UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-K
 
 x
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008o
              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.)HuihengBuilding, Gaoxin 7 Street South,Keyuannan
      Road,
                Nanshan District, ShenzhenGuangdong, 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.
 o 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   o 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. o Yes   x 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. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,”“accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one): o
  Large accelerated
      filer o
              Accelerated
      filer o
              Non-accelerated
      filer o
              Smaller
      reporting company x(Do not check if a
      smaller

                reporting
      company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 o Yes   x No
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 31, 2009  was
approximately $4,220,350 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, 2009, there were 13,914,282 shares of the registrant’s $0.001 par
value common stock issued and outstanding.
  
 
  PART
I
  Item
1.  Description of
Business.
  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 24 patents issued in the PRC,
one patent issued in the U.S., one patent issued in the European Union and
additional patent applications which cover our product line.
 
 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-sales
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 $16.2 million in 2007 to $12.3 million in 2008. Our net
income decreased from $9.0 million in 2007 to $4.01 million in
2008.
 
 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.
 
 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;
 
 ·
              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 network;
 
 ·
              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.
 
 The PRC’s
aging population, the popularization of private hospitals and clinics and
growing demand for high-quality medical equipment and efficient healthcare
services are some of the key factors contributing to the growth of the medical
equipment market in the country. 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 2006, 2007 and 2008. To the extent that cancer-related illness and
death are caused by environmental factors, the air and water pollution
associated with the PRC’s rapid industrial expansion are expected to increase
the rate of both. As a result, effective treatment of cancer is a high priority
for the PRC healthcare system.
 
 Radiotherapy
is used in approximately 50% of all cancer treatments worldwide. The United
States has 13 radiotherapy units per million people. The World Health
Organization recommends 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.
  3
  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.
 
 Corporate
Structure
  We are a
Nevada holding company and conduct all of our business through our operating
subsidiaries as described in the chart below. 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. (“Changdu Huiheng”), a Tibetan holding company that,
in turn, directly owns 100%, 75% and 50%, respectively, of our operating
subsidiaries, Wuhan Kangqiao Medical New Technology Company, Ltd. (“Wuhan
Kangqiao”), a PRC company, Shenzhen Hyper Technology Company, Ltd. (“Shenzhen
Hyper”), a PRC company and Beijing Yuankang Kbeta Nuclear Technology Co., Ltd.
(“Beijing Kbeta”), a PRC company. Wuhan Kangqiao focuses on research and
development and managing production 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 GTS products. The remaining equity interests
in Shenzhen Hyper and Beijing Kbeta are owned by unrelated, unaffiliated
parties.
  4
  
  Previous
Operations
  Prior to
the change of control transaction in September 2006, we were engaged in the
business of importing molding and door components and our corporate name was
Pinewood Imports, Ltd. In September 2006, we changed our corporate name to Mill
Basin Technologies, Ltd. In May 2007, we were subject to another change of
control transaction, in which we acquired Allied Moral.
  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.
  5
  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 customers and 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 required by
customer orders 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 Shenzhen Jiancheng
Investment Co, Ltd. (“Jiancheng”).  During the fiscal year ended
December 31, 2008, Jiancheng accounted for 53% 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 $5.87 million as of December 31, 2008. 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.
 
 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:
 
 ·
              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.
  6
  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 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.
  7
 
 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 suppliers of parts 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. For
international sales, which we are planning to commence in the near future, 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;
 
 ·
              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, 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.
  8
 
 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.
 
 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. We recently
experienced unexpected delays in obtaining regulatory approval for our HGTS and
MLC products. We believe these delays resulted from a combination of the
reorganization of the SFDA within the PRC Ministry of Health and greater
scrutiny of pending applications by the SFDA following corruption charges
against previous administrators. Based on our review of announced approvals, we
believe that no new applications for medical equipment incorporating advanced
technologies have been approved in almost two years, and we cannot be certain
how long the additional delays will be. In addition, the relevant regulatory
authorities may introduce additional requirements or procedures that could have
the effect of delaying or prolonging the regulatory clearance or 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 clearances or approvals
needed to market existing or new products, or obtain such clearances or
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.
  9
 
 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 and the Sarbanes-Oxley Act of 2002. 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 Securities Exchange
Act requires, among other things, that we file annual, quarterly and current
reports with respect to our business and financial condition. The Sarbanes-Oxley
Act 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.
 
 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. We have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. For example, in July 2008
we determined that our controls and procedures needed to be improved to ensure
that the information required to be disclosed by us in the reports that we file
and furnish under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and regulations. The significant deficiencies we
have found include: (1) lack of sufficient staff with appropriate knowledge,
experience, and training in the application of U.S. GAAP, and (2) needed
improvement in our enterprise risk management system to address enterprise risk
and internal policies over enterprise level controls.  As a result of
these deficiencies and the need to address other areas that we have determined
to need improvement, we determined that our disclosure controls and procedures
were not effective as of the end of the periods covered by this annual
report.
 
 Because
of these deficiencies in our controls and procedures, we are undertaking the
following remedial measures to: (1) recruit accountants with appropriate
knowledge and experience in U.S. GAAP and arrange for the training of our
accounting department staff in the application of U.S. GAAP, and (2) work 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.
  10
 
 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. The Sarbanes-Oxley Act of 2002, together with
rules implemented by the Securities and Exchange Commission 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 Securities and Exchange Commission
regarding internal controls over financial reporting pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002. 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 four products in our portfolio, and we added the fourth
product, our MLC, in 2007. 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.
 
 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 you that market withdrawals or product recalls will not
occur in the future, and they 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 24 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.
  11
 
 We also
rely on trade secrets, proprietary know-how and other non-patentable technology,
which we seek to protect through non-disclosure agreements with employees. We
cannot assure you that these non-disclosure agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets,
proprietary know-how and other non-patentable technology will not otherwise
become known to, or be independently developed by, our competitors.
 
 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 four 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.
 
 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 Head Gamma
Treatment System (“HGTS”) in 2004. As a result, we have a limited operating
history which may not provide a meaningful basis for you to evaluate our
business, financial performance and prospects. We may not have sufficient
experience to address the risks frequently encountered by early-stage companies,
and as a result we may not be able to:
 
 ·
              maintain
      profitability;
 
 ·
              preserve
      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;
  12
  ·
              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.
 
 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 you 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.
  13
 
 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.
 
 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. 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 will be located outside of the United States and most of our
officers and directors will 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.
  14
 
 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 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.
 
 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 your 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.
  15
 
 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.
 
 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;
  16
  ·
              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 exchange rate of the RMB to the U.S. dollar was about RMB 6.8225 to one U.S.
dollar on December 31, 2008 as compared to an average of approximately 7.60
during 2007. 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.
 
 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 our subsidiary in
the PRC 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 will be 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.
  17
 
 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 you 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.
 
 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 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
1,200,000 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.
  18
 
 Future
sales of our common stock may depress our stock price.
 
 The
13,914,282 shares of common stock outstanding, and an additional 2,336,838
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. In addition, we intend to file a registration statement under
the Securities Act covering up to 1,566,666 shares of common stock issuable
under our company stock plan. Accordingly, shares registered under that
registration statement will be available for sale in the open
market.
 
 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.
 
 There
may never be an active, liquid trading market for our common stock.
 
 There has
been very little trading in our shares of common stock to date. Our common stock
is currently traded on the Over-the-Counter Bulletin Board, and we have filed an
application for listing on The Nasdaq Capital Market.  We believe we
currently meet all of the requirements for listing except for the required
number of round lot holders and the composition of our Audit Committee, which
will require us to recruit an independent director with the appropriate
experience.  Even if we are listed on the Nasdaq Capital Market, we
cannot assure investors that an active trading market will develop for our
shares.
 
 Compliance
with the applicable provisions of the Sarbanes-Oxley Act may be a further
condition of continued listing or trading. If we are granted a listing on the
Nasdaq Capital Market, we may not always be able to meet the listing
requirements. Failure to continually meet the Nasdaq Capital Market listing
requirements could result in the delisting of our common stock, which may
adversely affect the liquidity of our shares, the price that can be obtained for
them or both.
 
 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 our 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 your investment is
dependent upon your ability to sell your shares at an acceptable price, rather
than receiving an income stream from your 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.
  19
  Item
1B.Unresolved
Staff Comments.
 
 Not
applicable.
  Item
2. Description of
Property.
 
 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, that
houses management, research and development personnel, marketing, finance and
administrative support staff. This 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.
 
 From time
to time, Huiheng may be involved in litigation relating to claims arising out of
its operations in the normal course of business. Any of these claims could
subject us to costly litigation and, while we generally believe that we have
adequate insurance to cover many different types of liabilities, our insurance
carriers may deny coverage or our policy limits may be inadequate to fully
satisfy any damage awards or settlements. If this were to happen, the payment of
any such awards could have a material adverse effect on our results of
operations and financial position. Additionally, any such claims, whether or not
successful, could damage our reputation and business. Huiheng currently is not a
party to any legal proceedings, the adverse outcome of which, in management’s
opinion, individually or in the aggregate, would have a material adverse effect
on our results of operations or financial position.
  Item
4.Submission of
Matters to a Vote of Security Holders.
 
 Not
applicable.
  20
 PART
II
 
 Item
5.Market for
Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities.
 
 Our
common stock is currently listed for trading in the Over-the-Counter Bulletin
Board maintained by NASD under the Symbol: “HHGM”. After we initially registered
shares for public trading in 2006, our common stock did not have any trading
volume or bid prices listed. Our common stock has only had bid prices entered
since the second quarter of 2007, following the share exchange we consummated
with Allied Moral Holdings, Ltd.
 
 The
following table shows the high and low bid prices for our stock since May 2007
(these amounts reflect inter-dealer prices, without retail mark-ups, mark-downs,
or commissions and do not necessarily represent actual
transactions):
  
 Fiscal
      2007
              
              High
              
              
              LowSecond
      Quarter
              
              $
              9.00
              
              
              $
              9.00Third
      Quarter
              
              $
              8.00
              
              
              $
              7.50Fourth
      Quarter
              
              $
              13.00
              
              
              $
              8.00
 
 Fiscal
      2008
              
              High
              
              
              LowFirst
      Quarter
              
              $
              10.00
              
              
              $
              7.20Second
      Quarter
              
              $
              8.50
              
              
              $
              5.50Third
      Quarter
              
              $
              13.10
              
              
              $
              6.75Fourth
      Quarter
              
              $
              5.50
              
              
              $
              2.25
 
 
  There are
no outstanding options or warrants that can be converted into our common stock.
Pursuant to the earnout provisions in the Allied Moral Securities Exchange
Agreement, if we achieve certain profit targets for 2009 through 2011, we may
distribute some or all of 1,200,000 shares of newly-issued common stock to those
persons who were the holders of Allied Moral’s common stock at the time of the
share exchange.
 
 We have
approximately 40 record holders of our common stock. This number excludes any
estimate by us of the number of beneficial owners of shares held in street name,
the accuracy of which cannot be guaranteed.
 
 Securities
authorized for issuance under equity compensation plans
 
 At
present, we have 1,566,666 shares authorized for issuance under our equity
compensation plan. However, no options for such shares have been granted as
yet.
 
 Dividends
 
 In 2006,
our subsidiary (Allied Moral) paid a dividend of approximately $9.16 million to
the sole stockholder of Allied Moral’s common stock at the time, Mr. Hui
Xiaobing, our Chief Executive Officer. This dividend was paid upon the
completion of a restructuring transaction in which Mr. Hui became the sole
stockholder of Allied Moral’s common stock. The dividend was intended to
distribute the retained earnings that had accumulated before the restructuring.
Huiheng has no plans to distribute additional dividends for at least the
immediate future, as it plans to retain any profit to support its growth
plans.
 
 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.
  21
  The State
Administration for Foreign Exchange (“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.
  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.
  Item
6.Selected
Financial Data
 
 Not
applicable.
  22
 
 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
four products; the Super Gamma System (“SGS”), the Body Gamma Treatment System
(“BGTS”), 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 24 patents issued in the PRC,
one patent in the U.S., one patent in the European Union, and additional patent
applications pending. Our SGS and BGTS 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.
 
 Currently,
the focus of our research and development efforts is on four main projects. The
first project is the development of next-generation SGS unit that will
incorporate advanced radiotherapy technologies through the addition of an Image
Guided System (“IGS”), which improves the targeting of the radiation beam
through use of computer-generated images, and a Respiration Tracking System
(“RTS”), which automatically adjusts the targeting of the radiation to
compensate for the patient’s breathing. We plan to install the first
next-generation SGS unit in the first half of 2009. The other major projects
include the development of an integrated linear accelerator (“LINAC”) and
multileaf collimator unit, another type of radiotherapy device that is used in
less demanding applications, an advanced magnetic resonance imaging (“MRI”)
device and an industrial LINAC unit used for, among other things, preserving
food through irradiation. These projects are in various stages of
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 have
also begun pursuing relationships with foreign medical equipment technology
leaders to provide high quality, low cost manufacturing services and China-based
distribution for their products.
 
 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.
  23
 
 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.
 
 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.
  24
 
 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 $5.9 million as of December 31, 2008.  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.
 
 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.
  25
 
 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, 2008. 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 10%, 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 15%, 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, 2008, the VAT refunds that we applied for in 2007 were booked
as revenue.
 
 Wuhan
Kangqiao
 
 Wuhan
Kangqiao 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 15%, compared to a statutory rate of 25% for most
companies in China. Furthermore, this classification, according to local tax
regulations, entitles Wuhan Kangqiao to a tax-free period for two years,
commencing the first year the company is established. Wuhan Kangqiao’s EIT rate
for the years ending December 31, 2005, 2006, 2007 and 2008 were 15% for all
four years.
 
 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.
  26
 
 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. The
company provided an allowance of $743,584 for doubtful accounts as of December
31, 2008 and an allowance of $5,059 as of December 31, 2007. The company also
provided an allowance of $1,465,738 for other receivables and the amounts due
from related parties. The significant increase in this allowance is due to the
write off of certain accounts receivables that have been past due for over two
years. Although management believes that these receivables can be collected in
the future, the receivables were written off to comply with US
GAAP.  Management will continue to work hard to collect these
amounts.
 
 Outstanding
account balances are reviewed individually for collectibility. 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.
  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.
  27
 
 The
estimated useful lives of the assets are as follows:
 
 YearsBuilding
      improvements
              
              
              3-5Buildings
              
              
              20Production
      equipment
              
              
              3-5Furniture,
      fixtures and office equipment
              
              
              3-5Motor
      vehicles
              
              
              5-10
 
 (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 as follows:
 
 YearsPatented
      technology
              
              
              20Software
              
              
              5
 
 (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.
 
 At
December 31, 2008 and 2007, the Company determined that there was no impairment
of value.
 
 (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.
  28
 
 (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.
 
 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.
 
 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.
 
 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.
 
 (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 $472,919 and $263,314 for the years ended December 31, 2008 and 2007,
respectively.
 
 (l)
              Income
      Taxes
 
 The
company accounts for income taxes under FASB Statement No. 109, Accounting for
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.
  29
 
 (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 doesn’t 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)
              Use
      of Estimates
 
 The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the year. Actual results could
differ from those estimates.
 
 (p)
              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 2008 and the closing rate as of December 31,
2008 were RMB 6.9351 and RMB 6.8225 to one USD, respectively. The average
monthly exchange rates for 2007 and the closing rate of December 31, 2007 were
RMB 7.5973 and RMB 7.2946 to one USD, respectively.
 
 (q)
              Earning
      Per Share
 
 Basic
earnings per share are computed on the basis of the weighted-average number of
shares of the company common stock outstanding during the year. Diluted earnings
per share is computed on the basis of the weighted-average number of shares of
the company 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 Preferred Stock.
  30
 
 The
following table sets forth the computation of basic and diluted net income per
share:
  For
      the year
              
              2008
              
              
              2007NET
      INCOME
              
              $
              4,011,626
              
              
              $
              9,015,769OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
              
              $
              1,069,357
              
              
              $
              702,914COMPREHENSIVE
      INCOME
              
              $
              5,080,983
              
              
              $
              9,718,683EARNINGS
      PER SHARE-
      Basic
              
              $
              0.29
              
              
              $
              0.68-
      Diluted
              
              $
              0.25
              
              
              $
              0.56Weighted
      Common Shares Outstanding-
      Basic
              
              
              13,754,118
              
              
              
              13,283,562-
      Diluted
              
              
              16,251,113
              
              
              
              16,084,675
 
 The
weighted-average number of common shares outstanding during the period from
January 1, 2006 through the May 2007 share exchange is based on the number of
shares of Allied Moral multiplied by the exchange ratio in the merger agreement.
The weighted-average number of common shares outstanding from the acquisition
date through December 31, 2008 is based upon the actual number of shares
outstanding during the year.
 
 (r)
              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.
 
 (s)
              Segment
      Reporting
 
 SFAS No.
131, Disclosure About Segments of an Enterprise and Related Information,
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.
 
 (t)
              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 and will be
charged to stockholders’ equity upon receipt of the capital raised. Should the
proposed offering prove to be unsuccessful, the deferred costs will be charged
to operations.
 
 (u)
              Comprehensive
      Income
 
 The
company has adopted SFAS No. 130 Reporting 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.
  31
 
 (v)
              Financial
      Instruments with Characteristics of both Liabilities and
      Equity
 
 The
company accounts for its Series A Preferred Stock in accordance with SFAS
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150) and SFAS Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended
(SFAS 133). We have determined that our Series A Preferred Stock is not
mandatorily redeemable. Accordingly, the company accounts for the Preferred
stock as permanent equity.
 
 (w)
              Impact
      of New Accounting Standards
 
 In
September 2006 the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP and requires enhanced disclosures about fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008 the FASB issued
FASB staff position, or FSP, No. 157-2, Effective Date of SFAS No. 157, which
delays the effective date of SFAS No. 157 for non-financial assets and
liabilities, other than those that are recognized or disclosed at fair value on
a recurring basis, to fiscal years beginning after November 15, 2008. Our
adoption of SFAS No. 157 related to financial assets and liabilities for the
year ended December 31, 2008 had no impact on our consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No.
141(R) establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This statement also requires
acquisition-related costs to be expensed as incurred. SFAS No. 141(R) is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations we engage in will be
recorded and disclosed following existing GAAP until January 1, 2009. We expect
SFAS No. 141(R) will have an impact on our consolidated financial statements,
but the nature and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate after the effective
date of January 1, 2009.
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 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, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which 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 is not expected to have a material impact on our results of operations
or financial position.
 
 In
December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures
about Postretirement Benefit Plan Assets. 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.
 
 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.
  32
 
 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, 400,000 shares of common stock each year over
three years (up to an aggregate of 1,200,000 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
              
              
              18,500,0002010
              
              
              26,200,0002011
              
              
              34,060,000
 
  OUR SELECTED RESULTS OF
OPERATIONS
  Operating
revenues
  For the
year ended December 31, 2008, revenues were $12.29 million, a decrease of $3.91
million, or 24%, compared to $16.20 million for the prior year. This decrease
was due to less revenue from product sales and tax refunds and subsidies in 2008
compared with 2007. The next two paragraphs discuss these changes in greater
detail.
 
 Total
revenues from product sales were $5.62 million for 2008, a decrease of $3.91
million or 41%, compared to $9.53 million for the prior year. In 2008, we sold 6
units and in 2007 we sold a total of 11units. This decrease in unit sales and
revenues in 2008 compared with 2007 can be attributed to a number of factors
including the Sichuan earthquake and the Olympic games which we believe delayed
government approvals for our products which our customers need to install and
operate the units.
 
 Total
revenues from services were $5.52 million for 2008, an increase of $0.48 million
or 9.5%, compared to $5.03 million for the prior year. For the years ended
December 31, 2007 and 2008, 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
$12.29 million of revenues, approximately $1.16 million related to tax refunds
and subsidies, a decrease of approximately $0.48 million or 29% compared with
the $1.64 million in tax refunds and subsidies for the prior
year.  The decrease in tax refunds and subsidies is due to delays in
the processing of some of our 2007 applications by the government.  We
believe that we will receive 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, 2008 amounted to $9.97 million, representing an increase of
304%, compared to $2.47 million as of December 31, 2006. 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 2009
and 2010.
  Cost
of revenues
  The total
cost of revenues amounted to $2.79 million for the year ended December 31,
2007, a decrease of $1.23 million or 31%, compared to $4.03 million for the
prior year. The decrease was due to a decrease in the number of units sold in
2008 compared with 2007.
  33
  Gross
margin
  As a
percentage of total revenues, the overall gross margin increased to 77.27% for
the year ended December 31, 2008 from 75.14% 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 2008 compared to 2007.
 
 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 $227,000 for the year ended December 31,
2008, an increase of 179%, or roughly $144,525 compared to approximately $81,000
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 2008.
  We expect
that our selling expenses will remain at or increase above the 2008 levels as we
increase our efforts to expand sales, particularly internationally, where our
brand is not as well known and the 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 $4.15 million for
the year ended December 31, 2008, an increase of roughly $2.62 million compared
to approximately $1.53 million for the prior year, representing an increase of
171%. The increase in general and administrative expenses was due primarily to
the significant allowance for doubtful accounts of $2.21 million as of the end
of 2008. As of December 31, 2007, this amount was approximately
$5,000.  Although management believes that these receivables can be
collected in the future, they were written off to comply with US GAAP as they
have been outstanding for more than 2 years. Management will continue to work
hard to collect these amounts.
 
 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 $472,920 for
the year ended December 31, 2008, compared to $263,310 for the prior year. This
was due to new product development including our MLC, linear accelerator and
next-generation SGS device.
  Income
tax provision
  Our
effective tax rate was 16.69% for the year ended December 31, 2008, compared to
9.12% for the year ended December 31, 2007. This increase in effective tax rate
resulted from a combination of factors. The tax rate payable at each level of
our operations is different. In 2007, the tax rate payable at Changdu Huiheng
was 15%, at Wuhan Kangqiao was 15% and at Shenzhen Hyper was 0%. In 2008
compared with 2007, a smaller percentage of the company’s income was earned at
Shenzhen Hyper, and therefore less income was subject to a 0% tax rate. Although
the effective tax rate increased, income tax paid decreased to $774,000 in 2008
from $938,078 in 2007 as a result of lower revenues in 2008 compared with
2007.
 
 Net
income
  For the
year ended December 31, 2008, the company’s net income amounted to $4.01
million, a decrease of $5.0 million or 55% compared to $9.02 million for the
prior year. This decrease was attributable primarily to the decrease in product
sales and the receivables that were written off that are described in “General
and Administrative” paragraph above.
 
 Comprehensive
Income
 
 For the
year ended December 31, 2008, the company’s comprehensive income amounted to
$5.08 million, a decrease of $4.64 million or 48% compared to $9.72 million for
the prior year. The decrease increase was due to a decrease in net income and
foreign currency translation adjustments over the period.
  34
 
 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 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, 2008, the company had total assets of $23.04 million. Our cash was
$1.02 million, accounts receivable were $10.98 million, prepayment and other
receivables were $4.01 million and inventories were $1.35 million.  Working capital was
approximately $15.06 million. The quick ratio was approximately
6.97:1.
 
 Comparison
of years ended December 31, 2007 and 2008
 
 Net cash
from operating activities totaled a negative of  $258,040 for the year
ended December 31, 2008, a decrease by $4,361,046 compared to $4,103,006 for the
prior year. This decrease resulted primarily from the following changes in the
operating assets and liabilities:
 
 
              $2.94
      million increase in accounts receivables;
              $282,000
      increase in inventories;
              $1.2
      million increase in prepayments and other
  receivables;
  
              $118,000
      increase in accounts payable;
              $186,000
      decrease in tax payable; and
              $691,000
      decrease in accrued expenses and other current
  liabilities.
 
 Net cash
provided by/(used in) investing activities was $30,000 and ($10.24 million) for
the years ended December 31, 2008 and 2007, respectively.
 
 Cash
flows (used in)/provided by financing activities amounted to ($460,000) for the
year ended December 31, 2008 and $5.62 million for the year ended December 31,
2007.  For the year ended December 31, 2007, cash flows generated by
financing activities consisted of $9.12 million from the sale of Series A
Preferred Stock in February 2007 and a $3.49 million payment for the redemption
of common shares.
  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.
  35
  Item
9A.Controls and
Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-15(e) and Rule 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act).  Based on this
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were not effective as of
the end of the period covered by this Annual Report.
 
 We
discovered information that indicated deficiencies in the controls and
procedures we use to ensure that information we are required to disclose in our
reports to the SEC is summarized and reported within the required
periods.   The significant deficiencies we have found include:
(1) lack of sufficient staff with appropriate knowledge, experience, and
training in the application of U.S. GAAP, and (2) needed improvement in our
enterprise risk management system to address enterprise risk and internal
policies over enterprise level controls.  As a result of these
deficiencies and the need to address other areas that we have determined to need
improvement, we determined that our disclosure controls and procedures were not
effective as of the end of the period covered by this Annual
Report.
 
 Remediation
Activities
 
 We have
disclosed the significant deficiencies identified above to the members of our
Audit Committee and to our independent accountants.  We have begun
recruiting additional accounting personnel with knowledge or experience in US
GAAP and have arranged training for our accounting staff in the application of
US GAAP.  Additionally, we have engaged a consultant to help us
analyze, re-design and implement improved policies and procedures affecting our
business (including our enterprise level controls) and our related internal
control over financial reporting, as part of our comprehensive review we are
undertaking to prepare for a future independent auditor attestation of
management’s evaluation, which will be required by the rules of the Securities
and Exchange Commission.
 
 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, 2008, that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f).  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
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  In conducting this assessment, we recognized
that the transition in 2007 of our operating subsidiaries to become the
principal operating entities of a public company and the continued development
of our business presented additional challenges and requirements on our internal
control systems and procedures that had not been present for earlier
periods.  For example, while we had developed strong accounting
systems and procedures to prepare the reports required of a privately held
company in China, the transactions in 2007 meant that we would have to convert
our financial reporting to prepare financial statements under generally accepted
accounting principles in the U.S. (“US GAAP”).  Similarly, although we
have historically relied on direct and extensive oversight of our systems and
operations by our experienced management team, we recognized that we would need
to implement additional and improved controls and procedures as our company grew
and developed.  Based on the evaluation of our internal control over
financial reporting, we determined that we had two significant deficiencies
which could adversely affect our ability to initiate, authorize, record, process
or report financial data in accordance with US GAAP.  While the areas
we identified are sources of potential risk, we do not believe that these
potential risks have affected our financial statements or that there are any
errors in our previously reported financial statements that would require
restatement.  The significant deficiencies we found
were:  (1) lack of sufficient accounting staff with appropriate
knowledge, experience and training in the application of US GAAP; and (2) needed
improvements in both our enterprise risk management system to address enterprise
risks and related policies over enterprise level controls.  Based on
our evaluation under the framework in Internal Control – Integrated
Frameworkand because of the significant deficiencies we identified, our
management concluded that our internal control over financial reporting was not
effective as of December 31, 2008.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report 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.
  Item
9B.Other
Information.
 
 None.
  36
  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, 2008)
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
              
              55
              
              Chairman
      and CEOHuang
      Jian
              
              52
              
              Vice
      President and DirectorHui
      Yang
              
              40
              
              Corporate
      SecretaryRichard
      Shen
              
              43
              
              Chief
      Financial OfficerCui
      Zhi
              
              39
              
              Chief
      Technology OfficerTang
      Shucheng
              
              46
              
              Director
      of MarketingLi
      Daxi
              
              61
              
              Director
 
 Hui
Xiaobing, Chairman of the Board and Chief Executive Officer
 
 Mr. Hui
currently serves as Chairman of the Board and Chief Executive Officer of
Huiheng, 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 Office 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, Corporate Secretary
 
 Mr. Hui
Yang was appointed as the Huiheng’s Corporate Secretary of Huiheng in August
2008.  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
 
 Mr. Shen
serves as Chief Financial Officer of Huiheng. 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.
  37
 
 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 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 Securities and Exchange Commission 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.
  Audit Committee
  Our Board
of Directors has established an Audit Committee which currently consists of Li
Daxi.  All members of the Audit Committee satisfy the independence
requirements established by the Nasdaq Marketplace Rules.  Li Daxi is
an “audit committee financial expert,” as defined in the rules of the Securities
and Exchange Commission.  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,
2008.
  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.
  38
 
 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, 2007 and December 31, 2008.
  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,
              2008
              
              $
              56,284
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              56,284Chief Executive
      Officer
              2007
              
              $
              19,200
              
              
              $
              2,667
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              21,867Huang
      Jian,
              2008
              
              $
              35,178
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              35,178Vice
      President
              2007
              
              $
              16,000
              
              
              $
              1,333
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              17,333Richard Shen
      (1)
              2008
              
              $
              52,766
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              52,766Chief Financial
      Officer
              2007
              
              $
              6,000
              
              
              $
              0
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              6,000Cui
      Zhi,
              2008
              
              $
              24,624
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              24,624Chief Technology
      Officer
              2007
              
              $
              13,440
              
              
              $
              1,333
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              14,773Tang
      Sucheng,
              2008
              
              $
              21,107
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              21,107Director of
      Marketing
              2007
              
              $
              7,200
              
              
              $
              1,200
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              8,400Li
      Bo (2),
              2008
              
              $
              12,312
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              12,312CorporateSecretary
              2007
              
              $
              8,000
              
              
              $
              1,333
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              9,333Hui
      Yang (3),
              2008
              
              $
              21,107
              
              
              $
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              $
              21,107CorporateSecretary
              2007
              
              $
              ---
              
              
              $
              ---
              
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              ---
 
 (1) Mr.
Shen joined the company in 2007.
  (2) Mr.
Li Bo resigned from his position with  the company for personal
reasons in August 2008.
  (3) Mr.
Hui Yang became the Corporate Secretary in August 2008, replacing Mr. Li
Bo.
  Options/SAR Grants
Table
  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.
  Aggregated
Option/SAR exercised and Fiscal year-end Option/SAR value table
  Neither
our executive officers nor the other individuals listed in the tables above,
exercised options or SARs during the last fiscal year.
  39
  Stock
Option Plan
  The
Company has adopted a stock option plan that reserves 1,566,666 shares for
issuance upon the exercise of options. No options have been issued under the
plan.
  Long-term
incentive plans
  No Long
Term Incentive awards were granted in the last fiscal year.
  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.
  Compensation
of Directors
  While the
Company has agreed  to compensate our outside directors for their
service through a combination of cash and stock options, 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
2008.  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).
  Employment
contracts and termination of employment and change-in-control
arrangements
  None of
our officers or employees is under an employment contract or has contractual
rights triggered by a change in control of the Company.
  Compensation
Committee Interlocks and Insider Participation
  The
Compensation Committee of our Board of Directors is currently comprised of Mr.
Li Daxi.  The
Compensation Committee is comprised entirely of independent directors. None of
the members of our Compensation Committee is or has ever been one of our
officers or employees.  No interlocking relationship exists between
the Huiheng Board of Directors or Compensation Committee and the board of
directors orcompensationcommittee of any other entity.
  40
 
 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 Securities Exchange Act of 1934, as amended, 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.
  As of
March 31, 2009, we had a total of 13,914,282 shares of common stock outstanding
and 222,467 shares of Series A Preferred Stock issued and outstanding. As a
class the Series A Preferred Stock is convertible into 2,336,838 shares of our
common stock.
  Common
Stock
  The
following table sets forth, as of March 31, 2009: (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.
  Name of Beneficial
      Owner
              
              Shares Owned
                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
              
              
              0
              
              
              
              *All Officers & Directors as a Group
      (7 people)
              
              
              11,750,000
              
              
              
              84.44
              %
 
 *
Individual owns less than 1% of our securities.
  (1)
Includes shares held by Clear Honest International Limited, Boom High Management
Limited and Charm Sea Management Limited, all of which are companies controlled
by Mr. Hui Xiaobing, Chief Executive Officer of Huiheng.
  41
  Preferred
Stock
  The
following table sets forth, as of March 31, 2009: 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:
  Name and
      Address
              
              Shares
                Beneficially
                Owned
              
              
              Percentage
                Ownership
              
              
              Shares of
                Common
                Stock
                Issuable on
                ConversionChardanChinaInvestments,
      LLC
                625 Broadway,Ste.1111
                San Diego,CA92101
              
              
              52,667
              
              
              
              23.7
              %
              
              
              553,225Platinum Partners Value Arbitrage
      Fund, L.P.(conversion in 2008, needs update)
                152 West 57th St.
                New York,NY10019
              
              
              48,988
              
              
              
              22.0
              %
              
              
              514,580Kenneth Greif
                240 Maple
      Street
                Englewood,NJ07631
              
              
              20,000
              
              
              
              8.9
              %
              
              
              210,084Atlas Master Fund,
      Ltd
                135 East 57th St.
                New York,NY10022
              
              
              15,087
              
              
              
              6.8
              %
              
              
              158,477
 
 Item
13.Certain
Relationships and Related Transactions, and Director
Independence.
 
 None.
  Indebtedness
of Management
  There
have been no borrowings by management from the company.
  Item
14.Principal
Accounting Fees and Services.
 
 We paid
the aggregate fee of $115,000 to UHY VOCATION HK CPA LIMITED, our principal
external auditors, for the professional services rendered by them for the
quarterly reviews and audit of our annual financial statements for the fiscal
year ended on December 31, 2008.
  42
 
  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, 2008
              F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
              F-3Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
              F-4Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2008
      and 2007
              F-5Notes
      to Consolidated Financial Statements
              F-6
      - F-34
 
 (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 Securities and Exchange
      Commission 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 Securities and Exchange Commission on
      April 10, 2008)4.1
              Certificate of Designation for
      Series A Preferred Stock (incorporated by reference to the exhibit to the
      registrant's current report on Form 8-K filed with the Securities and
      Exchange Commission on January 16, 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 Securities and Exchange
      Commissionon May 15, 2007)10.2
              Huiheng
      2007 Share Plan (incorporated by reference to the exhibit to the Amendment
      No. 2 to Form SB-2 filed with the Securities and Exchange
      Commissionon February 1, 2008)10.3
              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 Securities and Exchange
      Commissionon February 28, 2007)10.4
              Office
      Lease (incorporated by reference to the exhibit to the Amendment No. 1 to
      Form SB-2 filed with the
      Securities and Exchange Commissionon December 5,
    2007)10.5
              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 Securities and Exchange
      Commissionon July 7, 2008)10.6
              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 Securities and Exchange
      Commissionon July 7, 2008)
  43
  10.7
              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
      Securities and Exchange Commissionon July 7,
  2008)10.8
              Creditor’s
      Rights and Liability Confirmation Agreement (incorporated by reference to
      the exhibit to the Amendment No. 2 on Form S-1 to Form SB-2 filed with the Securities and Exchange
      Commissionon July 7, 2008)10.9
              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 Securities and Exchange
      Commissionon July 7, 2008)10.10
              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 Securities
      and Exchange Commissionon July 7, 2008)10.11
              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 Securities and Exchange
      Commissionon July 7, 2008)10.12
              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 Securities
      and Exchange Commissionon July 7, 2008)31.1
              Certification of Chief Executive
      Officer pursuant to Section 302 of the Sarbanes Oxley Act of
      2002.31.2
              Certification of ChiefFinancialOfficer pursuant to
      Section 302 of the Sarbanes Oxley Act of
  2002.32
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
  44
  SIGNA TURES
  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 in the
Shenzen, China on April 21, 2009.
  Huiheng
      Medical, Inc.,
                  a
      Nevada corporationBy:
                /s/ Hui
      XiaobingHui
      XiaobingPresident
      and Chief Executive Officer
  Date:
April 21, 2009
  POWER
OF ATTORNEY
  Know all
persons by these presents, that each person whose signature appears below
constitutes and appoints Hui
Xiaobing and Richard
Shen, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of them or their
or his substitute or substituted, may lawfully do or cause to be done by virtue
thereof.
   Pursuant
to the requirements of the Securities Act of 1933, as amended, this Annual
Report has been signed by the following persons in the capacities and on the
dates indicated.
  
 Signature(s)
              
              Title(s)
              
              Date/s/Hui
Xiaobing
              
              Chairman and
      CEOHui
Xiaobing
              
              (Principal Executive
      Officer)
              
              April
      21, 2009/s/ Richard
      Shen
              
              Chief Financial
      OfficerRichard
Shen
              
              (Principal Financial and
      Accounting Officer)
              
              April
      21, 2009/s/ Jian
    HuangJian Huang
              
              Director
              
              April
      21, 2009/s/ Daxi LiDaxi Li
              
              Director
              
              April
      21, 2009
  45
  HUIHENG
MEDICAL, INC.
 
 
 DECEMBER 31, 2008
 
 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 Year Ended December 31, 2008 and 2007
                F-3Consolidated Statements of
      Stockholders’ Equity for the Year Ended December 31, 2008 and
      2007
                F-4Consolidated Statements of Cash
      Flows for the Year Ended December 31, 2008 and 2007
                F-5Notes to the Consolidated
      Financial Statements
                F-6
      to F-34
 
  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.
(the “Company”) and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, 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 includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Huiheng Medical Inc. and
subsidiaries as of December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
 
 
 /s/ UHY
VOCATION HK CPA LIMITED
 
 Hong
Kong, the People’s Republic of China
 April 15,
2009
  F-1
  HUIHENG
MEDICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  ASSETS
                  
                  
                  As
      at year ended December 31,Note
                  
                  
                  2008
                  
                  
                  2007CURRENT
      ASSETS:Cash
                  
                  
                  
                  
                  $
                  1,019,176
                  
                  
                  $
                  866,585Accounts
      receivable, net of allowance for doubtful accounts of $743,584 and
      $5,059
                  
                  
                  
                  
                  
                  10,978,419
                  
                  
                  
                  8,040,015Prepayments
      and other receivables, net of allowance for doubtful accounts of $732,869
      and $0
                  
                  4
                  
                  
                  
                  4,008,810
                  
                  
                  
                  3,478,518Inventories
                  
                  3
                  
                  
                  
                  1,353,352
                  
                  
                  
                  1,071,613Amount
      due from a related party, net of allowance for doubtful accounts of
      $732,869 and $0
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  745,483Deferred
      income tax assets
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  20,630Total
      Current Assets
                  
                  
                  
                  
                  
                  17,359,757
                  
                  
                  
                  14,222,844INVESTMENT
      IN AFFILIATE
                  
                  
                  
                  
                  
                  45,194
                  
                  
                  
                  48,326PROPERTY,
      PLANT AND EQUIPMENT
                  
                  5
                  
                  
                  
                  2,643,022
                  
                  
                  
                  3,701,692INTANGIBLE
      ASSETS
                  
                  6
                  
                  
                  
                  860,175
                  
                  
                  
                  881,738OTHER
      RECEIVABLES, net of current portion
                  
                  
                  
                  
                  
                  1,666,684
                  
                  
                  
                  -DEFERRED
      OFFERING COSTS
                  
                  
                  
                  
                  
                  460,209
                  
                  
                  
                  -DEFERRED
      INCOME TAX ASSETS, net of current portion
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  5,753Total
      Assets
                  
                  
                  
                  
                  $
                  23,035,041
                  
                  
                  $
                  18,860,353LIABILITIES,
      MINORITY INTEREST AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                  
                  
                  
                  
                  $
                  832,906
                  
                  
                  $
                  714,837Amount
      due to related parties
                  
                  9
                  
                  
                  
                  24,577
                  
                  
                  
                  117,162Income
      tax payable
                  
                  
                  
                  
                  
                  21,431
                  
                  
                  
                  207,660Accrued
      liabilities and other payables
                  
                  7
                  
                  
                  
                  1,418,644
                  
                  
                  
                  2,109,287Total
      Current Liabilities
                  
                  
                  
                  
                  
                  2,297,558
                  
                  
                  
                  3,148,946MINORITY
      INTEREST
                  
                  8
                  
                  
                  
                  1,298,604
                  
                  
                  
                  1,353,511Total
      Liabilities and Minority Interest
                  
                  
                  
                  
                  
                  3,596,162
                  
                  
                  
                  4,502,457STOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized;
                  
                  10Designated
      300,000 shares of Series A convertible preferred stock;
                  
                  
                  
                  
                  
                  229
                  
                  
                  
                  267229,133
      and 266,666 shares issued and outstanding withliquidation
      preference of $8,592,487.50 at December 31, 2008Common
      stock, $0.001 par value; 74,000,000 shares authorized;23,544,254
      shares issued, 13,844,254 and  13,450,000 shares
      outstanding
                  
                  
                  
                  
                  
                  13,844
                  
                  
                  
                  13,450Additional
      paid-in capital
                  
                  
                  
                  
                  
                  7,498,086
                  
                  
                  
                  7,498,086Retained
      earnings
                  
                  
                  
                  
                  
                  10,159,147
                  
                  
                  
                  6,147,877Accumulated
      other comprehensive incomeForeign
      currency translation gain
                  
                  
                  
                  
                  
                  1,767,573
                  
                  
                  
                  698,216Total
      Stockholders' Equity
                  
                  
                  
                  
                  
                  19,438,879
                  
                  
                  
                  14,357,896Total
      Liabilities, Minority Interest and Stockholders' Equity
                  
                  
                  
                  
                  $
                  23,035,041
                  
                  
                  $
                  18,860,353
 See
accompanying notes to the consolidated financial statements.
  F-2
  HUIHENG
MEDICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME
  For
      the year ended December 31,2008
                
                
                2007REVENUES
                
                $
                12,293,641
                
                
                $
                16,203,566COST
      OF REVENUES
                
                
                2,794,859
                
                
                
                4,028,029GROSS
      PROFIT
                
                
                9,498,782
                
                
                
                12,175,537OPERATING
      EXPENSES:Sales
      and marketing expenses
                
                
                226,525
                
                
                
                81,199General
      and administrative expenses
                
                
                4,154,539
                
                
                
                1,530,074Research
      and development costs
                
                
                472,919
                
                
                
                263,314Total
      Operating Expenses
                
                
                4,853,983
                
                
                
                1,874,587OPERATING
      INCOME
                
                
                4,644,799
                
                
                
                10,300,950OTHER
      EXPENSE:Interest
      income
                
                
                1,303
                
                
                
                5,269Equity
      in loss of affiliate
                
                
                (6,371
                )
                
                
                (19,023
                )Total
      Other Expense
                
                
                (5,068
                )
                
                
                (13,754
                )NET
      INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
                
                
                4,639,731
                
                
                
                10,287,196INCOME
      TAXES
                
                
                774,259
                
                
                
                938,078NET
      INCOME BEFORE MINORITY INTEREST
                
                
                3,865,472
                
                
                
                9,349,118MINORITY
      INTEREST
                
                
                146,154
                
                
                
                (333,349
                )NET
      INCOME
                
                
                4,011,626
                
                
                
                9,015,769OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
                
                
                1,069,357
                
                
                
                702,914COMPREHENSIVE
      INCOME
                
                $
                5,080,983
                
                
                $
                9,718,683EARNINGS
      PER SHARE-
      Basic
                
                $
                0.29
                
                
                $
                0.68-
      Diluted
                
                $
                0.25
                
                
                $
                0.56Weighted
      Common Shares Outstanding-
      Basic
                
                
                13,754,118
                
                
                
                13,283,562
                *-
      Diluted
                
                
                16,251,113
                
                
                
                16,084,675
                **
      As restated to reflect the reverse merger acquisition.
 See
accompanying notes to the consolidated financial statements.
  F-3
  HUIHENG
MEDICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
  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
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Earnings
                
                
                Income
                
                
                EquityBalance,
      December 31, 2006
                
                
                -
                
                
                $
                -
                
                
                
                13,000,000
                
                
                $
                13,000
                
                
                $
                (1,616,554
                )
                
                $
                712,279
                
                
                $
                (4,698
                )
                
                $
                (895,973
                )Recapitalization
      - reverse merger
                
                
                266,666
                
                
                
                267
                
                
                
                450,000
                
                
                
                450
                
                
                
                (717
                )
                
                
                -
                
                
                
                -
                
                
                
                -Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,015,769
                
                
                
                -
                
                
                
                9,015,769Foreign
      currency translation gain
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                702,914
                
                
                
                702,914Total
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,718,683Contribution
      to capital, net
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,115,357
                
                
                
                -
                
                
                
                -
                
                
                
                9,115,357Payment
      for redemption ofcommon
      shares
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,580,171
                )
                
                
                -
                
                
                
                (3,580,171
                )Balance,
      December 31, 2007
                
                
                266,666
                
                
                
                267
                
                
                
                13,450,000
                
                
                
                13,450
                
                
                
                7,498,086
                
                
                
                6,147,877
                
                
                
                698,216
                
                
                
                14,357,896Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,011,626
                
                
                
                -
                
                
                
                4,011,626Foreign
      currency translation gain
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,069,357
                
                
                
                1,069,357Total
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,080,983Conversion
      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
                
                
                $
                19,438,879
 See
accompanying notes to the consolidated financial statements.
  F-4
  HUIHENG
MEDICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 2008
                
                
                2007Cash
      flows from operating activities:Net
      income
                
                $
                4,011,626
                
                
                $
                9,015,769Adjustments
      to reconcile net income to netcash
      (used in) / provided by operating activities:Depreciation
      of property, plant and equipment
                
                
                253,891
                
                
                
                79,399Amortization
      of intangible assets
                
                
                81,236
                
                
                
                91,758Minority
      interest
                
                
                (146,154
                )
                
                
                333,349Equity
      in loss of affiliate
                
                
                6,371
                
                
                
                19,023Deferred
      taxes
                
                
                26,383
                
                
                
                (415
                )Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (2,938,404
                )
                
                
                (5,390,715
                )Prepayments
      and other receivables
                
                
                (1,201,146
                )
                
                
                (692,000
                )Inventories
                
                
                (281,739
                )
                
                
                553,062Accounts
      payable
                
                
                118,069
                
                
                
                76,853Income
      tax payable
                
                
                (186,229
                )
                
                
                (620,168
                )Amounts
      due from related parties
                
                
                688,699
                
                
                
                116,068Accrued
      liabilities and other payables
                
                
                (690,643
                )
                
                
                521,023Net
      cash (used in) / provided by operating activities
                
                
                (258,040
                )
                
                
                4,103,006Cash
      flows from investing activities:Capital
      expenditures on addition of property, plant and equipment
                
                
                (129,528
                )
                
                
                (3,371,037
                )Repayment
      of advances to third parties
                
                
                195,236
                
                
                
                -Repayment
      of advances to related parties
                
                
                64,199
                
                
                
                -Repayment
      of advance from related parties
                
                
                (100,000
                )
                
                
                -Advances
      to related parties
                
                
                -
                
                
                
                (12,635
                )Payment
      for the acquisition of a subsidiary
                
                
                -
                
                
                
                (6,854,386
                )Net
      cash from / (used in) investing activities
                
                
                29,907
                
                
                
                (10,238,058
                )Cash
      flows from financing activities:Contribution
      to capital
                
                
                -
                
                
                
                9,115,357Deferred
      offering costs
                
                
                (460,209
                )
                
                
                -Payment
      for redemption of common shares
                
                
                -
                
                
                
                (3,494,836
                )Net
      cash (used in) / from financing activities
                
                
                (460,209
                )
                
                
                5,620,521Net
      decrease in cash
                
                
                (688,342
                )
                
                
                (514,531
                )Effect
      on change of exchange rates
                
                
                840,933
                
                
                
                1,043,077Cash
      as of January 1
                
                
                866,585
                
                
                
                338,039Cash
      as of December 31
                
                $
                1,019,176
                
                
                $
                866,585Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
      paid
                
                $
                -
                
                
                $
                -Income
      tax paid
                
                $
                971,600
                
                
                $
                1,558,246
 
 Non-cash
item:
 During
the year ended December 31, 2008, an amount of $1,191,066 was transferred from
Property, Plant and Equipment to Other Receivables, representing amounts paid on
construction in progress on behalf of the landlord in 2007 and 2008 that will
now be offset against future lease payments. During 2008, an amount of
$2,198,608 was transferred from Construction in progress to Building under
Property, Plant and Equipment.
 See
accompanying notes to the consolidated financial statements.
  F-5
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 
 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 aNevadaholding company and conducts all of its
business through operating subsidiaries.
 
 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 inTibet. 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 unaffiliatedparties.
 
 In 2006, Mr. Hui Xiaobing, the sole
owner of Changdu Huiheng, established Allied Moral Holdings, Ltd. (the “Allied
Moral”) in theBritish
Virgin Islandsas 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.
  F-6
 HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 As a result of the share exchange,
Huiheng owns all of the issued and outstanding stock of Allied Moral, which was
incorporated in theBritish
Virgin Islandson 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.
 
 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.
  F-7
 HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 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 theUnited States of
America("US GAAP")
..  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, realizable values for
inventories. Actual results could differ from those
estimates.
 
 The share exchange was regarded as a
reverse merger, since Allied Moral's former shareholders obtained control of
Huiheng Medical, Inc. (formerly known asMillBasin). As a result, Allied Moral was
considered to be the acquirer for accounting purposes.
 
 In a reverse acquisition all accounting
history becomes, that of the accounting acquirer, therefore all historical
information prior to the acquisition is that of Allied Moral.  The
shares issued to the shareholders of Allied Moral have been stated
retroactively.  The reverse merger adjustment is therefore all the
shares held byMillBasinshareholders prior to the
acquisition.
 
 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.
 
 Reverse Acquisition
Merger
 
 Prior to the May 2007 share exchange,
Allied Moral was a non-reporting privately held company.  The
post-acquisition Company is accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions with Allied Moral being treated as
the accounting parent (acquirer) and Huiheng, the legal parent, being treated as
the accounting subsidiary (acquiree).  Prior to the consummation of
the acquisition in May 2007,MillBasinwas an inactive public shell with no
material assets, liabilities, or net stockholders' equity.  In
accordance with the provisions governing the accounting for reverse
acquisitions, the historical figures presented are those of the Allied
Moral.
  F-8
 HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
 
 NOTE 2 - BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
 
 Reverse Acquisition Merger
(.../Cont'd)
 
 Common
Stock
                  
                  
                  Additional
                    Paid-InShares
                  
                  
                  Amount
                  
                  
                  CapitalDiscount on capital
      issuance
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,577,555
                  )Public company shares already
      outstandingon date of Merger (May
      15, 2007),par value
      $0.001
                  
                  
                  10,150,000
                  
                  
                  
                  10,150
                  
                  
                  
                  -Treasury
    stock
                  
                  
                  (9,700,000
                  )
                  
                  
                  (9,700
                  )
                  
                  
                  9,700Shares issued on date of
      Merger(May 15, 2007), par
      value $0.001- Common
      stock
                  
                  
                  13,000,000
                  
                  
                  
                  13,000
                  
                  
                  
                  (13,000
                  )- Series A
      convertible preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (267
                  )Contribution to capital,
      net- Share
      premium
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,973,333- Less:
      Transactions cost
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,014,642
                  )- Elimination of
      Allied Moral
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  156,666Absorb balances from Mill
      Basin
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (36,149
                  )Reverse acquisition
      recapitalization adjustment,net as at December 31,
      2007
                  
                  
                  13,450,000
                  
                  
                  
                  13,450
                  
                  
                  
                  7,498,086
  F-9
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  NOTE 2 - BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (.../Cont'd)
 
 Summary of significant accounting
policies
 
 Estimates
 
 The preparation of consolidated
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.
 
 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 $743,584 and $5,059 for doubtful
accounts  respectively as of December 31, 2008 and
2007.
 
 Outstanding account balances are
reviewed individually for collectibility. 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-10
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 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
 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 investmentusing 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-11
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
  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
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.  At December 31, 2008 and 2007, 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,
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.
  F-12
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 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 thetraining 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.
 
 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-13
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
 
 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.
  F-14
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  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 $472,919 and $263,314 for the
year ended December 31, 2008 and 2007, respectively.
  F-15
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  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 FASB Statement No. 109,Accounting for
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 FASB
Interpretation No. FIN 48, Accounting for Uncertainty in 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 stockholders' equity
section of our consolidated balance sheet.
 
 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. The average monthly exchange
rates for the year ended December 31, 2007 and the closing rate as of December
31, 2007 were Rmb 7.5973 and Rmb 7.2946 to one USD,
respectively.
  F-16
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 Comprehensive income
 
 The Company has adopted SFAS No. 130
Reporting 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.
  F-17
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
 
 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
      31,2008
                    
                    
                    2007Net income
                    
                    $
                    4,011,626
                    
                    
                    $
                    9,015,769Weighted average outstanding
      shares of common stock
                    
                    
                    13,754,118
                    
                    
                    
                    13,283,562Dilutive effect of Convertible
      Preferred Stock
                    
                    
                    2,496,995
                    
                    
                    
                    2,801,113Diluted weighted average
      outstanding shares
                    
                    
                    16,251,113
                    
                    
                    
                    16,084,675Earnings per
      share:Basic
                    
                    $
                    0.29
                    
                    
                    $
                    0.68Diluted
                    
                    $
                    0.25
                    
                    
                    $
                    0.56
 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.
  F-18
 HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  Segment
reporting
 
 SFAS No. 131, Disclosure About Segments
of anEnterpriseand Related Information, 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
11.
 
 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 and will be charged to
stockholders’ equity upon receipt of the capital raised.  Should the
proposed offering prove to be unsuccessful, the deferred costs will be charged
to operations.
  F-19
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
 
 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 SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity and
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. We have determined that our Series A Preferred Stock is not mandatorily
redeemable. Accordingly, the Company accounts for the Preferred stock as
permanent equity.
 
 Impact of new accounting
standards
 
 In
September 2006 the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP and requires enhanced disclosures about fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008 the FASB issued
FASB staff position, or FSP, No. 157-2, Effective Date of SFAS No. 157, which
delays the effective date of SFAS No. 157 for non-financial assets and
liabilities, other than those that are recognized or disclosed at fair value on
a recurring basis, to fiscal years beginning after November 15, 2008. Our
adoption of SFAS No. 157 related to financial assets and liabilities for the
year ended December 31, 2008 had no impact on our consolidated financial
statements.
 
 In December 2007, the FASB issued SFAS
No. 141(R), Business Combinations. SFAS No. 141(R) establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This statement also requires acquisition-related costs to
be expensed as incurred. SFAS No. 141(R) is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Accordingly, any
business combinations we engage in will be recorded and disclosed following
existing GAAP until January 1, 2009. We expect SFAS No. 141(R) will have an
impact on our consolidated financial statements, but the nature and magnitude of
the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the effective date of January 1,
2009.
  F-20
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  In April 2008, the FASB issued FSP FAS
142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3
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, the FASB issued SFAS No.
162, The Hierarchy of Generally Accepted Accounting Principles, which 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 is not expected to have a material
impact on our results of operations or financial position.
  F-21
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 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)
 
 In December 2008, the FASB issued FSP
No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan
Assets. 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.
 
 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, 2008 and 2007,
inventories consisted of the following:
 
 2008
                    
                    
                    2007Raw
    materials
                    
                    $
                    262,355
                    
                    
                    $
                    338,637Work-in-progress
                    
                    
                    1,090,997
                    
                    
                    
                    732,976$
                    1,353,352
                    
                    
                    $
                    1,071,613
 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-22
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
  NOTE 4 – PREPAYMENTS AND OTHER
RECEIVABLES
 
 At December 31, 2008 and 2007,
prepayments and other receivables consisted of the
following:
  2008
                    
                    
                    2007Prepayments to
      suppliers
                    
                    $
                    3,247,978
                    
                    
                    $
                    2,333,901Advances to third parties
      (a)
                    
                    
                    -
                    
                    
                    
                    866,669Other
      receivables- construction in progress paid on
      behalf of landlord (b)
                    
                    
                    281,422
                    
                    
                    
                    -- VAT tax
      refund
                    
                    
                    -
                    
                    
                    
                    102,523- loan or advance to staff for
      business travelling
                    
                    
                    22,758
                    
                    
                    
                    91,496- utilities and rental
      deposits
                    
                    
                    1,949
                    
                    
                    
                    12,394- prepayment made to Jilin
      University for research
                    
                    
                    -
                    
                    
                    
                    41,126- prepaid expenses made by
      director
                    
                    
                    2,932
                    
                    
                    
                    6,854- deposit for acquisition of a
      Land use right at WuhanKangqiao384,621
                    
                    
                    
                    -- others
                    
                    
                    67,150
                    
                    
                    
                    23,555$
                    4,008,810
                    
                    
                    $
                    3,478,518
  F-23
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
  NOTE 4 – PREPAYMENTS AND OTHER
RECEIVABLES (.../Cont'd)
 
 (a)
                  Advances to third parties
      represent unsecured, interest-free advances due from Shenzhen Hui Xin Nano
      Technology Development Company Limited (“Hui Xin”) and advances due from
      Shenzhen Jiancheng Investment Co., Ltd ("Jiancheng") as
      follows:
 
 The
balance due at December 31, 2007 included $181,230 resulting from advances made
during prior periods in contemplation of a business acquisition of Hui Xin which
has since been abandoned. The balance was repaid to the Company in
2008.
 
 The
balance due at December 31, 2007 included $685,439 resulting from advances made
to Jiancheng, a distributor of the Company’s products, in prior periods also in
contemplation of a business acquisition which has since been
abandoned.  The Company fully reserved the balance due as of December
31, 2008 due to the uncertainty as to the collectabilityof the
receivable.
 
 (b)
                  During
      the year ended December, 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 Prepayments 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 15). $1,666,684 has been
      classified as non-current assets and $281,422 has been classified as
      current assets.
 
 NOTE 5 – PROPERTY, PLANT AND
EQUIPMENT
 
 At December 31, 2008 and 2007, property,
plant and equipment consisted of the following:
  2008
                    
                    
                    2007Building
      improvements
                    
                    $
                    172,346
                    
                    
                    $
                    161,192Buildings
                    
                    
                    2,309,072
                    
                    
                    
                    103,316Production
      equipment
                    
                    
                    617,806
                    
                    
                    
                    531,506Furniture, fixture and office
      equipment
                    
                    
                    271,867
                    
                    
                    
                    182,002Motor
    vehicles
                    
                    
                    187,432
                    
                    
                    
                    175,3013,558,523
                    
                    
                    
                    1,153,317Less: Accumulated
      depreciation
                    
                    
                    (915,501
                    )
                    
                    
                    (617,175
                    )2,643,022
                    
                    
                    
                    536,142Construction in
      progress
                    
                    
                    -
                    
                    
                    
                    3,165,550$
                    2,643,022
                    
                    
                    $
                    3,701,692
 Depreciation expense is included in the
consolidated statements of income. For the year ended December 31, 2008 and
2007, depreciation expenses were $253,891 and $79,399,
respectively.
 
 Construction in progress had been
completed and transferred to Building under Property, Plant and Equipment at the
end of 2008. An amount of $1,191,066 was transferred from Construction in
progress under Property, Plant and Equipment to Other Receivables during the
year of 2008 was to offset against future lease payments.
  F-24
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
 
 NOTE 6 – 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, 2008 and
2007, amortization expense was $81,236 and $91,758.
 
 NOTE 7 – ACCRUED LIABILITIES AND OTHER
PAYABLES
 
 At December 31, 2008 and 2007, accrued
liabilities and other payables consisted of the following:
  2008
                    
                    
                    2007Accrued
      expenses
                    
                    $
                    327,224
                    
                    
                    $
                    364,503Accrued payroll and
      welfare
                    
                    
                    376,303
                    
                    
                    
                    264,391Value added tax, other taxes
      payable and surcharges
                    
                    
                    686,229
                    
                    
                    
                    1,136,565Customer
      deposits
                    
                    
                    28,888
                    
                    
                    
                    343,828Advance from third
      party
                    
                    
                    -
                    
                    
                    
                    -$
                    1,418,644
                    
                    
                    $
                    2,109,287
  Advance from third party represents
unsecured, interest-free loans due to Tibet Changdu Hefeng Industrial
Development Company Limited for paying the income tax in the nine months ended
September 30, 2008. At September 30, 2008, the balance was $147,278 and the
outstanding amount has since been fully paid in October
2008.
  F-25
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 NOTE 8 – MINORITY
INTEREST
 
 Minority interest represents the share
of 25% equity interest of Shenzhen Hyper owned by Shenzhen OUR International
Limited.
 
 NOTE 9 –AMOUNTS DUE FROM/TO RELATED
PARTIES
 
 A summary of related party receivables
at December 31, 2008 is as follows:
 
 Amounts due from a related party at
December 31, 2008 includes amounts due from Huiheng Industry related to the
original acquisition of Changdu Huiheng in 2004 together with working capital
advances made to Huiheng Industry during 2007 and 2006.  The Company
received the working capital of $64,199 and provided a 100% allowance for
doubtful accounts for the remaining balance $732,869 as of December 31,
2008.
 
 A summary of related party payables at
December 31, 2008 is as follows:
 
 Amounts
due to related parties at December 31, 2008 represent 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. Clear Honest
International Limited has settled $100,000 during 2008.
  F-26
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 NOTE 10–STOCKHOLDERS' EQUITY
AND RETAINED EARNINGS
 
 (a)Stockholders’
Capital
 
 The Company has authorized 74,000,000
shares of Common stock. As of December 31, 2008, 23,510,641 shares were issued
and 13,810,641 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 September 30, 2008, 232,333 shares were
issued and outstanding with liquidation preference of
$8,712,488.
 
 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 theBritish
Virgin Islandsas 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.
  F-27
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  Redemption of
shares
 
 In January, 2007, 957,265 shares were
redeemed by Allied Moral at $3.75 per share resulting in 13,000,000 common
shares left outstanding.
 
 Reverse merger
 
 Prior to the share exchange,MillBasinhad 10,150,000 shares of its common
stock outstanding.  In contemplation of the share exchange,MillBasinshareholders contributed 9,700,000
common shares to treasury, resulting in 450,000 shares ofMillBasin's common stock outstanding immediately
prior to the share exchange.  Taking into account the 13,000,000
shares ofMillBasincommon stock issued for the exchange
with Allied Moral's shareholders,MillBasinthen 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 byMillBasinshareholders.  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-28
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 NOTE 10–STOCKHOLDERS' EQUITY
AND RETAINED EARNINGS (.../Cont'd)
 
 (a)Stockholders’ 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.
 
 (b) Retained Earnings
 
 As of December 31, 2008, the
Companyestablished 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-29
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31,
2008
  NOTE 11 - 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, 2008 and
2007:
 
 2008
                    
                    
                    2007
                    
                    
                    Annual
      % changeRevenues:Products
                    
                    $
                    5,619,870
                    
                    
                    $
                    9,530,071
                    
                    
                    
                    -41.03
                    %Services
                    
                    
                    5,515,422
                    
                    
                    
                    5,034,683
                    
                    
                    
                    9.55
                    %Other
                    
                    
                    1,158,349
                    
                    
                    
                    1,638,812
                    
                    
                    
                    -29.32
                    %$
                    12,293,641
                    
                    
                    $
                    16,203,566
                    
                    
                    
                    -24.13
                    %
  2008
                    
                    
                    2007
                    
                    
                    Annual
      % changeOperating
      income:Products
                    
                    $
                    3,287,787
                    
                    
                    $
                    5,796,585
                    
                    
                    
                    -43.28
                    %Services
                    
                    
                    4,895,555
                    
                    
                    
                    4,600,109
                    
                    
                    
                    6.42
                    %Other
                    
                    
                    1,158,349
                    
                    
                    
                    1,638,812
                    
                    
                    
                    -29.32
                    %9,341,691
                    
                    
                    
                    12,035,506
                    
                    
                    
                    -22.38
                    %Corporate
      expenses
                    
                    
                    (4,696,892
                    )
                    
                    
                    (1,734,556
                    )
                    
                    
                    170.78
                    %Operating
      income
                    
                    $
                    4,644,799
                    
                    
                    $
                    10,300,950
                    
                    
                    
                    -54.91
                    %
 Other revenue consistsprincipally of government financial
subsidies to Changdu Huiheng.
  F-30
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 NOTE 12 – 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 ofChinaconcerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax
laws.
 
 Income tax expense for the year ended
December 31, 2008 and 2007 were $774,259 and $938,078,
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 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,
2008 and 2007 are as follows:
 
 2008
                    
                    
                    2007Income before income taxes and
      minority interest
                    
                    $
                    4,639,731
                    
                    
                    $
                    10,287,196Expected PRC income tax expense at
      statutory tax rate of 25% (33%)
                    
                    
                    1,159,933
                    
                    
                    
                    3,394,775Non-deductible
      expenses
                    
                    
                    184,497
                    
                    
                    
                    (165,835
                    )Temporary
      difference
                    
                    
                    -
                    
                    
                    
                    (415
                    )Others
                    
                    
                    187,761
                    
                    
                    
                    52,020Tax rate
      differences
                    
                    
                    (757,932
                    )
                    
                    
                    (2,342,467
                    )Actual income tax
      expense
                    
                    $
                    774,259
                    
                    
                    $
                    938,078
  F-31
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 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 13 – CONCENTRATION OF CREDIT
RISK
 
 Customers
concentrations
 
 Three
customers accounted for 84% and two customers accounted for 76% of Revenue for
the years ended December 31, 2008 and 2007 respectively. These customers also
accounted for 89% and 79% of accounts receivable as of December 31, 2008 and
2007, 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-32
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
 NOTE 13 – CONCENTRATION OF CREDIT RISK
(.../Cont'd)
 
 Other credit risks
 
 As of December 31, 2008, 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, 2008.
 
 NOTE 14 - 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 stockholders’ 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
stockholders.
  F-33
  HUIHENG MEDICAL,
INC.
 Notes to the Consolidated Financial
Statements
 December 31, 2008
  NOTE 15 - OPERATING LEASE
COMMITMENTS
 
 As of
December 31, 2008, the total future minimum lease payments under non-cancellable
operating leases in respect of premises are $5.3 million (Rmb36.16 million),
which was based on the closing rate as of December 31, 2008. The amounts payable
are as follows:
 
 December 312009
                    
                    $
                    281,4222010
                    
                    
                    281,4222011
                    
                    
                    281,4222012
                    
                    
                    281,4222013
                    
                    
                    281,422Thereafter
                    
                    
                    3,893,000TOTAL
                    
                    $
                    5,300,110
 F-34