact the Company’s financial condition or
results of operations.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.





Incentive
Share and After-tax Profit Targets





As an
additional payment under the Allied Moral Holdings Securities Exchange
Agreement, the previous holders of common stock of Allied Moral Holdings will be
issued, on an all or none basis, 309,525 shares of common stock each year over
three years (up to an aggregate of 928,575 shares of common stock), if on a
consolidated basis, the Company has after-tax profits in the following amounts
for the indicated periods:





Years Ending December 31,
                    
                    After-tax Profit
                      in USD2009
                    
                    
                    18,500,000
                    *2010
                    
                    
                    26,200,0002011
                    
                    
                    34,060,000


* This
after-tax profit goal was not achieved in the fiscal year ending December 31,
2009.




OUR SELECTED RESULTS OF
OPERATIONS




Operating
revenues




For the
year ended December 31, 2009, revenues were $10.63 million, a decrease of $1.66
million, or 14%, compared to $12.29 million for the prior year.  This
decrease was due to less revenue from product sales and tax refunds and
subsidies in 2009 compared with 2008.  The next two paragraphs discuss
these changes in greater detail.





36





Total
revenues from product sales were $3.46 million for 2009, a decrease of $2.16
million or 39%, compared to $5.62 million for the prior year.  In
2009, we sold 3 units and in 2008 we sold a total of 6 units.  This
decrease in unit sales and revenues in 2009 compared with 2008 was due in part
to certain customers delaying the installation of their units for various
reasons.  As the contracts underlying these unit sales have not been
cancelled, we believe that the sales will be made some time in the near
future.





Total
revenues from services were $5.92 million for 2009, an increase of $0.40 million
or 7.4%, compared to $5.52 million for the prior year.  For the years
ended December 31, 2008 and 2009, we managed the same number of service
contracts.  The increase in revenue was due to the appreciation of the
RMB against the USD over the period.





Of the
$10.63 million of revenues, approximately $1.25 million related to tax refunds
and subsidies, an increase of approximately $0.09 million or 7.6% compared with
the $1.16 million in tax refunds and subsidies for the prior
year.  The increase in tax refunds and subsidies was due to our
receipt of additional refunds and subsidies from 2007, in 2009.





Revenue
Backlog




Revenue
backlog represents the total amount of unrecognized revenue associated with
existing purchase orders for our products.  Any deferral of revenue
recognition is reflected in an increase in backlog as of the end of that
period.  The backlog as of December 31, 2009 amounted to $11.76
million, representing an increase of 18%, compared to $9.97 million as of
December 31, 2008.  The increase in backlog was due to an increased
demand from customers as well as delays in the government approval process which
caused some of the units to stay in our backlog longer than we
expected.





These
purchase orders are not cancelable and we expect them to be installed in 2010
and 2011.




Cost
of revenues




The total
cost of revenues amounted to $2.35 million for the year ended December 31,
2009, a decrease of $0.44 million or 16%, compared to $2.79 million for the
prior year.  The decrease was due to a decrease in the number of units
sold in 2009 compared with 2008.




Gross
margin




As a
percentage of total revenues, the overall gross margin increased to 77.87% for
the year ended December 31, 2009 from 77.27% for the prior year.  The
increase in the gross margin was due to higher margin service revenues
accounting for a larger percentage of total revenues in 2009 compared to
2008.





Operating
expenses




Sales and marketing
expenses.  Sales and marketing expenses consist primarily of
salaries and related expenses for personnel engaged in sales, marketing and
customer support functions and costs associated with advertising and other
marketing activities.




Sales and
marketing expenses were approximately $316,000 for the year ended December 31,
2009, an increase of 39.6%, or roughly $90,000 compared to approximately
$227,000 for the prior year.  The increase was due to the Company
increasing its sales personnel and due to increased marketing expenses related
to international sales in 2009.




We expect
that our selling expenses will remain at or increase above the 2009 levels as we
increase our efforts to expand sales, particularly internationally, where our
brand is not as well known, and the resulting resources devoted to establish a
presence in new markets will be greater.





General and administrative
expenses.  General and administrative expenses consist
primarily of salaries and benefits and related costs for our administrative
personnel and management, fees and expenses of our outside advisers, including
legal, audit and valuation expenses, expenses associated with our administrative
offices.  General and administrative expenses amounted to
approximately $3.35 million for the year ended December 31, 2009, a decrease of
roughly $0.8 million compared to approximately $4.15 million for the prior year,
representing a decrease of 19.3%.  The decrease in general and
administrative expenses was due primarily to that partial allowance for doubtful
accounts of $0.9 million at of the end of 2008 that was eliminated as the
Company has collected these amounts.





37





Research and development
expenses.  Research and development expenses include employee
compensation, materials consumed and experiment expenses for specific new
product research and development, and any expenses incurred for basic research
on advanced technologies.  Research and development expenses were
$485,290 for the year ended December 31, 2009, compared to $472,920 for the
prior year.  This was due to new product development, including the
development of our MLC, linear accelerator and SGS-I+ device.




Income
tax provision




Our
effective tax rate was 16.27% for the year ended December 31, 2009, compared to
16.69% for the year ended December 31, 2008.  This small decrease in
effective tax rate resulted from a combination of factors.  The tax
rate payable at each level of our operations is different.  In 2009,
the tax rate payable at Changdu Huiheng is 10%, Wuhan Kangqiao is 25%, and
Shenzhen Hyper is 9%.  In 2008, the tax rate payable at Changdu
Huiheng was 12%, at Wuhan Kangqiao was 15% and at Shenzhen Hyper was
0%.  The effective tax rate is the result of a combination of taxes
paid in different items and at different levels.  Although the
effective tax rate increased, comprehensive tax paid decreased to $671,000 in
2009 from $774,000 in 2008 as a result of lower revenues in 2009 compared with
2008.





Net
income




For the
year ended December 31, 2009, the Company’s net income amounted to $3.64
million, a decrease of $0.37 million or 9% compared to $4.01 million for the
prior year.  This decrease was attributable primarily to the decrease
in product sales as described in “Operating revenues” paragraph
above.





Comprehensive
Income





For the
year ended December 31, 2009, the Company’s comprehensive income amounted to
$3.44 million, a decrease of $1.59 million or 32% compared to $5.03 million for
the prior year.  The decrease was due to a decrease in net income and
foreign currency translation adjustments over the period.





LIQUIDITY
AND CAPITAL RESOURCES





To date,
we have financed our operations primarily through the issuance of equity and
cash flows from operations.  We currently do not have any outstanding
short-term or long-term bank debt.  Our relatively high margins have
historically provided us with sufficient cash to purchase various raw materials,
meet our component inventory needs and pay our vendors.  In addition,
there are very few direct costs associated with our service business which
further enhances our margins.  We have longstanding, positive
relationships with our vendors and have maintained favorable payment terms and
believe that we will continue to maintain such favorable payment
terms.  Also, we believe that we can defer certain tax payments, if we
choose to do so.




As of
December 31, 2009, the Company had total assets of $27.11
million.  Our cash totaled $0.09 million, accounts receivable totaled
$16.50 million, prepayment and other receivables totaled $3.31 million and
inventories totaled $1.36 million.  Working capital was approximately
$18.32 million.





Comparison
of years ended December 31, 2008 and 2009





Net cash
from operating activities totaled a negative of $565,956 for the year ended
December 31, 2009, a further decrease of $307,916 compared to a negative cash
flow of $258,040 for the prior year.  This decrease resulted primarily
from the following changes in the operating assets and liabilities:





 ̈
            $5.72
      million increase in accounts
receivables;





 ̈
            $6,548
      increase in inventories;





38




 ̈
            $0.7
      million decrease in prepayments and other
  receivables;




 ̈
            $11,633
      increase in accounts payable;





 ̈
            $368,201
      increase in tax payable; and





 ̈
            $257,995
      increase in accrued expenses and other current
  liabilities.





Net cash
(used in) provided by investing activities was ($358,401) and $30,907 for the
years ended December 31, 2009 and 2008, respectively.





Cash
flows from (used in) financing activities was nil for the year ended December
31, 2009 and ($460,000) for the year ended December 31, 2008.





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





Not
applicable.





Item
8.Financial
Statements and Supplementary Data.





Our
financial statements are annexed to this report beginning on page
F-1.





Item
9.Changes In and
Disagreements With Accountants on Accounting and Financial
Disclosure.





None.




Item
9A(T).Controls and
Procedures.





Evaluation
of Disclosure Controls and Procedures





The
Company’s management, under the supervision and with the participation of its
chief executive officer and chief financial officer, evaluated the effectiveness
of the design and operation of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 2009.  Based on that evaluation, the Company’s chief
executive officer and chief financial officer concluded that the disclosure
controls and procedures employed at the Company were effective to ensure that
the information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.





Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined under Exchange Act Rules
13a-15(f).  The Company’s internal control system is designed to
provide reasonable assurance to its management and board of directors regarding
the preparation and fair presentation of published financial
statements.  Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on our evaluation under that framework,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2009.





We
believe that our consolidated financial statements for the year ended December
31, 2009 included in this report fairly present our financial position, results
of operations and cash flows as of and for the periods presented in all material
respects.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  The Company’s internal control over financial reporting
was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.





39





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met.  In
addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events.  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.





Changes
in Internal Controls Over Financial Reporting





There
have been no changes in our internal controls over financial reporting that
occurred during the quarter ended December 31, 2009, that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.




Item
9B.Other
Information.





None.





40





PART
III





Item
10.   Directors,
Executive Officers and Corporate Governance.





The
following table and text set forth the names and ages (as of December 31, 2009)
of all of our directors and executive officers.  The Board of
Directors is comprised of only one class.  All of the directors will
serve until the next annual meeting of stockholders and until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal.  Except for Mr. Huang being the brother-in-law of Mr. Hui
and Mr. Hui Yang being the nephew of Mr. Hui, there are no family relationships
among directors and executive officers.





Each of
our directors, other than Mr. Hui and Mr. Huang, is “independent” under the
independence standards adopted by the Nasdaq Capital Market.  Also
provided herein are brief descriptions of the business experience of each
director and executive officer during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under United States Federal securities laws.





Name
                      
                      Age
                      
                      PositionHui
      Xiaobing
                      
                      56
                      
                      Chairman
      and CEOHuang
      Jian
                      
                      53
                      
                      Vice
      President and DirectorHui
      Yang
                      
                      41
                      
                      Former
      Corporate Secretary (resigned June 6, 2009)Richard
      Shen
                      
                      44
                      
                      Chief
      Financial Officer, Current Corporate SecretaryCui
      Zhi
                      
                      40
                      
                      Chief
      Technology OfficerTang
      Shucheng
                      
                      47
                      
                      Director
      of MarketingLi
      Daxi
                      
                      62
                      
                      Director





Hui
Xiaobing, Chairman of the Board and Chief Executive Officer





Mr. Hui
currently serves as our Chairman of the Board and Chief Executive Officer,
positions he has held (including with Allied Moral) since the inception of that
company in 2006, and Chairman of the Board and Chief Executive Officer of
Changdu Huiheng, positions he has held since 2005.  In addition, Mr.
Hui has been the Chief Executive Officer of Huiheng Industry since
2004.  Mr. Hui also served from 1999 to 2006 as the President and
Chairman of the Board of Shenzhen OUR Technology Co., Ltd., the pioneer of the
radiotherapy industry in China.  He is the former CEO of Everbright
Securities, a major Chinese financial institution.  Mr. Hui holds a
Masters degree in Regional Economics from Tongji University.





Huang
Jian, Vice President and Director





Mr.
Huang, a director since November 2007, has a background in business and
management.  He currently serves as the Vice President of the Company,
a position he assumed in 2007.  Mr. Huang is also the President and
Director of Wuhan Kangqiao, positions he has held since 2006.  In
addition, Mr. Huang has been a director of Shenzhen Hyper since 2006 and has
been the President of Shenzhen Hyper since 2001.  Mr. Huang has a
degree from Beijing Broadcast and Television University.





Hui
Yang, Former Corporate Secretary (Resigned June 6, 2009)





Mr. Hui
Yang was appointed as our Corporate Secretary in August 2008, and resigned from
the position on June 6, 2009.  Before that, he served since 2001 as
chief financial officer of Shenzhen Hyper, a subsidiary of
Huiheng.  Before joining Shenzhen Hyper, Mr. Hui was a manager of
International Settlement Department for China Everbright Bank from 1997 through
2000.  Mr. Hui obtained his undergraduate degree from Zhejiang
University, where he majored in International Finance, and received a master’s
degree in Economic Law from Xian Jiaotong University.





Richard
Shen, Chief Financial Officer, Current Corporate Secretary





Mr. Shen
serves as our Chief Financial Officer and, as of June 6, 2009, also serves as
the Company’s Corporate Secretary.  In addition, he is also a managing
partner of Sunlight Investment Limited, an asset management and investment
consultant business, where he has served since 2005.  From 2002
through 2005, Mr. Shen was a Vice President and Director of New Tech &
Telecom Investment Limited.  Previously, he served as the General
Manager of Touchstone Investment Limited.  Mr. Shen received his MBA
from York University in Toronto, Canada.





41





Cui
Zhi, Chief Technology Officer





Mr. Cui
oversees Changdu Huiheng’s research and development operations as the Chief
Technology Officer, a position he has held since 2005.  From 2002 to
2005, Mr. Cui was the Chief Engineer for Shenzhen Hyper, where he played a key
role in the development of the Super Gamma System.  Mr. Cui holds a
Ph.D. in Physics from China Science and Technology University.





Tang
Shucheng, Director of Marketing





Mr. Tang
is responsible for the sales and marketing functions of Tibet Changdu as
Director of Marketing, a position he has held since 2005.  From 2000
to 2005, Mr. Tang was the Vice General Manager of SZ Jiancheng Investment Co.,
Ltd., a former affiliate of Huiheng.  Mr. Tang studied at the Austria
National Science and Technology Academy, where he earned a Ph.D. degree in
physics.





Dr.
Li Daxi, Director





Dr. Li
has been a director since November 2007 and is a member of the Company’s Audit
Committee and Compensation Committee.  He founded the Chinese
Association of Science and Business, an organization devoted to bridging science
with business and bridging China with the world, in 1997.  Dr. Li has
14 years experience in investment banking and venture capital, including ten
years on Wall Street with Salomon Brothers and Lehman Brothers.  He is
a director of the United Orient Bank where he oversees investments and auditing
of the bank.  In March 2005, he was invited as an overseas
representative to participate in the China National Chinese People’s Political
Consultative Conference.  He is also a co-founder of the Shenzhen
Overseas Chinese Student Venture Park, a joint-venture with the Shenzhen city
government, which hosts 250 high-tech startup companies.  Dr. Li is a
member of the Company’s Audit Committee.  Dr. Li received a Ph.D. in
high energy physics from the City University of New York.





Involvement
in Certain Legal Proceedings




To the
best of our knowledge, during the past five years, none of our directors or
executive officers were involved in any of the following: (1) any federal or
state 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; (2) any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being 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 or banking activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodities 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




Because
we have not registered a class of securities under Section 12 of the Securities
Exchange Act, our officers and directors are not subject to the reporting
requirements of Section 16(a) of the Securities Exchange Act of
1934.




Code
of Conduct and Ethics





We have
not yet adopted a Code of Conduct and Ethics that applies to all of our
employees, officers and directors.  However, our board of directors
are currently discussing andworking to adopt such
Code of Conduct and Ethics.





Nominations
to the Board of Directors




There
were no material changes to the procedures by which security holders may
recommend nominees to our Board of Directors.




Audit Committee




Our Board
of Directors has established an Audit Committee in accordance with section
3(a)(58)(A) of the Exchange Act, which currently consists of Li Daxi, Hui
Xiaobing and Huang Jian.  Dr. Li Daxi satisfies the independence
requirements established by the Nasdaq Marketplace Rules.  The Audit
Committee conducts an annual review of the committee’s overall
performance.  The primary purpose of the Audit Committee is to oversee
our accounting and financial reporting processes and the function of the Audit
Committee includes retaining our independent auditors, reviewing their
independence, reviewing and approving the planned scope of our annual audit,
reviewing and approving any fee arrangements with our auditors, overseeing their
audit work, reviewing and pre-approving any non-audit services that may be
performed by them, reviewing the adequacy of accounting and financial controls,
reviewing our critical accounting policies and reviewing and approving any
related party transactions.  The Audit Committee held one meeting
during the fiscal year ended December 31, 2009.





42





Audit
Committee Financial Expert




Our Board
of Directors has determined that Li Daxi is an “audit committee financial
expert,” as defined in the rules of the SEC.  As disclosed above, Li
Daxi is “independent,” as defined by the Nasdaq Marketplace rules.




Item
11.Executive
Compensation.




Summary
Compensation Table




The
following table sets forth the information, on an accrual basis, with respect to
the compensation of our and Allied Moral’s executive officers for the
fiscal years ended December 31, 2008 and December 31, 2009.




Name and
                              Principal Position
                            
                            Year
                            
                            Salary
                              ($)
                            
                            
                            Bonus
                              ($)
                            
                            
                            Stock
                              Awards
                              ($)
                            
                            
                            Option
                              Awards
                              ($)
                            
                            
                            Non-
                              Equity
                              Incentive
                              Plan
                              Compen-
                              sation
                              ($)
                            
                            
                            Non-
                              Qualified
                              Deferred
                              Compen-
                              sation
                              Earnings
                            
                            
                            All Other
                              Compen-
                              sation
                              ($)
                            
                            
                            Total
                              ($)Hui
      Xiaobing,
                            
                            2009
                            
                            $
                            56,284
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            56,284Chief
      Executive Officer
                            
                            2008
                            
                            $
                            56,284
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            56,284Huang
      Jian,
                            
                            2009
                            
                            $
                            35,178
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            35,178Vice
      President
                            
                            2008
                            
                            $
                            35,178
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            35,178Richard
      Shen
                            
                            2009
                            
                            $
                            37,333
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            37,333Chief
      Financial Officer and Corporate Secretary
                            
                            2008
                            
                            $
                            52,766
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            $
                            52,766





Employment
Agreements




None of
our executive officers have employment agreements with us.




Equity
Awards




During
the last fiscal year, neither we nor Allied Moral have granted any stock options
or Stock Appreciation Rights (“SARS”) to any executive officers or other
individuals listed in the table above.  No long term incentive awards
were granted in the last fiscal year.




Outstanding
Equity Awards at Fiscal Year End




None of
our executive officers, directors or employees have exercised options or SARs
during the last fiscal year.  There are no outstanding SARS for any
executive officer or person listed in the table above.





43





Stock
Option Plan




As
discussed previously, on June 6, 2009, the Board of Directors and the
shareholders of the Company approved the Huiheng Medical, Inc. 2009 Share Plan
(the “Plan”), under which employees and directors of the Company are eligible to
receive direct awards of shares or grants of stock options (either Incentive
Stock Options or Nonstatutory Stock Options, as determined by the administrator
of the Plan at the time of grant).  The Plan replaces the Company’s
2007 Share Plan which expired under its terms since the 2007 Share Plan was
never approved by the Company’s shareholders.  Under the Plan,
1,566,666 shares have been reserved, which is the same number of shares that was
reserved under the Company’s 2007 Share Plan.  No awards were ever
issued under the 2007 Share Plan prior to its expiration.




Compensation
of Directors




Each
director (other than the Chair of the Compensation Committee or Audit Committee)
will receive $3,000 per month and a stock option to purchase 30,000 shares
vesting quarterly over a period of three years.  The Chair of the
Compensation Committee will receive $3,500 per month and options for 36,000
shares (with the same vesting schedule as the other directors) and the Chair of
the Audit Committee will receive $4,000 per month and options for 36,000 shares
(with the same vesting schedule as the other directors).  While the
Company has agreed to compensate our outside directors for their service through
a combination of cash and stock options, as noted above, in addition to the
reimbursement of their expenses incurred in performing their duties, we have not
made any payment to our directors nor have we awarded any stock options in 2009
except as noted below.




In June
2009, the Company granted the independent director a non-statutory stock option
to purchase 30,000 shares under the Plan with an exercise price of $5.00 per
share subject to a vesting schedule.




The
following table sets forth compensation paid to our non-executive directors for
the fiscal year ended December 31, 2009.


Name
            
            Fees
              Earned
              or Paid
              in Cash
              ($)
            
            
            Stock
              Awards
              ($)
            
            
            Option
              Awards
              ($)
            
            
            Non-Equity
              Incentive Plan
              Compensation
              ($)
            
            
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            
            All
              Other
              Compen-sation
              ($)
            
            
            Total
              ($)Li
      Daxi
            
            $
            21,000
            
            
            $
            -
            
            
            $
            -
            (1)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            21,000





(1)
            As
      of December 31, 2009, the number of option awards outstanding and
      attributable to Dr. Li Daxi totaled 30,000.  The exercise price
      of $5.00 per share was greater than the $0.30 per share closing price for
      a share of Company common stock on the date of grant.  The
      options are subject to vesting and as of December 31, 2009, 7,500 out of
      the 30,000 option awards had vested.   In light of the
      higher exercise price than the closing price on the date of the grant, the
      amount of the option awards recognized for financial statement reporting
      purposes for the year ended December 31, 2009 in accordance with FASB ASC
      Topic 718 was determined to be
immaterial.




Defined
benefit or actuarial plan disclosure




As
required by Chinese law, our Chinese subsidiaries contribute 10% of an
individual employee’s monthly salary to pension insurance.




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





As used
in this section, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared
voting power (including the power to vote or direct the vote) and/or sole or
shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable.





44





As of
March 31, 2010, we had a total of 13,935,290 shares of common stock outstanding
and 220,467 shares of Series A Preferred Stock issued and
outstanding.  As a class the Series A Preferred Stock is convertible
into 2,315,785 shares of our common stock.




Common
Stock




The
following table sets forth, as of March 31, 2010: (a) the names and addresses of
each beneficial owner of more than five percent of our common stock known to us,
the number of shares of common stock beneficially owned by each such person, and
the percent of our common stock so owned; and (b) the names and addresses of
each director and executive officer, the number of shares our common stock
beneficially owned, and the percentage of our common stock so owned, by each
such person, and by all of our directors and executive officers as a
group.  Unless otherwise indicated, the business address of each of
our directors and executive offices is c/o Huiheng Medical, Inc., Huiheng
Building, Gaoxin 7 Street South, Keyaunnan Road, Nanshan District, Shenzhen
Guangdong, P.R. China 51807.  Each person has sole voting and
investment power with respect to the shares of our common stock, except as
otherwise indicated.  Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise
indicated.




NameandAddressofBeneficialOwner(IncludesManagement)
                
                SharesOwned
                  Beneficially
                
                
                Percentage
                  OwnershipHui
      Xiaobing (1)
                
                
                11,750,000
                
                
                
                84.44
                %Huang
      Jian
                
                
                0
                
                
                
                *Hui
      Yang
                
                
                0Richard
      Shen
                
                
                0
                
                
                
                *Cui
      Zhi
                
                
                0
                
                
                
                *Tang
      Shucheng
                
                
                0
                
                
                
                *Li
      Daxi
                
                
                10,000
                (2)
                
                
                *All
      Officers & Directors as a Group (7 people)
                
                
                11,760,000
                
                
                
                84.44
                %





*
Individual owns less than 1% of our securities.




(1)           Includes
shares held by Clear Honest International Limited, a company controlled by Mr.
Hui Xiaobing, Chief Executive Officer of Huiheng.




(2)           Represents
stock options exercisable at March 31, 2010 or within sixty (60) days of March
31, 2010.




Preferred
Stock




The
following table sets forth, as of March 31, 2010: the names and addresses of
each beneficial owner of more than five percent of our Series A Preferred Stock
known to us, the number of shares of preferred stock beneficially owned by each
such person, the percent of the preferred stock so owned, and the number of
shares of common stock issuable upon conversion of the preferred
stock.  To our knowledge, none of our directors or executive officers
have any direct or beneficial ownership interest in shares of preferred stock or
shares of common stock issuable upon conversion of the preferred
stock:





45




NameandAddress
                
                Shares
                  Beneficially
                  Owned
                
                
                Percentage
                  Ownership
                
                
                Sharesof
                  Common
                  Stock
                  Issuableon
                  ConversionChardan
      China Investments, LLC (1)
                  402
      West Broadway, Ste. 2600
                  San
      Diego, CA 92101
                
                
                52,667
                
                
                
                23.89
                %
                
                
                553,224Platinum
      Partners Value Arbitrage Fund, L.P. (2)
                  152
      West 57th St.
                  New
      York, NY 10019
                
                
                48,988
                
                
                
                22.22
                %
                
                
                514,580Kenneth
      Greif
                  240
      Maple Street
                  Englewood,
      NJ 07631
                
                
                20,000
                
                
                
                9.07
                %
                
                
                210,084Atlas
      Master Fund, Ltd. (3)
                  135
      East 57th St.
                  New
      York, NY 1002
                
                
                15,087
                
                
                
                6.84
                %
                
                
                158,477





(1)
Richard D. Propper exercises voting and investment control over the shares of
Series A Preferred Stock held by Chardan China Investments, LLC.





(2) Mark
Nordlicht exercises voting and investment control over the shares of Series A
Preferred Stock held by Platinum Partners Value Arbitrage Fund,
L.P.





(3) Scott
Schroeder exercises voting and investment control over the shares of Series A
Preferred Stock held by Atlas Master Fund, Ltd.





Securities
Authorized for Issuance under Equity Compensation Plans




Please
see Item 5 for this information.




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





Transactions
with Related Persons




In June,
2009, Tibet Changdu Huiheng Development Co., Ltd. (“Changdu Huiheng”), a
subsidiary of the Company, received $732,869 from Shenzhen Huiheng Industry Co.,
Ltd. (“Huiheng Industry”), a company owned by Mr. Hui Xiaobing, the Company’s
Chairman and CEO.  That amount relates to the payment by Huiheng
Industry in connection with the RMB 5 million obligation owed by Huiheng
Industry to Changdu Huiheng consisting of (i) an original advance of $640,690
associated with Huiheng Industry’s 2004 acquisition of a 10% equity interest in
Changdu Huiheng, and (ii) an interest free and unsecured advance it received for
working capital originally in the amount of $47,410 in 2005 (collectively,
the “Obligation”).  As of December 31, 2008, the Company provided a
100% allowance for doubtful accounts for the Obligation.  As a result
of the payment of the Obligation, the allowance for doubtful accounts was
reversed.




Director
Independence





Mr. Li
Daxi is an independent director, as determined by Rule 4200 of the National
Association of Securities Dealers’ (NASD) listing standards.  A
Director is considered independent if the Board affirmatively determines that
the Director (or an immediate family member) does not have any direct or
indirect material relationship with us or our affiliates or any member of our
senior management or his or her affiliates.  The term “affiliate”
means any corporation or other entity that controls, is controlled by, or under
common control with us, evidenced by the power to elect a majority of the Board
of Directors or comparable governing body of such entity.  The term
“immediate family member” means spouse, parents, children, siblings, mothers-
and fathers-in-law, sons- and daughters-in law, brothers- and sisters-in-laws
and anyone (other than domestic employees) sharing the Director’s
home.





46




Item
14.Principal
Accounting Fees and Services.





Relationship
with Independent Registered Public Accounting Firm




Our Audit
Committee has responsibility for the appointment, compensation and oversight of
the work of our independent registered public accounting firm, UHY Vocation HK
CPA Limited (“UHY”).  We retained the firm of UHY as our Independent
Registered Public Accounting Firm for the fiscal year ending December 31,
2009.  We have appointed UHY as our independent registered public
accounting firm for our fiscal year 2010.




Audit
Fees




For the
fiscal years ended 2009 and 2008, the aggregate fees billed for services
rendered for the audits of the annual financial statements and the review of the
financial statements included in the quarterly reports on Form 10-Q and the
services provided in connection with the statutory and regulatory filings or
engagements for those fiscal years and registration statements filed with the
SEC were $120,000 and $115,000, respectively.




Audit-Related
Fees




For the
fiscal years ended December 31, 2009 and 2008, there were no fees billed for the
audit or review of the financial statements that are not reported above under
Audit Fees.




Tax
Fees




For the
fiscal years ended December 31, 2009 and 2008, fees billed for tax compliance
services were $13,270 and $13,020 respectively.




All
Other Fees




For the
fiscal years ended December 31, 2009 and 2008, there were no fees billed for
services other than services described above.




Audit
Committee Approval of Audit and Non-Audit Services of Independent
Accountants





The Audit
Committee approves all audit and non-audit services provided by the independent
auditors.  These services may include audit services, audit-related
services, tax services and other services.  The independent
accountants and management are required to periodically report to the Audit
Committee regarding the extent of services provided by the independent
accountants, and the fees for the services performed to date.





Item
15.Exhibits,
Financial Statements and Schedules.





The
following documents are filed as part of this Annual Report:




(a)           Financial
Statements:




PageReport
      of Independent Registered Accounting Firm
                          F-1Consolidated
      Balance Sheet at December 31, 2009
                          F-2Consolidated
      Statements of Income for the Years Ended December 31, 2009 and
      2008
                          F-3Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2009 and 2008
                          F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                          F-5Notes
      to Consolidated Financial Statements
                          F-6
      to
22





47





(b)           Exhibits:




Exhibit No.
                  
                  Document Description3.1
                  
                  Articles
      of Incorporation, as revised (incorporated by reference to the exhibit to
      the registrant’s annual report on Form 10-KSB filed with the SEC on April
      10, 2008)3.2
                  
                  Amended
      and Restated By-Laws (incorporated by reference to the exhibit to the
      registrant’s annual report on Form 10-KSB filed with the SEC on April 10,
      2008)4.1
                  
                  Amended
      and Restated Certificate of Designations of Rights and Preferences of the
      Series A 7% Convertible Preferred Stock (incorporated by reference to the
      exhibit to the registrant’s current report on Form 8-K filed with the SEC
      on January 16, 2008)4.2
                  
                  Form
      of Common Stock Purchase Warrant (incorporated by reference to the exhibit
      to the registrant’s current report on Form S-1 filed August 29,
      2008)10.1
                  
                  Securities
      Exchange Agreement dated May 15, 2007 (incorporated by reference to the
      exhibit to the registrant’s current report on Form 8-K filed with the SEC
      on May 15, 2007)10.2
                  
                  Stock
      Purchase Agreement dated September 1, 2006 (incorporated by reference to
      the exhibit to the registrant’s annual report on Form 10-KSB filed with
      the SEC on February 28, 2007)10.3
                  
                  Office
      Lease (incorporated by reference to the exhibit to the Amendment No. 1 to
      Form SB-2 filed with the SEC on December 5, 2007)10.4
                  
                  Investors’
      Right Agreement among Allied Moral Holdings and the purchasers of Series A
      Preferred Stock (incorporated by reference to the exhibit to the Amendment
      No. 2 on Form S-1 to Form SB-2 filed with the SEC on July 7,
      2008)10.5
                  
                  Amendment
      to Investors’ Rights Agreement (incorporated by reference to the exhibit
      to the Amendment No. 2 on Form S-1 to Form SB-2 filed with the SEC on July
      7, 2008)10.6
                  
                  Capital
      Contribution Transfer Agreement between Shenzhen Huiheng Industry Co.,
      Ltd. and Allied Moral Holdings Limited dated August 21, 2006 (incorporated
      by reference to the exhibit to the Amendment No. 2 on Form S-1 to Form
      SB-2 filed with the SEC on July 7, 2008)10.7
                  
                  Capital
      Contribution Transfer Agreement between Shenzhen Huiheng Industry Co.,
      Ltd. and Tibet Changdu Huiheng Development Co., Ltd. dated February 25,
      2006 (incorporated by reference to the exhibit to the Amendment No. 2 on
      Form S-1 to Form SB-2 filed with the SEC on July 7,
  2008)10.8
                  
                  Capital
      Contribution Transfer Agreement between Hui Xiaobing and Tibet Changdu
      Huiheng Development Co., Ltd. dated February 25, 2006 (incorporated by
      reference to the exhibit to the Amendment No. 2 on Form S-1 to Form SB-2
      filed with the SEC on July 7, 2008)10.9
                  
                  Creditor’s
      Rights and Liability Confirmation Agreement, dated  January 3,
      2008 (incorporated by reference to the exhibit to the Amendment No. 2 on
      Form S-1 to Form SB-2 filed with the SEC on July 7,
  2008)





48





10.10
                
                Letter
      Agreement between Allied Moral Holdings Limited and Clear Honest
      International Co. Ltd., dated January 5, 2008 (incorporated by reference
      to the exhibit to the Amendment No. 2 on Form S-1 to Form SB-2 filed with
      the SEC on July 7, 2008)10.11
                
                Letter
      Agreement between Shenzhen Huiheng Industry Co., Ltd. and Tibet Changdu
      Huiheng Development Co., Ltd. dated January 5, 2008 (incorporated by
      reference to the exhibit to the Amendment No. 2 on Form S-1 to Form SB-2
      filed with the SEC on July 7, 2008)10.12
                
                Huiheng
      2009 Share Plan (incorporated by reference to the exhibit to the
      registrant’s current report on Form 8-K filed with the SEC on June 10,
      2009)31.1
                
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes
      Oxley Act of 200231.2
                
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes
      Oxley Act of 200232.1
                
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                
                Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




49





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.




Huiheng
      Medical, Inc.,a
      Nevada corporationDate:
      September 16, 2010
                    
                    By:
                    /s/ Hui XiaobingHui
      XiaobingChief
      Executive Officer (Principal Executive Officer)Date:
      September 16, 2010
                    
                    By:
                    /s/ Richard ShenRichard
      ShenChief
      Financial Officer (Principal Financial & Accounting
                      Officer)




Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.




Signature(s)
                                      
                                      Title(s)
                                      
                                      Date/s/ Hui Xiaobing
                                      
                                      Chairman
      and Chief Executive OfficerHui
      Xiaobing
                                      
                                      (Principal
      Executive Officer)
                                      
                                      September
      16, 2010/s/
      Richard Shen
                                      
                                      Chief
      Financial OfficerRichard
      Shen
                                      
                                      (Principal
      Financial and Accounting Officer)
                                      
                                      September
      16, 2010/s/
      Huang JianHuang
      Jian
                                      
                                      Director
                                      
                                      September
      16, 2010Li
      Daxi
                                      
                                      Director
                                      
                                      September      ,
      2010





50





HUIHENG
MEDICAL, INC.





DECEMBER
31, 2009





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Contents
                                
                                Page(s)Report
      of Independent Registered Public Accounting Firm
                                
                                F-1Consolidated
      Balance Sheets
                                
                                F-2Consolidated
      Statements of Income for the Years Ended December 31, 2009 and
      2008
                                
                                F-3Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2009 and 2008
                                
                                F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                                
                                F-5Notes
      to the Consolidated Financial Statements
                                
                                F-6
      to
F-22











REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM




TO
THE BOARD OF DIRECTORS


HUIHENG
MEDICAL INC.





We have
audited the accompanying consolidated balance sheets of Huiheng Medical Inc. and
its subsidiaries (collectively the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of income, changes in stockholders’
equity and cash flows for the years then ended.  These consolidated
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Huiheng
Medical Inc. as of December 31, 2009 and 2008, the consolidated results of its
operations and its consolidated cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.





/s/ UHY
Vocation HK CPA Limited





UHY
VOCATION HK CPA LIMITED





Hong
Kong, the People’s Republic of China


March 31,
2010





F-1





HUIHENG
MEDICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


( IN US
DOLLARS)




December 31,2009
                                              
                                              
                                              2008ASSETSCURRENT
      ASSETS:Cash
                                              
                                              $
                                              84,962
                                              
                                              
                                              $
                                              1,019,176Accounts
      receivable, net of allowance for doubtful accounts of
    $897,319and
      $743,584
                                              
                                              
                                              16,499,819
                                              
                                              
                                              
                                              10,978,419Prepaid
      expenses and other receivables, net of allowance for
    doubtfulaccounts
      of $732,386 and $732,869
                                              
                                              
                                              3,307,255
                                              
                                              
                                              
                                              4,008,810Inventories
                                              
                                              
                                              1,359,900
                                              
                                              
                                              
                                              1,353,352Total
      Current Assets
                                              
                                              
                                              21,251,936
                                              
                                              
                                              
                                              17,359,757INVESTMENT
      IN AFFILIATE
                                              
                                              
                                              43,152
                                              
                                              
                                              
                                              45,194PROPERTY,
      PLANT AND EQUIPMENT
                                              
                                              
                                              2,520,787
                                              
                                              
                                              
                                              2,643,022LAND
      USE RIGHT, NET
                                              
                                              
                                              939,575
                                              
                                              
                                              
                                              -INTANGIBLE
      ASSETS
                                              
                                              
                                              777,086
                                              
                                              
                                              
                                              860,175OTHER
      RECEIVABLES, net of current portion
                                              
                                              
                                              1,582,093
                                              
                                              
                                              
                                              1,666,684DEFERRED
      OFFERING COSTS
                                              
                                              
                                              -
                                              
                                              
                                              
                                              460,209Total
      Assets
                                              
                                              $
                                              27,114,629
                                              
                                              
                                              $
                                              23,035,041LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                              
                                              $
                                              844,539
                                              
                                              
                                              $
                                              832,906Amount
      due to related party
                                              
                                              
                                              24,560
                                              
                                              
                                              
                                              24,577Income
      tax payable
                                              
                                              
                                              389,632
                                              
                                              
                                              
                                              21,431Accrued
      liabilities and other payables
                                              
                                              
                                              1,676,639
                                              
                                              
                                              
                                              1,418,644Total
      Liabilities, all current
                                              
                                              
                                              2,935,370
                                              
                                              
                                              
                                              2,297,558EQUITY:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized;Designated
      300,000 shares of Series A convertible preferred stock;220,467
      and 229,133 shares issued and outstanding withliquidation
      preference of $8,267,513 at December 31, 2009
                                              
                                              
                                              220
                                              
                                              
                                              
                                              229Common
      stock, $0.001 par value; 74,000,000 shares authorized;23,635,290
      shares issued, 13,935,290 and 13,844,254 shares
outstanding
                                              
                                              
                                              13,935
                                              
                                              
                                              
                                              13,844Additional
      paid-in capital
                                              
                                              
                                              7,498,086
                                              
                                              
                                              
                                              7,498,086Retained
      earnings
                                              
                                              
                                              13,799,481
                                              
                                              
                                              
                                              10,159,147Accumulated
      other comprehensive incomeForeign
      currency translation gain
                                              
                                              
                                              1,756,510
                                              
                                              
                                              
                                              1,767,573Non
      controlling interests
                                              
                                              
                                              1,111,027
                                              
                                              
                                              
                                              1,298,604Total
      Equity
                                              
                                              
                                              24,179,259
                                              
                                              
                                              
                                              20,737,483Total
      Liabilities and Equity
                                              
                                              $
                                              27,114,629
                                              
                                              
                                              $
                                              23,035,041




See
accompanying notes to the consolidated financial statements.





F-2





HUIHENG
MEDICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(IN US
DOLLARS)





For the year ended December 31,2009
                      
                      
                      2008REVENUES
                      
                      $
                      10,632,326
                      
                      
                      $
                      12,293,641COST
      OF REVENUES
                      
                      
                      2,353,088
                      
                      
                      
                      2,794,859GROSS
      PROFIT
                      
                      
                      8,279,238
                      
                      
                      
                      9,498,782OPERATING
      EXPENSES:Sales
      and marketing expenses
                      
                      
                      316,247
                      
                      
                      
                      226,525General
      and administrative expenses
                      
                      
                      3,351,201
                      
                      
                      
                      4,154,539Research
      and development costs
                      
                      
                      485,290
                      
                      
                      
                      472,919Total
      Operating Expenses
                      
                      
                      4,152,738
                      
                      
                      
                      4,853,983OPERATING
      INCOME
                      
                      
                      4,126,500
                      
                      
                      
                      4,644,799OTHER
      (EXPENSES) / INCOME:Interest
      income
                      
                      
                      375
                      
                      
                      
                      1,303Equity
      in loss of affiliate
                      
                      
                      (2,012
                      )
                      
                      
                      (6,371
                      )Total
      Other (Expenses) / Income
                      
                      
                      (1,637
                      )
                      
                      
                      (5,068
                      )NET
      INCOME BEFORE INCOME TAXES
                      
                      
                      4,124,863
                      
                      
                      
                      4,639,731INCOME
      TAXES
                      
                      
                      671,078
                      
                      
                      
                      774,259NET
      INCOME
                      
                      
                      3,453,785
                      
                      
                      
                      3,865,472NET
      LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
                      
                      
                      186,631
                      
                      
                      
                      146,154NET
      INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
                      
                      
                      3,640,416
                      
                      
                      
                      4,011,626EARNINGS
      PER SHARE-
      Basic
                      
                      $
                      0.26
                      
                      
                      $
                      0.29-
      Diluted
                      
                      $
                      0.22
                      
                      
                      $
                      0.25Weighted
      Common Shares Outstanding-
      Basic
                      
                      
                      13,918,771
                      
                      
                      
                      13,754,118-
      Diluted
                      
                      
                      16,251,113
                      
                      
                      
                      16,251,113





See
accompanying notes to the consolidated financial statements.





F-3





HUIHENG
MEDICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


(IN US
DOLLARS)




Series A Preferred Stock$0.001 Par Value
                                                                
                                                                
                                                                Common Stock, $0.001 Par Value
                                                                
                                                                
                                                                Additional
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Accumulated Other
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                TotalNumber of
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Number of
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Paid-in
                                                                
                                                                
                                                                Retained
                                                                
                                                                
                                                                Comprehensive
                                                                
                                                                
                                                                Non-controlling
                                                                
                                                                
                                                                Stockholders’Shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Capital
                                                                
                                                                
                                                                Earnings
                                                                
                                                                
                                                                Income
                                                                
                                                                
                                                                interest
                                                                
                                                                
                                                                EquityBalance,
      December 31, 2007
                                                                
                                                                
                                                                266,666
                                                                
                                                                
                                                                $
                                                                267
                                                                
                                                                
                                                                
                                                                13,450,000
                                                                
                                                                
                                                                $
                                                                13,450
                                                                
                                                                
                                                                $
                                                                7,498,086
                                                                
                                                                
                                                                $
                                                                6,147,877
                                                                
                                                                
                                                                $
                                                                698,216
                                                                
                                                                
                                                                $
                                                                1,353,511
                                                                
                                                                
                                                                $
                                                                15,711,407Comprehensive
      income:Net
      income / (loss)
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                4,011,626
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (146,154
                                                                )
                                                                
                                                                $
                                                                3,865,472Foreign
      currency translation gain
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,069,357
                                                                
                                                                
                                                                
                                                                91,247
                                                                
                                                                
                                                                
                                                                1,160,604Total
      comprehensive income
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                5,026,076Conversion
      of stock
                                                                
                                                                
                                                                (37,533
                                                                )
                                                                
                                                                
                                                                (38
                                                                )
                                                                
                                                                
                                                                394,254
                                                                
                                                                
                                                                
                                                                394
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (356
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Balance,
      December 31, 2008
                                                                
                                                                
                                                                229,133
                                                                
                                                                
                                                                
                                                                229
                                                                
                                                                
                                                                
                                                                13,844,254
                                                                
                                                                
                                                                
                                                                13,844
                                                                
                                                                
                                                                
                                                                7,498,086
                                                                
                                                                
                                                                
                                                                10,159,147
                                                                
                                                                
                                                                
                                                                1,767,573
                                                                
                                                                
                                                                
                                                                1,298,604
                                                                
                                                                
                                                                
                                                                20,737,483Comprehensive
      income:Net
      income / (loss)
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                3,640,416
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (186,631
                                                                )
                                                                
                                                                $
                                                                3,453,785Foreign
      currency translation loss
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (11,063
                                                                )
                                                                
                                                                
                                                                (946
                                                                )
                                                                
                                                                
                                                                (12,009
                                                                )Total
      comprehensive income
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                3,441,776Conversion
      of stock
                                                                
                                                                
                                                                (8,666
                                                                )
                                                                
                                                                
                                                                (9
                                                                )
                                                                
                                                                
                                                                91,036
                                                                
                                                                
                                                                
                                                                91
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (82
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Balance,
      December 31, 2009
                                                                
                                                                
                                                                220,467
                                                                
                                                                
                                                                $
                                                                220
                                                                
                                                                
                                                                
                                                                13,935,290
                                                                
                                                                
                                                                $
                                                                13,935
                                                                
                                                                
                                                                $
                                                                7,498,086
                                                                
                                                                
                                                                $
                                                                13,799,481
                                                                
                                                                
                                                                $
                                                                1,756,510
                                                                
                                                                
                                                                $
                                                                1,111,027
                                                                
                                                                
                                                                $
                                                                24,179,259





See
accompanying notes to the consolidated financial statements





F-4





HUIHENG
MEDICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN US
DOLLARS)





FOR THE YEARS ENDEDDECEMBER 31,2009
                                  
                                  
                                  2008Cash
      flows from operating activities:Net
      income
                                  
                                  $
                                  3,453,785
                                  
                                  
                                  $
                                  3,865,472Adjustments
      to reconcile net income to netcash
      used in operating activities:Depreciation
      of property, plant and equipment
                                  
                                  
                                  253,991
                                  
                                  
                                  
                                  253,891Write
      off of deferred offering costs
                                  
                                  
                                  460,209
                                  
                                  
                                  
                                  -Amortization
      of intangible assets
                                  
                                  
                                  82,483
                                  
                                  
                                  
                                  81,236Amortization
      of prepaid land lease
                                  
                                  
                                  17,569
                                  
                                  
                                  
                                  -Allowance
      for doubtful accounts
                                  
                                  
                                  375,679
                                  
                                  
                                  
                                  -Reversal
      of allowance for doubtful accounts
                                  
                                  
                                  (907,720
                                  )
                                  
                                  
                                  -Equity
      in loss of affiliate
                                  
                                  
                                  2,012
                                  
                                  
                                  
                                  6,371Deferred
      taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  26,383Changes
      in assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (5,721,391
                                  )
                                  
                                  
                                  (2,938,404
                                  )Prepaid
      expenses and other receivables
                                  
                                  
                                  786,146
                                  
                                  
                                  
                                  (1,201,146
                                  )Inventories
                                  
                                  
                                  (6,548
                                  )
                                  
                                  
                                  (281,739
                                  )Accounts
      payable
                                  
                                  
                                  11,633
                                  
                                  
                                  
                                  118,069Income
      tax payable
                                  
                                  
                                  368,201
                                  
                                  
                                  
                                  (186,229
                                  )Amounts
      due from related parties
                                  
                                  
                                  -
                                  
                                  
                                  
                                  688,699Accrued
      liabilities and other payables
                                  
                                  
                                  257,995
                                  
                                  
                                  
                                  (690,643
                                  )Net
      cash used in operating activities
                                  
                                  
                                  (565,956
                                  )
                                  
                                  
                                  (258,040
                                  )Cash
      flows from investing activities:Capital
      expenditures on addition of property, plant and equipment
                                  
                                  
                                  (134,207
                                  )
                                  
                                  
                                  (129,528
                                  )Repayment
      of advance to third parties
                                  
                                  
                                  541,704
                                  
                                  
                                  
                                  195,236Repayment
      of advances to related party
                                  
                                  
                                  732,032
                                  
                                  
                                  
                                  64,199Repayment
      of advance from related party
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (100,000
                                  )Advance
      to third party
                                  
                                  
                                  (541,704
                                  )
                                  
                                  
                                  -Payment
      for land use right
                                  
                                  
                                  (956,226
                                  )
                                  
                                  
                                  -Net
      cash (used in) / from investing activities
                                  
                                  
                                  (358,401
                                  )
                                  
                                  
                                  29,907Cash
      flows used in financing activities:Deferred
      offering costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (460,209
                                  )Net
      cash used in financing activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (460,209
                                  )Net
      decrease in cash
                                  
                                  
                                  (924,357
                                  )
                                  
                                  
                                  (688,342
                                  )Effect
      on change of exchange rates
                                  
                                  
                                  (9,857
                                  )
                                  
                                  
                                  840,933Cash
      as of January 1
                                  
                                  
                                  1,019,176
                                  
                                  
                                  
                                  866,585Cash
      as of December 31
                                  
                                  $
                                  84,962
                                  
                                  
                                  $
                                  1,019,176Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
      paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Income
      tax paid
                                  
                                  $
                                  303,041
                                  
                                  
                                  $
                                  971,600




See
accompanying notes to the consolidated financial statements.





F-5





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
1 - ORGANIZATION AND OPERATIONS





Huiheng
Medical, Inc. (“the Company” or “Huiheng”), formerly known as Mill Basin
Technologies, Limited (“Mill Basin”), is a China-based medical device company
that, through its subsidiaries, designs, develops and markets radiation therapy
systems used for the treatment of cancer.  The Company is a Nevada
holding company and conducts all of its business through operating subsidiaries
in China.





In 2005,
the ownership interests of Shenzhen Hyper Technology Company, Ltd. (“Shenzhen
Hyper”), Wuhan Kangqiao Medical New Technology Company, Ltd. (“Wuhan Kangqiao”)
and Beijing Yuankang Kbeta Nuclear Technology Company, Ltd. (“Beijing Kbeta”)
were reorganized under Tibet Changdu Huiheng Industry Development Company, Ltd.
(“Changdu Huiheng”), a Chinese holding company established in
Tibet.  Upon the completion of the reorganization, Changdu Huiheng
owned 75% of the equity interest in Shenzhen Hyper, 100% of the equity interest
of Wuhan Kangqiao and 50% of the equity interest of Beijing
Kbeta.  Remaining equity interests in Shenzhen Hyper and Beijing Kbeta
are owned by unrelated and unaffiliated parties.





In 2006,
Mr. Hui Xiaobing, the sole owner of Changdu Huiheng, established Allied Moral
Holdings, Ltd. (the “Allied Moral”) in the British Virgin Islands as a holding
company and transferred 100% of the ownership interests of Changdu Huiheng to
Allied Moral as part of an ownership restructuring to facilitate investments by
foreign investors.





In May
2007, Mill Basin entered into a share exchange agreement to acquire (i) all of
the issued and outstanding shares of the common stock of Allied Moral in
exchange for 13,000,000 shares of Mill Basin’s common stock, and (ii) all of the
issued and outstanding Series A Convertible Preferred Stock of Allied Moral in
exchange for 266,666 shares of Mill Basin’s Series A Preferred
Stock.  In connection with the share exchange, Mill Basin agreed to
change its name to “Huiheng Medical, Inc.”  Prior to the share
exchange, Mill Basin had 10,150,000 shares of its common stock
outstanding.  In contemplation of the share exchange, Mill Basin
shareholders contributed 9,700,000 common shares to treasury, resulting in
450,000 shares of Mill Basin’s common stock outstanding immediately prior to the
share exchange.  Taking into account the 13,000,000 shares of Mill
Basin common stock issued for the exchange with Allied Moral’s shareholders,
Mill Basin then had 13,450,000 shares of common stock issued and outstanding, of
which 13,000,000 (96.65%) shares were held by Allied Moral’s former
shareholders,
with  the  balance  being  held  by  Mill
Basin  shareholders.  In addition, following the completion
of the share exchange, 266,666 shares of Series A Preferred Stock were issued
and outstanding, all of which were held by former holders of Allied Moral’s
Series A Convertible Preferred Stock.





As a
result of the share exchange, Huiheng owns all of the issued and outstanding
stock of Allied Moral, which was incorporated in the British Virgin Islands on
July 26, 2006.  Allied Moral, holds all of the issued and outstanding
stock of Changdu Huiheng Development Co., Ltd. (“Changdu Huiheng”), which in
turn owns 100% of the issued and outstanding stock of Wuhan Kangqiao Medical New
Technology Co., Ltd. (“Wuhan Kangqiao”), 75% of the issued and outstanding stock
of Shenzhen Hyper Technology Co., Ltd (“Shenzhen Hyper”) and 50% of the issued
and outstanding stock of Beijing Yuankang Kbeta Nuclear Technology Co., Ltd.
(“Beijing Kbeta”).  Remaining equity interests in Shenzhen Hyper and
Beijing Kbeta are still owned by unrelated and unaffiliated
parties.




F-6





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis
of Presentation





The
Company’s financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America (“US
GAAP”).





The
consolidated financial statements include all accounts of the Company and its
wholly-owned and majority-owned subsidiaries.  All material
inter-company balances and transactions have been eliminated.





Summary
of significant accounting policies





Estimates





The
preparation of the financial statements in accordance with US GAAP requires
management of the Company to make a number of estimates and assumptions relating
to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
years.  Significant items subject to such estimates and assumptions
include the recoverability of the carrying amount and the estimated useful lives
of long-lived assets; valuation allowances for receivables and realizable values
for inventories.  Actual results could differ from those estimates in
consolidation.





Accounts
receivable





Accounts
receivable are recorded at the invoiced amount, net of allowances for doubtful
accounts, sales returns, trade discounts and value added tax.  The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company performs ongoing credit evaluations of its customers’ financial
conditions.  The Company provided an allowance of $897,319 and
$743,584 for doubtful accounts, respectively as of December 31, 2009 and
December 31, 2008.





Outstanding
account balances are reviewed individually for
collectability.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.





Inventories





The
Company values inventories, consisting of work in process and raw materials, at
the lower of cost or market.  Cost of material is determined on the
weighted average cost method.  Cost of work in progress includes
direct materials, direct production cost and an allocated portion of production
overhead.





The final
steps of assembly of our products, including installation of radioactive service
materials, are completed at customer locations.  Accordingly, the
Company generally does not carry finished goods (inventory held for sale in the
ordinary course of business) inventory.




F-7





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Property,
plant and equipment





Property,
plant and equipment are recorded at cost less accumulated
depreciation.  Expenditures for major additions and betterments are
capitalized.  Maintenance and repairs are charged to general and
administrative expenses as incurred.  Depreciation of property, plant
and equipment is computed by the straight-line method (after taking into account
their respective estimated residual values) over the assets estimated useful
lives ranging from three to twenty years.  Building improvements are
amortized on a straight-line basis over the estimated useful
life.  Depreciation of property, plant and equipment are stated at
cost less accumulated depreciation.  Upon sale or retirement of
property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
operations.  The estimated useful lives of the assets are as
follows:





Estimated LifeBuilding
      improvements
                3
      to 5Buildings
                20Production
      equipment
                3
      to 5Furniture
      fixtures and office equipment
                3
      to 5Motor
      vehicles
                5
      to 10





Land
use right





Land use
right is recorded at cost less accumulated amortization.  Under ASC
350 “Intangibles, Goodwill and Other,” land use right is classified as a
definite lived intangible asset and is amortized over its useful
life.  According to the laws of the PRC, the government owns all of
the land in the PRC.  Companies or individuals are authorized to
possess and use the land only through land use rights granted by  the
PRC government.  The Company’s land use right is amortized using the
straight-line method over the lease term of 50 years.





Intangible
assets





Intangible
assets are stated at cost, representing the fair value at the time such
intangibles were contributed to the Company by the minority owner of a
subsidiary in exchange for equity interests.  Fair value was supported
by cash contributed contemporaneously by another investor.  Intangible
assets are carried net of accumulated amortization and impairment
losses.  Amortization expense is recognized on the straight-line basis
over the estimated respective useful lives of these intangible assets as
follows:





Estimated LifePatented
      technology
                20Software
                5





Investment
in affiliate





The
Company owns a 50% equity interest of Beijing Kbeta and accounts for the
investment using the equity method of accounting.  The equity method
is utilized as the Company has the ability to exercise significant influence
over the investee, but does not have a controlling financial
interest.





If
circumstances indicate that the carrying value of the Company’s investment in
Beijing Kbeta may not be recoverable, the Company would recognize an impairment
loss by writing down its investment to its estimated net realizable value if
management concludes such impairment is other than temporary.





F-8





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Impairment
of long-lived assets





Long-lived
assets, which include tangible assets and intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.





Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows
expected to be generated by the asset.  If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset.  Assets to be disposed of, if any, are
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer
depreciated.  At December 31, 2009 and 2008, the Company determined
that there was no impairment of value.





Fair
value of financial instruments





The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The
carrying amounts of financial assets and liabilities, such as cash, accounts
receivable, current income tax assets, prepaid expenses and other current
assets, accounts payable, income taxes payable, accrued expenses and other
current liabilities, approximate their fair values because of the short maturity
of these instruments and market rates of interest.





Revenue
recognition





The
Company generates revenue primarily from sales of medical equipment and
provision of maintenance and support services.  Revenue is recognized
as follows:





(i)           Sales
of medical equipment





The
Company recognizes revenue when products are delivered and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.  The sales price of the medical equipment
includes the training services, which generally take about 1
month.  These services are ancillary to the purchase of medical
equipment by customers and are normally considered by the customers to be an
integral part of the acquired equipment.  As training services do not
have separately determinable fair values, the Company recognizes revenue for the
entire arrangement upon customer acceptance, which occurs after delivery and
installation.





In the
PRC, value added tax (“VAT”) of 17% on invoiced amounts is collected in respect
of the sales of goods on behalf of tax authorities.  The VAT collected
is not revenue of the Company; instead, the amount is recorded as a liability on
the balance sheet until such VAT is paid to the authorities.





Pursuant
to the laws and regulations of the PRC, Shenzhen Hyper is entitled to a refund
of VAT on the sales of self-developed software embedded in medical
equipment.  The VAT refund represents the amount of VAT collected from
customers and paid to the authorities in excess of 3% of relevant
sales.  The amount of VAT refund is calculated on a monthly
basis.  As the refund relates directly to the sale of self-developed
software that is embedded in the Company’s products, the Company recognizes the
VAT refund at the time the product is sold.  The amount is included in
the line item “Revenues” in the consolidated statements of income and is
recorded on an accrual basis.




F-9





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Revenue
recognition (.../Cont’d)





(i)           Sales
of medical equipment (.../Cont’d)





The
medical equipment sold by the Company has embedded self-developed software which
can also be sold on a standalone basis.





(ii)          Provision
of maintenance and support services





The
Company also provides comprehensive post-sales services to certain distributors
for medical equipment used by hospitals.  These contracts are
negotiated and signed independently and separately from the sales of medical
equipments.  In accordance with the agreements, the Company provides
comprehensive services including exchange of cobalt, additional training to
users of the medical equipment, maintenance of medical equipment, software
upgrades and consulting.  Fees for these services are recognized over
the life of the contract on a monthly basis.





Government
subsidies





Pursuant
to the document dated December 16, 2004 with No.173 issued by Tibet Finance
Bureau, the profits tax payment of Changdu Huiheng in excess of RMB 900,000 for
a year will be refundable by Tibet Finance Bureau.  The 31% of
business tax payment will be refundable by Tibet Finance Bureau provided that
the business tax payment exceeds RMB 1.0 million for a year.  The
38.75% of value added tax payment will be refundable by Tibet Finance Bureau
provided that the value added tax payment exceeds RMB 1.5 million for a
year.  All tax incentive policies will be valid for five (5) years
from the year of commencement of tax refund, starting from September
2006.





Warranty





The
Company provides a product warranty to its customers to repair any product
defects that occur generally within twelve months from the date of
sale.  The Company’s purchase contracts generally allow the customer
to withhold up to 10% of the total purchase price for the duration of the
warranty period.  Based on the limited number of actual warranty
claims and the historically low cost of such repairs, the Company has not
recognized a liability for warranty claims, but rather recognizes such cost when
product repairs are made.





Research
and development costs





Research
and development costs are charged to expense as incurred.  Research
and development costs mainly consist of remuneration for the research and
development staff and material costs for research and
development.  The Company incurred $485,290 and $472,919 for the year
ended December 31, 2009 and 2008, respectively.




F-10





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Income
taxes





The
Company accounts for income taxes under ASC 740 “Income
Taxes.”  Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.  Deferred
tax assets are reduced by a valuation allowance to the extent management
concludes it is more likely than not that the assets will not be
realized.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statements of operations in the period
that includes the enactment date.





During
2008, the Company adopted ASC740 “Income Taxes,” which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return.  This
interpretation also provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures.





Foreign
currency translation





Assets
and liabilities of foreign subsidiaries are translated at the rate of exchange
in effect on the balance sheet date; income and expenses are translated at the
average rate of exchange prevailing during the period.  The related
transaction adjustments are reflected in “Accumulated other comprehensive income
/ (loss)” in the equity section of our consolidated balance sheet.





The
average monthly exchange rates for year ended December 31, 2009 and the closing
rate as of December 31, 2009 were Rmb 6.8303 and Rmb 6.8270 to one USD,
respectively.The average monthly exchange rates for year ended December 31, 2008
and the closing rate as of December 31, 2008 were Rmb 6.9351 and Rmb 6.8225 to
one USD, respectively.





Share
Plan





During
2009, the Company adopted a share plan (the “Plan”) for selected employees,
directors, consultants to promote the success of the Company’s business by
offering these individuals an opportunity to acquire a proprietary interest in
the Company.  The Plan provides both for direct awards of shares and
for the granting of options to purchase shares as determined by the
Administrator at the time of the grant.  The Plan replaces the
Company’s 2007 Share Plan which was never approved by the Company’s
shareholders.  Under the Plan, 1,566,666 shares have been reserved for
awards.  The number of shares reserved under the Plan is the same
number that was reserved under the Company’s 2007 Share Plan.  In June
2009, the Company granted options to purchase 30,000 shares under the
Plan.  Compensation cost related to the option issuance was not
material.





Awards
under the Plan will be accounted for in accordance with ASC 718 “Stock
Compensation.”





Comprehensive
income





The
Company has adopted ASC 220 “Comprehensive Income.”  This statement
establishes rules for the reporting of comprehensive income and its
components.  Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statements
of Income and the Consolidated Statement of Changes in Stockholders’
Equity.




F-11





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Earnings
per share





Basic
earnings per share is computed on the basis of the weighted-average number of
shares of our common stock outstanding during the period.  Diluted
earnings per share is computed on the basis of the weighted-average number of
shares of our common stock plus the effect of dilutive potential common shares
outstanding during the period using the if-converted method.  Dilutive
potential common shares include Series A Convertible Preferred
Stock.





The
following table sets forth the computation of basic and diluted net income per
share:





For the Year ended December 31,2009
                            
                            
                            2008Net income
                            
                            $
                            3,640,416
                            
                            
                            $
                            4,011,626Weighted average outstanding
      shares of common stock
                            
                            
                            13,918,771
                            
                            
                            
                            13,754,118Dilutive effect of Convertible
      Preferred Stock
                            
                            
                            2,332,342
                            
                            
                            
                            2,496,995Diluted weighted average
      outstanding shares
                            
                            
                            16,251,113
                            
                            
                            
                            16,251,113Earnings per
      share:Basic
                            
                            $
                            0.26
                            
                            
                            $
                            0.29Diluted
                            
                            $
                            0.22
                            
                            
                            $
                            0.25





For the
year ended December 31, 2009 options to purchase 30,000 common shares were not
included in diluted earnings per share because the effect would be
anti-dilutive.





Commitments
and contingencies





Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably
estimated.





Segment
reporting





ASC 280
“Segment Reporting,” establishes standards for reporting information on
operating segments in interim and annual financial statements.  The
Company operates in two segments (i) selling the medical equipment and, (ii)
providing the consultancy, repairs and maintenance services for the
customers.  The chief operating decision-makers review the Company’s
operation results on an aggregate basis and manage the operations as two
operating segments as disclosed in note 12.





Deferred
offering costs





Deferred
offering costs represented costs directly attributable to the Company’s proposed
public offering.  Such costs consisted principally of professional
fees.  Deferred costs accumulated through December 31, 2008 were
charged to operations in 2009 as the Company’s proposed offering was deemed
unsuccessful.





F-12





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Financial
instruments with characteristics of both liabilities and equity





The
Company accounts for its Series A Preferred Stock in accordance with ASC 480
“Distinguishing Liabilities from Equity” and ASC 815 “Derivatives and
Hedging.”  We have determined that our Series A Preferred Stock is not
mandatorily redeemable.  Accordingly, the Company accounts for the
Preferred stock as permanent equity.





Non-controlling
interest in consolidated financial statements





In
December 2007, the FASB issued authoritative guidance related to noncontrolling
interests in consolidated financial statements, which was an amendment of ARB
No. 51.  This guidance is set forth in Topic 810 in the Accounting
Standards Codification (ASC 810).  ASC 810 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This accounting standard is
effective for fiscal years beginning after December 15, 2008.  The
Company adopted the presentation and disclosure requirements of ASC 810
retrospectively to the December 31, 2008 financial statements.





Subsequent
Events





The
Company adopted FASB ASC 855 (previously SFAS No. 165, “Subsequent Events”) in
2009 which establishes general standards regarding the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be
issued.  Adoption of this standards did not result in significant
changes in the subsequent events that we are required to recognize or disclosure
in our financial statements.





The
Company accounts for and discloses events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued.  We evaluated subsequent events through March 31, 2010, the
date these consolidated financial statements were filed with the
SEC.





Impact
of new accounting standards





We
describe below recent pronouncements that have had or may have a significant
effect on our financial statements.  We do not discuss recent
pronouncements that are not anticipated to have an impact on or are unrelated to
our financial condition, results of operations, or disclosures.





In June
2009, the FASB issued Updates No. 2009-01, which establishes the FASB Accounting
Standards Codification TM (the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with generally
accepted accounting principles (GAAP).  The Codification is effective
for interim and annual periods ending after September 15, 2009.  We
adopted the Codification when referring to GAAP in this report on Form 10-K for
the fiscal period ending December 31, 2009.  The adoption of the
Codification did not have an impact on our consolidated results.




F-13





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Impact
of new accounting standards  (.../Cont’d)





The FASB
issued authoritative guidance related to subsequent events in May 2009, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued.  This guidance is set forth in
Topic 855 in the Accounting Standards Codification (ASC 855).  ASC 855
provides guidance on the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.  We adopted ASC 855 and its
application had no impact on our consolidated financial statements.





The FASB
issued authoritative guidance for fair value measurements in September 2006,
which defines fair value, establishes a framework of measuring fair value, and
expands disclosures assets and liabilities measured at fair value in financial
statements.  This guidance is set forth in Topic 820 in the Accounting
Standards Codification (ASC 820).  ASC 820 does not require any new
fair value measurements but rather eliminates inconsistencies in guidance found
in various prior accounting pronouncements.  ASC 820 is effective for
fiscal years beginning after November 15, 2007.  However, on February
6, 2008, the FASB issued authoritative guidance which deferred the effective
date of ASC 820 for one year for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis.  The adoption of ASC 820 did not have
a material impact on our consolidated financial position, results of operations
or cash flows.





The
December 2007, the FASB issued revised authoritative guidance for business
combinations, which establishes principles and requirements for how the acquirer
in a business combination: i) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, an any
noncontrolling interest in the acquiree, ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  This guidance is set forth in Topic 805 in the
Accounting Standards Codification (ASC 805).  This accounting standard
is effective for fiscal years beginning after December 15, 2008.  We
adopted ASC 805 and the adoption of ASC 805 did not have a material impact on
our consolidated financial position, results of operations or cash flows as of
the date of adoption.  ASC 805 will be applied to any future business
combinations.





In April
2008, ASC 350-30 “General Intangibles Other Than Goodwill” was
issued.  It amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Asset.  FSP FAS 142-3 is effective for the Company
beginning in fiscal 2010.  The Company is currently evaluating FSP FAS
142-3 and the impact, if any, that it may have on its results of operations or
financial position.





In May
2008, ASC 105 “Generally Accepted Accounting Principles” was
issued.  It identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with U.S. GAAP.  SFAS No. 162 is effective for the Company
60 days following the SEC’s approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  The
adoption of this Standard did not have a material impact on our results of
operations or financial position.




F-14





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(.../Cont’d)





Summary
of significant accounting policies (.../Cont’d)





Impact
of new accounting standards  (.../Cont’d)





ASC 715
“Retirement Benefits” amends SFAS No. 132(R), Employers’ Disclosures about
Pensions and Other Postretirement Benefits, to require additional disclosure in
sponsor’s financial statements about pension plan assets, obligations, benefit
payments, contributions and net benefit cost and other postretirement
benefits.  The requirements of this statement are effective for the
Company for the fiscal year ending January 31, 2010.  Since this
statement only pertains to disclosures in the notes to consolidated financial
statements, it will not impact the Company’s consolidated financial position and
results of operations.





In
October 2009, the FASB issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a revenue-generating
transaction where multiple deliverables exist, and provides guidance for
allocating and recognizing revenue based on those separate
deliverables.  The guidance is expected to result in more
multiple-deliverable arrangements being separable than under current guidance
and is required to be applied prospectively to new or significantly modified
revenue arrangements.  This guidance, for which the Company is
currently assessing the impact on its financial condition and results of
operations, will become effective for the Company on January 1,
2011.





In
January 2010, the FASB issued authoritative guidance intended to improve
disclosures about fair value measurements.  The guidance requires
entities to disclose significant transfers in and out of fair value hierarchy
levels and the reasons for the transfers and to present information about
purchases, sales, issuances and settlements separately in the reconciliation of
fair value measurements using significant unobservable inputs (Level
3).  Additionally, the guidance clarifies that a reporting entity
should provide fair value measurements for each class of assets and liabilities
and disclose the inputs and valuation techniques used for fair value
measurements using significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3).  This guidance is effective for interim
and annual periods beginning after December 15, 2009 except for the disclosures
about purchases, sales, issuances and settlements in the Level 3 reconciliation,
which will be effective for interim and annual periods beginning after December
15, 2010.  As this guidance provides only disclosure requirements, the
adoption of this guidance will not impact the Company’s financial condition or
results of operations.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.





NOTE
3 – INVENTORIES





At
December 31, 2009 and 2008, inventories consisted of the following:





2009
                    
                    
                    2008Raw
    materials
                    
                    $
                    281,112
                    
                    
                    $
                    262,355Work-in-progress
                    
                    
                    1,078,788
                    
                    
                    
                    1,090,997$
                    1,359,900
                    
                    
                    $
                    1,353,352





Final
assembly of our products, including installation of radioactive source
materials, is conducted on site at our customer locations.  Our
products are not considered to be finished good (available for sale in the
normal course of business) until such time as the source material is installed
in the units.




F-15





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
4 – PREPAID EXPENSES AND OTHER RECEIVABLES





At
December 31, 2009 and 2008, prepayments and other receivables consisted of the
following:





2009
                      
                      
                      2008Prepayments to
      suppliers
                      
                      $
                      3,058,465
                      
                      
                      $
                      3,247,978Other
      receivables- construction in progress paid on
      behalf of landlord (a)
                      
                      
                      156,759
                      
                      
                      
                      281,422- loan or advance to staff for
      business travelling
                      
                      
                      43,072
                      
                      
                      
                      22,758- utilities and rental
      deposits
                      
                      
                      1,948
                      
                      
                      
                      1,949- prepaid expenses made by
      director
                      
                      
                      2,930
                      
                      
                      
                      2,932- deposit for acquisition of a
      Land use right at Wuhan Kangqiao
                      
                      
                      -
                      
                      
                      
                      384,621- others
                      
                      
                      44,081
                      
                      
                      
                      67,150$
                      3,307,255
                      
                      
                      $
                      4,008,810





(a)
            Included
      in the other receivables, the amount will be offset against future years
      lease payments (Note 16).  As at December 31, 2009, $1,582,093
      has been classified as non-current assets and $156,759 has been classified
      as current assets.





During
      the year ended December 31, 2008, an amount of $1,191,066 was transferred
      from Construction in progress under Property, Plant and Equipment to Other
      Receivables and $757,040 was transferred from Prepaid expenses to Other
      Receivables, representing amounts paid on construction in progress on
      behalf of the landlord in 2007 and 2008.  Such amounts will be
      offset against future years lease payments (Note
  16).





NOTE
5 – PROPERTY, PLANT AND EQUIPMENT





At
December 31, 2009 and 2008, property, plant and equipment consisted of the
following:





2009
                  
                  
                  2008Building
      improvements
                  
                  $
                  172,232
                  
                  
                  $
                  172,346Buildings
                  
                  
                  2,307,550
                  
                  
                  
                  2,309,072Production
      equipment
                  
                  
                  656,423
                  
                  
                  
                  617,806Furniture, fixture and office
      equipment
                  
                  
                  366,868
                  
                  
                  
                  271,867Motor
    vehicles
                  
                  
                  187,308
                  
                  
                  
                  187,4323,690,381
                  
                  
                  
                  3,558,523Less: Accumulated
      depreciation
                  
                  
                  (1,169,594
                  )
                  
                  
                  (915,501
                  )$
                  2,520,787
                  
                  
                  $
                  2,643,022





Depreciation
expense is included in the consolidated statements of income.  For the
year ended December 31, 2009 and  2008,
depreciation expenses were $253,991 and $253,891,
respectively.




F-16





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
6 - LAND USE RIGHT





Land use
right consisted of the following:





2009
                  
                  
                  2008Land
      use right
                  
                  $
                  939,575
                  
                  
                  $
                  -





Land use
right represents prepaid lease payments to the Local Government for land use
right held for a period of 50 years from Jan 20, 2009 to December 26, 2058 in
Wuhan, People’s Republic of China.





Land use
right is amortized using the straight-line method over the lease term of 50
years.  The amortization expense for the year ended December 31, 2009
was $17,569.





NOTE
7 – INTANGIBLE ASSETS





Patented
technology represents a patent for the production of a component of the
radiation treatment system.  The patent was applied prior to its
injection to Shenzhen Hyper as a capital contribution.  Pursuant to
the patent certificate, the patent was valid for 20 years from the application
date, May 1999.  Therefore it was amortized over the rest of the valid
patent period, which is the estimated remaining useful life.





Software
is utilized in the production of medical equipment and is amortized over its
estimated useful life.





For the
year ended December 31, 2009 and 2008, amortization expense was $82,483 and
$81,236.





NOTE
8 – ACCRUED LIABILITIES AND OTHER PAYABLES





At
December 31, 2009 and 2008, accrued liabilities and other payables consisted of
the following:





2009
                    
                    
                    2008Accrued
      expenses
                    
                    $
                    365,923
                    
                    
                    $
                    327,224Accrued payroll and
      welfare
                    
                    
                    188,125
                    
                    
                    
                    376,303Value added tax, other taxes
      payable and surcharges
                    
                    
                    1,121,406
                    
                    
                    
                    686,229Customer
      deposits
                    
                    
                    1,185
                    
                    
                    
                    28,888$
                    1,676,639
                    
                    
                    $
                    1,418,644




NOTE
9 – NON-CONTROLLING INTEREST





Non-controlling
interest represents the share of 25% equity interest of Shenzhen Hyper owned by
Shenzhen OUR International Limited.




F-17





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009





NOTE
10 –AMOUNTS DUE TO RELATED PARTY





Amounts
due to related party at December 31, 2009 and 2008 represents the remaining
balance due to Clear Honest International Limited pursuant to the 2007 share
redemption as well as advances related to the acquisition of Changdu
Huiheng.





NOTE
11 – EQUITY AND RETAINED EARNINGS





(a)         Capital





The
Company has authorized 74,000,000 shares of Common stock.  As of
December 31, 2009, 23,635,290 shares were issued and 13,935,290 shares were
outstanding.





The
Company has authorized 1,000,000 shares of Preferred stock, with 300,000 shares
designated as Series A convertible preferred stock.  As of December
31, 2009, 220,467 shares were issued and outstanding with a liquidation
preference of $8,267,513.





During
2008, the Company modified the terms of its Series A Convertible Preferred
Stock.  The modifications:





-
            removed
      the redemption provisions,


-
            revised
      the dividend provisions whereby dividends are only payable on a
      liquidation event and would not be payable in the event of a voluntary
      conversion or an automatic conversion on a qualifying public
      offering,


-
            authorized
      stock dividends as long as the preferred stock conversion ratio is
      adjusted, and


-
            revised
      the automatic conversion provisions in the event of a public
      offering





The
Company has classified the preferred stock as permanent equity.





Acquisition
of Changdu Huiheng





In July
2006, Mr. Hui Xiaobing, the sole owner of Changdu Huiheng, established Allied
Moral Holdings, Ltd. (“Allied Moral”) in the British Virgin Islands as a holding
company to facilitate investments by foreign investors.  Allied Moral
then purchased 100% of the ownership interests of Changdu Huiheng.





Private
placement





In
February 2007, Allied Moral issued 2,666,666 shares of its Series A preferred
stock at stated value of $3.75 per share for gross proceeds of approximately
$10,000,000.  Net proceeds to the Company after deducting offering
expenses, resulted in a capital contribution of $9,115,357.





Reverse
merger





Prior to
the share exchange in 2007, Mill Basin had 10,150,000 shares of its common stock
outstanding.  In contemplation of the share exchange, Mill Basin
shareholders contributed 9,700,000 common shares to treasury, resulting in
450,000 shares of Mill Basin’s common stock outstanding immediately prior to the
share exchange.  Taking into account the 13,000,000 shares of Mill
Basin common stock issued for the exchange with Allied Moral’s shareholders,
Mill Basin then had 13,450,000 shares of common stock issued and outstanding, of
which 13,000,000 (96.65%) shares were held by Allied Moral’s former
shareholders, with the balance being held by Mill Basin
shareholders.  In addition, following the completion of the share
exchange, 266,666 shares of Series A Preferred Stock were issued and
outstanding, all of which were held by former holders of Allied Moral’s Series A
Convertible Preferred Stock.




F-18





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
11 – EQUITY AND RETAINED EARNINGS (.../Cont’d)





(a)          Capital
(.../Cont’d)





Preferred stock - Certificate of
correction





In
September 2007, Huiheng filed a Certificate of Correction to correct the
Certificate of Designation of the Series A Preferred Stock.  The
filing corrected the initial Conversion Price of the Preferred Stock from $3.75
to $3.57 per share and corrected the initial conversion rate from 10.0 to
10.5042 shares of common stock for each share of Series A Preferred
Stock.





Series A
Conversion





During
2008, certain shareholders of the Series A Preferred Stock converted a total of
37,533 shares into common stock, at a rate of 1 share Series A Preferred stock
to 10.5042 shares common stock resulting in the issuance of 394,254 shares of
common stock.





During
2009, certain shareholders of the Series A Preferred Stock converted a total of
8,666 shares into common stock, at a rate of 1 share Series A Preferred stock to
10.5042 shares common stock resulting in the issuance of 91,036 shares of common
stock.





(b)         Retained
Earnings





As of
December 31, 2009, the Company established and segregated in retained earnings
an aggregate amount for the Statutory Surplus Reserve and the Statutory Common
Welfare Fund of $1,310,516.





Statutory
surplus reserve





In
accordance with PRC Company Law, Changdu Huiheng is required to appropriate at
least 10% of the profit to the statutory surplus
reserve.  Appropriation to the statutory surplus reserve by Changdu
Huiheng is based on profits arrived at under PRC accounting standards for
business enterprises for each year.





The
profit arrived at must be set off against any accumulated losses sustained by
Changdu Huiheng  in prior years, before allocation is made to the
statutory surplus reserve.  Appropriation to the statutory surplus
reserve must be made before distribution of dividends to owners.  The
appropriation is required until the statutory surplus reserve reaches 50% of the
stockholders’ equity.  This statutory surplus reserve is not
distributable in the form of cash dividends.




F-19





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
12 - SEGMENT REPORTING





The Group
has two reportable segments: products and services.





The
following table presents information about the Company’s operating segments for
the year ended December 31, 2009 and 2008:





Annual
      % change2009
                          
                          
                          2008Revenues:Products
                          
                          $
                          3,456,193
                          
                          
                          $
                          5,619,870
                          
                          
                          
                          -38.50
                          %Services
                          
                          
                          5,922,386
                          
                          
                          
                          5,515,422
                          
                          
                          
                          7.38
                          %Other
                          
                          
                          1,253,747
                          
                          
                          
                          1,158,349
                          
                          
                          
                          8.24
                          %$
                          10,632,326
                          
                          
                          $
                          12,293,641
                          
                          
                          
                          -13.51
                          %Annual
      % change2009
                          
                          
                          2008Operating
      income:Products
                          
                          $
                          1,652,118
                          
                          
                          $
                          3,287,787
                          
                          
                          
                          -49.75
                          %Services
                          
                          
                          5,269,992
                          
                          
                          
                          4,895,555
                          
                          
                          
                          7.65
                          %Other
                          
                          
                          1,253,748
                          
                          
                          
                          1,158,349
                          
                          
                          
                          8.24
                          %8,175,858
                          
                          
                          
                          9,341,691
                          
                          
                          
                          -12.48
                          %Corporate
      expenses
                          
                          
                          (4,049,358
                          )
                          
                          
                          (4,696,892
                          )
                          
                          
                          -13.79
                          %Operating
      income
                          
                          $
                          4,126,500
                          
                          
                          $
                          4,644,799
                          
                          
                          
                          -11.16
                          %




Other
revenue consists principally of government financial subsidies to Changdu
Huiheng and reversal of allowance for doubtful accounts.




F-20





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
13 – INCOME TAXES





Huiheng
Medical, Inc. is a non-operating holding company.  All of the
Company’s income before income taxes and related tax expenses are from PRC
sources.  The Company’s PRC subsidiaries file income tax returns under
the Income Tax Law of the People’s Republic of China concerning Foreign
Investment Enterprises and Foreign Enterprises and local income tax
laws.





Income
tax expense for the years ended December 31, 2009 and 2008 was $671,078 and
$774,259, respectively.





As
Changdu Huiheng, Huiheng’s subsidiary, is located in the western area in the PRC
and is within the industry specified by relevant laws and regulations of the
PRC, the tax rate applicable to Changdu Huiheng is 12% (2008: 10%).





Wuhan
Kangqiao is a high-tech enterprise with operations in an economic-technological
development area in the PRC.  Therefore, the applicable tax rate is
25%.





Shenzhen
Hyper is a high-tech manufacturing company located in the Shenzhen special
economic region.  Therefore, the applicable tax rate is also
18%.  According to local tax regulation, Shenzhen Hyper is entitled to
a tax-free period for the first two years, commencing from the first
profit-making year and a 50% reduction in state income tax rate for the next six
years.





A
reconciliation of the expected income tax expense to the actual income tax
expense for the year ended December 31, 2009 and 2008 are as
follows:





2009
                                    
                                    
                                    2008Income
      before income taxes
                                    
                                    $
                                    4,124,863
                                    
                                    
                                    $
                                    4,639,731Expected
      PRC income tax expense at statutory tax rate of 25% (25%)
                                    
                                    
                                    1,031,216
                                    
                                    
                                    
                                    1,159,933Non-deductible
      expenses
                                    
                                    
                                    347,710
                                    
                                    
                                    
                                    184,497Others
                                    
                                    
                                    -
                                    
                                    
                                    
                                    187,761Tax
      rate differences
                                    
                                    
                                    (707,848
                                    )
                                    
                                    
                                    (757,932
                                    )Actual
      income tax expense
                                    
                                    $
                                    671,078
                                    
                                    
                                    $
                                    774,259





The PRC
tax system is subject to substantial uncertainties and has been subject to
recently enacted changes.  The interpretation and enforcement of which
are also uncertain.  The Company remains open to examination by the
major jurisdictions to which the Company is subject to, in this case, the PRC
tax authorities.





No
deferred tax liability has been provided as the amount involved is
immaterial.





NOTE
14 – CONCENTRATION OF CREDIT RISK





Customers
concentrations





Two
customers accounted for 90% and three customers accounted for 84% of Revenue for
the years ended December 31, 2009 and 2008, respectively.  These
customers also accounted for 83% and 89% of accounts receivable as of December
31, 2009 and 2008, respectively.  As a result, a termination in
relationship with or a reduction in orders from any of these customers could
have a material impact on the Company’s results of operations and financial
condition.





F-21





HUIHENG MEDICAL,
      INC.Notes to the Consolidated
      Financial StatementsDecember 31,
      2009




NOTE
14 – CONCENTRATION OF CREDIT RISK (.../Cont’d)





Other
credit risks





As of
December 31, 2009, all of the Company’s cash and cash equivalents were held by
major financial institutions located in the PRC, none of which were insured or
collateralized.  However, management believes those financial
institutions are of high credit quality and has assessed the loss arising from
the non-insured cash and cash equivalents from those financial institutions to
be immaterial to the consolidated financial statements.  Therefore, no
loss in respect of the cash and cash equivalent were recognized as of December
31, 2009.





NOTE
15 - FOREIGN OPERATIONS





Operations





All of
the Company’s operations are carried out and all of its assets are located in
the PRC.  Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal
environments in the PRC.  The Company’s business may be influenced by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency fluctuation and remittances and methods of
taxation, among other things.





Dividends
and reserves





Under
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior years’
losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least
10% of net income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company’s equity; (iii)
allocations of 5-10% of income after tax, as determined under PRC accounting
rules and regulations, to the Company’s “Statutory Common Welfare Fund,” which
is established for the purpose of providing employee facilities and other
collective benefits to employees in China; and (iv) allocations to any
discretionary surplus reserve, if approved by equity owners.





NOTE
16 - OPERATING LEASE COMMITMENTS





As of
December 31, 2009, the total future minimum lease payments under non-cancellable
operating leases in respect of premises are $5.02 million (RMB34.2 million),
which was based on the closing rate as of December 31, 2009.  The
amounts payable are as follows:





December 312010
                    
                    $
                    281,2362011
                    
                    
                    281,2362012
                    
                    
                    281,2362013
                    
                    
                    281,2362014
                    
                    
                    281,236Thereafter
                    
                    
                    3,609,200TOTAL
                    
                    $
                    5,015,380




F-22