UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549




FORM
10-K




(Mark
One)




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


For the
fiscal year ended July 31,
2009




OR




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


For the
transition period from ____________________ to
____________________




Commission
      File Number  0-13176NON-INVASIVE
      MONITORING SYSTEMS, INC.(Exact
      name of registrant as specified in its charter)Florida
                        
                        59-2007840(State
      or other jurisdiction of
                          incorporation
      or organization)
                        
                        (I.R.S.
      Employer Identification No.)4400
      Biscayne Blvd., Suite 180, Miami, Florida, 33137(Address
      of principal executive offices)     (Zip
      Code)Registrant’s
      telephone number, including area code:  (305)
      575-4200Securities
      registered pursuant to Section 12(b) of the Exchange Act:  NoneSecurities
      registered pursuant to Section 12(g) of the Exchange
  Act:Common
      Stock, $0.01 par value per share(Title
      of
Class)





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




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




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




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




Large
accelerated filer  ̈Accelerated filer
 ̈Non-accelerated
filer  ̈Smaller reporting companyx




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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of January 31, 2009 was: $14.0 million




As of
October 15, 2009 there were 68,385,637 shares of Common Stock, $0.01 par value
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Document
            Where
      IncorporatedProxy
      Statement for the 2010 Annual Meeting of Stockholders
            Part
      III







NON-INVASIVE
MONITORING SYSTEMS, INC.




TABLE
OF CONTENTS FOR FORM 10-K




PART
      I
                
                5Item
      1.
                Business
                5Item
      1A.
                Risk
      Factors
                13Item
      1B.
                Unresolved
      Staff Comments
                18Item
      2.
                Properties
                18Item
      3.
                Legal
      Proceedings
                18Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                18PART
      II
                
                19Item
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                19Item
      6.
                Selected
      Financial Data
                20Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                21Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                25Item
      8.
                Financial
      Statements and Supplementary Data
                25Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                46Item
      9A(T).
                Controls
      and Procedures
                46Item
      9B.
                Other
      Information
                46PART
      III
                
                47Item
      10.
                Directors,
      Executive Officers and Corporate Governance
                47Item
      11.
                Executive
      Compensation
                47Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                47Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                47Item
      14.
                Principal
      Accounting Fees and Services
                47PART
      IV
                
                48Item
      15.
                Exhibits,
      Financial Statement Schedules
                48SIGNATURES
                
                49




2


CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS




This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”), about our expectations, beliefs or intentions regarding, among other
things, our product development and commercialization efforts, business,
financial condition, results of operations, strategies or prospects. You can
identify forward-looking statements by the fact that these statements do not
relate strictly to historical or current matters. Rather, forward-looking
statements relate to anticipated or expected events, activities, trends or
results as of the date they are made. Because forward-looking statements relate
to matters that have not yet occurred, these statements are inherently subject
to risks and uncertainties that could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking
statements. Many factors could cause our actual activities or results to differ
materially from the activities and results anticipated in forward-looking
statements. These factors include those set forth below as well as those
contained in “Item 1A - Risk Factors” of this Annual Report on Form 10-K. We do
not undertake any obligation to update forward-looking statements, except as
required by applicable law. We intend that all forward-looking statements be
subject to the safe harbor provisions of the PSLRA, to the extent applicable to
an issuer of penny stock. These forward-looking statements are only predictions
and reflect our views as of the date they are made with respect to future events
and financial performance.




Risks and
uncertainties, the occurrence of which could adversely affect our business,
include the following:




·
            We
      have a history of operating losses and we do not expect to become
      profitable in the near future.




·
            The
      current worldwide economic crisis and concurrent market instability may
      materially and adversely affect the demand for our products, as well as
      our ability to obtain credit or secure funds through sales of our stock,
      which may materially and adversely affect our business, financial
      condition and ability to fund our
operations.




·
            Healthcare
      policy changes, including pending proposals to reform the U.S. healthcare
      system, may have a material adverse effect on
  us.




·
            The
      terms of clearances or approvals and ongoing regulation of our products
      may limit how we manufacture and market our products, which could
      materially impair our ability to generate anticipated
      revenues.




·
            We
      rely on third parties to manufacture and supply our
    products.




·
            Our
      competitors may develop and market products that are more effective, safer
      or less expensive than our products, negatively impacting our commercial
      opportunities.




·
            If
      we are unable to obtain and enforce patent protection for our products,
      our business could be materially
harmed.




·
            If
      we are unable to protect the confidentiality of our proprietary
      information and know-how, the value of our technology and products could
      be adversely affected.




·
            Our
      commercial success depends significantly on our ability to operate without
      infringing the patents and other proprietary rights of third
      parties.




·
            If
      we become involved in patent litigation or other proceedings related to a
      determination of rights, we could incur substantial costs and expenses,
      substantial liability for damages or be required to stop our product
      development and commercialization
efforts.




3


·
            We
      will likely require additional funding, which may not be available to us
      on acceptable terms, or at all.  In addition, we may need to
      amend our Articles of Incorporation to increase our number of authorized
      shares of Common Stock.




·
            We
      do not anticipate paying dividends on our Common Stock in the foreseeable
      future.




·
            Because
      our Common Stock is a “penny stock,” it may be more difficult for
      investors to sell shares of our Common Stock, and the market price of our
      Common Stock may be adversely
affected.




·
            Our
      stock price has been volatile and there may not be an active, liquid
      trading market for our Common
Stock.




·
            Our
      quarterly results of operations will fluctuate, and these fluctuations
      could cause our stock price to
decline.




* * * *
*




4


PART
I




Item
      1.
            Business.




General




Non-Invasive
Monitoring Systems, Inc. (together with its consolidated subsidiaries, the
“Company” or “NIMS”) was incorporated in Florida on July 16, 1980. The Company’s
offices are located at 4400 Biscayne Boulevard, Miami, Florida, 33137 and its
telephone number is (305) 575-4200. The Company’s primary business is the
research, development, manufacturing and marketing of a line of motorized,
non-invasive, whole body, periodic acceleration platforms. These platforms are
the home, wellness center and clinic version of the Company’s original
acceleration platform, the AT-101. In addition, the Company has developed
computer assisted, non-invasive diagnostic monitoring devices and related
software designed to detect abnormal respiratory, cardiac, and other medical
conditions from sensors placed externally on the body’s surface. These
diagnostic devices were sold in 1999 to the SensorMedics Division of ViaSys
(which is now a unit of Cardinal Health, Inc. (“SensorMedics”)), and to
privately held VivoMetrics, Inc. (“VivoMetrics”), both of which are required to
pay royalties to NIMS on sales of these products. VivoMetrics ceased operations
in July 2009, filed for Chapter 11 bankruptcy protection in October 2009, and
has not paid royalties since July 2009.




Company
Overview




Prior to
2002, our primary business was the development of computer assisted,
non-invasive diagnostic monitoring devices and related software designed to
detect abnormal respiratory, cardiac, and other medical conditions from sensors
placed externally on the body’s surface. We assigned our patents for these
ambulatory monitoring devices to SensorMedics for cash and royalties on sales.
We also assigned certain patents to VivoMetrics, then a related party, for an
equity ownership interest in VivoMetrics (now carried at zero value for
financial reporting purposes) and royalties on sales and leasing of VivoMetrics’
LifeShirt® systems.
In April 2002, VivoMetrics received FDA clearance to market the LifeShirt® system,
however VivoMetrics stopped selling the LifeShirt® in July
2009. We continue to receive royalties from SensorMedics, however there can be
no assurance as to the future amount of royalty revenue that will be derived
from this patent assignment.




In 2002,
we began restructuring our operations and business strategy to focus on the
research, development, manufacturing, marketing, and sales of non-invasive,
motorized, whole body periodic acceleration (“WBPA”) platforms. These
therapeutic acceleration platforms are intended for use in the home, wellness
centers and clinics as an aid to improve circulation and joint mobility, relieve
minor aches and pains, relieve morning stiffness, relieve troubled sleep and as
a mechanical feedback device for slow rhythmic breathing exercise for stress
management. The Company’s first such platform, the AT-101, was initially
registered with the United States Food and Drug Administration (the “FDA”) as a
Class 1 (exempt) powered exercise device and was sold to physicians and their
patients. In January 2005, the FDA disagreed with our device classification, and
requested that we cease commercial sales and marketing efforts for the AT-101
until we received clearance from the FDA to market the device following
submission of a 510(k) application incorporating appropriate clinical trial
data. Accordingly, the Company ceased its commercial sales and marketing of
therapeutic platforms in 2005, but continued to receive royalty revenue from
sales of diagnostic monitoring hardware and software by SensorMedics and
VivoMetrics. The Company additionally has received revenues from small research
contracts, sales of parts and units sold for research purposes.




In
January 2005 we began development of a less costly and more efficient second
generation version of the AT-101, the Exer-Rest® (now
designated the Exer-Rest® AT). In
January 2008, we received ISO 13485 certification for Canada, the United Kingdom
and Europe from SGS United Kingdom Ltd., the world’s leading verification and
certification body. ISO 13485 certification is recognized and accepted worldwide
as a sign of design and manufacturing quality for medical devices. In addition
to our ISO certification, NIMS’ Exer-Rest® AT
acceleration therapeutic platform (Class IIa) was awarded CE0120 certification,
which requires several safety related conformity tests including clinical
assessment for safety and effectiveness. The CE0120 marking is often referred to
as a “passport” that allows manufacturers from anywhere in the world to sell
their goods throughout the European market as well as in many other countries.
Prior to obtaining FDA clearance for the sale of our therapeutic acceleration
platforms in the United States, we marketed and sold the Exer-Rest® AT
platforms in the United Kingdom, Canada, Europe, India, and Latin
America.




5


The
Company entered into a Product Development and Supply Agreement with Sing Lin
Technology Co., Ltd. (“Sing Lin”) of Taichung, Taiwan on September 4, 2007.
Under this agreement, Sing Lin is manufacturing new third generation versions of
our patented Exer-Rest®
motorized platforms (designated the Exer-Rest® SL and
the Exer-Rest® TL). We
filed a 510(k) premarket notification submission with the FDA in October 2008
for approval to market the Exer-Rest® line of
platforms in the United States. The submission included 23 investigational and
clinical studies on the vasodilatation properties of WBPA, as well as a
controlled, four week clinical trial in a group of patients with chronic aches
and pains carried out at the Center of Clinical Epidemiology and Biostatistics
at the University of Pennsylvania Medical School. The submission supported
Exer-Rest® safety
and efficacy for the intended uses as an aid to temporarily increase local
circulation, to provide temporary relief of minor aches and pains, and to
provide local muscle relaxation. The FDA granted clearance under the 510(k)
application in January 2009 to market the full Exer-Rest® line of
products as Class I (Exempt) Medical Devices as described in the Company’s
510(k) premarket notification submission. In June 2009, the FDA granted
clearance to market the Exer-Rest® with the
additional intended use as an aid to reduce morning stiffness. Accordingly, we
have begun to market and sell the Exer-Rest® in the
U.S and abroad.




We have
determined that it is in the best interest of NIMS and its shareholders to focus
the Company’s time and resources on developing and marketing the Exer-Rest® line of
acceleration therapeutic platforms. These devices are being marketed and sold by
NIMS in the US, Canada, UK, Europe, India and Latin America. Sing Lin is selling
Exer-Rest®
platforms in the Far East as an authorized distributor.




The
development of the Exer-Rest® has
necessitated additional expenditures and commitments of capital, and we
anticipate experiencing losses through the end of the 2010 fiscal year as we
expand sales in the US, Canada, the UK, Europe, India, Latin America and the Far
East. We may be required to raise additional capital to fulfill our business
plan, but no commitment to raise such additional capital exists or can be
assured. If we are unsuccessful in our efforts to expand sales or raise capital,
we will not be able to continue operations.




Market
Opportunities




We
believe the market for our products is driven by, among other
factors:




·
            The
      aging population;




·
            The
      increasing number of the elderly reporting chronic
    ailments;




·
            An
      increased awareness of the benefits of exercise, particularly as a form of
      prevention;




·
            An
      increasing portion of the population that is incapable of performing
      traditional exercise;




·
            The
      expanding body of research connecting the body’s production of Nitric
      Oxide with vasodilatation, reduction of inflammation and improved
      transmission of neural impulses;
and




·
            The
      expanding body of research linking WBPA to production of Nitric Oxide and
      related benefits.




Our
products are designed for use by people who are unable or unwilling to exercise
or in whom exercise is contraindicated. The Exer-Rest® line of
platforms has been cleared for the intended uses of temporarily increasing local
circulation, relieving minor aches and pains, providing local muscle relaxation
and as an aid to reduce morning stiffness. These symptoms are frequently
reported by individuals with chronic neurological or musculoskeletal conditions
such as Multiple Sclerosis, Parkinson’s Disease, Neuropathy, Arthritis and
Fibromyalgia.




6


Products




Acceleration Therapeutic
Vibrators




The
original AT-101 therapeutic vibrator is a comfortable gurney styled device that
moves a platform repetitively in a head-to-foot motion, similar to the movement
used to comfort a child in a baby carriage but at a much more rapid pace. Sales
of the AT-101 commenced in October 2002 in Japan and in February 2003 in the
United States. QTM Incorporated (“QTM”), an FDA registered manufacturer
(Oldsmar, FL) manufactured the device, which was built in accordance with ISO
and FDA Good Manufacturing Practices. As discussed above, we stopped selling the
AT-101 in the United States in January 2005, but continued selling overseas as
we began development of the Exer-Rest®. We ceased manufacturing the AT-101 in
January 2005 and we no longer market this product.




The
Exer-Rest® AT
therapeutic vibrator is based upon the design and concept of the AT-101
therapeutic vibrator, but has the dimensions and appearance of a commercial
extra long twin bed. The Exer-Rest® AT,
which is also manufactured by QTM, weighs about half as much as the AT-101, has
a much more efficient and less costly drive mechanism, has a much lower selling
price than the AT-101, and is designed such that the user can utilize and
operate it without assistance. The wired hand held controller provides digital
values of speed, travel and time rather than analog values of speed and
arbitrary force values as in the AT-101. Sales of the Exer-Rest ® AT began
outside the US in October 2007 and in the US in February 2009.




The
Exer-Rest® SL and
Exer-Rest® TL,
which are being manufactured by Sing Lin, are next generation versions of the
Exer-Rest ® AT and
further advance the acceleration therapeutic platform technology. The SL
(“single” bed) and TL (“twin” bed) models combine improved drive technology for
quieter operation, a more comfortable “memory-foam” mattress, more convenient
operation with a multi-function wireless remote and a more streamlined look to
improve the whole body, periodic acceleration experience. Sales of the
Exer-Rest® SL and
Exer-Rest® TL
platforms began outside the US in October 2008, and US sales commenced in
February 2009.




The
Somno-EaseTM, a
variation of the Exer-Rest®
currently in development, is designed to aid patients with sleep disorders as
well as provide feedback for slow rhythmic breathing exercises for the relief of
stress associated with daily living. The Somno-EaseTM will have a similar
appearance to the Exer-Rest® SL and
TL models, but produces slower motion over a greater travel distance than
Exer-Rest® and is
based upon the notion of “rocking” the adult to sleep analogous to rocking a
baby to sleep. The Exer-Rest® Plus,
which is also in development, will combine the features of both the
Exer-Rest® and
Somno-EaseTM.




LifeShirt®




The
LifeShirt® is a
Wearable Physiological Computer (US Patents 6,551,252 [issued April 22, 2003],
6,413,225 [issued July 2, 2002], 6,047,203 [issued April 4, 2000]) that
incorporates four inductive plethysmographic transducers, electrocardiographic
electrodes, and a two posture sensor into a low turtle neck sleeveless garment.
Pulse oximetry is an optional add-on. These transducers are connected to a
miniaturized, battery powered, electronic module. This module interfaces with
the compact flash memory of a Personal Digital Assistant (“PDA”) for collection
of raw waveforms and digital data. Such data are then transmitted from the flash
memory to a Data Collection Center that transforms the data into
minute-by-minute median trends of over 30 physical and emotional signs of health
and disease. In addition, the monitored patient can enter symptoms with
intensity, mood, and medication directly into the PDA for integration with the
physiologic information collected with the LifeShirt® garment.
Vital and physiological signs can be obtained non-invasively, continuously,
cheaply, and reliably with the comfortably worn LifeShirt® garment
system while at rest, during exercise, at work, and during sleep. The
LifeShirt® was sold
exclusively by VivoMetrics until July 2009, and is currently not being
marketed.




Intellectual
Property




The
Company currently holds five United States patents with respect to both overall
design and specific features of its present and proposed products and has
submitted applications with respect to an additional United States provisional
patent as well as four foreign patents. No assurance can be given as to the
scope of protection afforded by any patent issued, whether patents will be
issued with respect to any pending or future patent application, that patents
issued will not be designed around, infringed or successfully challenged by
others, that the Company will have sufficient resources to enforce any
proprietary protection afforded by its patents or that the Company’s technology
will not infringe on patents held by others. The Company believes that in the
event its patent protection is materially impaired, a material adverse effect on
its present and proposed business could result. The following table lists the
Company’s patents, along with their expiration dates (each of which is 20 years
from the filing date):




7




US
      Patent
              
              Inventors
              
              Title
              
              Expiration
      Date7,404,221
              
              Sackner,
      Marvin A.
              
              Reciprocating
      movement platform for the external addition of pulses to the fluid
      channels of a subject
              
              August
      4, 20287.228,576
              
              Inman,
      D. Michael;
                Sackner,
      Marvin A.
              
              Reciprocating
      movement platform for the addition of pulses of the fluid channels of a
      subject
              
              June
      12, 20277,111,346
              
              Inman,
      D. Michael;
                Sackner,
      Marvin A.
              
              Reciprocating
      movement platform for the addition of pulses of the fluid channels of a
      subject
              
              May
      15, 20237,090,648
              
              Sackner,
      Marvin A.;
                Inman,
      D. Michael
              
              External
      addition of pulses to fluid channels of body to release or suppress
      endothelial mediators and to determine effectiveness of such
      intervention
              
              September
      28, 20216,155,976
              
              Sackner,
      Marvin A.;
                Inman,
      D. Michael;
                Meichner,
      William J.
              
              Reciprocating
      movement platform for shifting subject to and fro in headwards-footwards
      direction
              
              May
      24, 2019




With
respect to its present and proposed product line, the Company has 17 trademarks
and trade names which are registered in the United States and in several foreign
countries, including the Company’s principal trademark, Exer-Rest®.




Research
and Development




Our
strategy is to develop a portfolio of non-invasive products through a
combination of internal development and collaborations with external partners.
We are also sponsoring or monitoring research investigating the effectiveness of
WBPA in treating stroke, fibromyalgia, cystic fibrosis, delayed onset muscle
soreness (DOMS), traumatic brain injury, angina, sickle cell disease, asthma,
smoking, myocardial infarction and sleep apnea. We are also investigating the
expansion of our product line with other non-invasive vibration therapies. For
the fiscal years ended July 31, 2009 and 2008, research and development costs
were $176,000 and $178,000, respectively.




Competition




The
Company competes with several entities that market, sell or distribute
therapeutic vibratory devices that are registered with FDA as powered exercise
devices, or therapeutic vibrators. These include Power Plate of North America,
Vibraflex, CERAGEM International, Inc.all of which are larger,
have longer operating histories and have financial and personnel resources far
greater than those of the Company. We believe that we effectively compete with
such competitors based upon the uniqueness of our products and their
differentiation on the basis of intended uses and operation.




Government
Regulation of our Medical Device Development and Distribution
Activities




Healthcare
is heavily regulated by the federal government and by state and local
governments. The federal laws and regulations affecting healthcare change
constantly thereby increasing the uncertainty and risk associated with any
healthcare-related venture.




The
federal government regulates healthcare through various agencies, including but
not limited to the following: (i) the FDA which administers the Food, Drug, and
Cosmetic Act (“FD&C Act”), as well as other relevant laws; (ii) the Centers
for Medicare & Medicaid Services (“CMS”) which administers the Medicare and
Medicaid programs; (iii) the Office of Inspector General (“OIG”), which enforces
various laws aimed at curtailing fraudulent or abusive practices including, by
way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly
referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and
the laws that authorize the OIG to exclude health care providers and others from
participating in federal healthcare programs; and (iv) the Office of Civil
Rights which administers the privacy aspects of the Health Insurance Portability
and Accountability Act of 1996 (“HIPAA”). All of the aforementioned are agencies
within the Department of Health and Human Services (“HHS”). Healthcare is also
provided or regulated, as the case may be, by the Department of Defense through
its TriCare program, the Department of Veterans Affairs under, among other laws,
the Veterans Health Care Act of 1992, the Public Health Service within HHS under
the Public Health Service Act, the Department of Justice through the Federal
False Claims Act and various criminal statutes, and state governments under the
Medicaid program and their internal laws regulating all healthcare
activities.




8


FDA
Regulation of the Design, Manufacture and Distribution of Medical
Devices




The
testing, manufacture, distribution, advertising and marketing of medical devices
are subject to extensive regulation by federal, state and local governmental
authorities in the United States, including the FDA, and by similar agencies in
other countries. Any product that we develop must receive all relevant
regulatory clearances or approvals, as the case may be, before it may be
marketed in a particular country. Under United States law, a “medical device”
(“device”) is an article, which, among other things, is intended for use in the
diagnosis of disease or other conditions, or in the cure, mitigation, treatment
or prevention of disease, in man or other animals. See FD&C Act § 201(h).
Substantially all of our products are classified as medical devices and subject
to regulation by numerous agencies and legislative bodies, including the FDA and
its foreign counterparts.




Devices
are subject to varying levels of regulatory control, the most comprehensive of
which requires that a clinical evaluation be conducted before a device receives
approval for commercial distribution. The FDA classifies medical devices into
one of three classes. Class I devices are relatively simple and can be
manufactured and distributed with general controls. Class II devices are
somewhat more complex and require greater scrutiny. Class III devices are new
and frequently help sustain life.




In the
United States, a company generally can obtain permission to distribute a new
device in two ways – through a Section 510(k) premarket notification application
(“510(k) submission”), or through a Section 515 premarket approval (“PMA”)
application. The 510(k) submission applies to any device that is substantially
equivalent to a device first marketed prior to May 1976 or to another device
marketed after that date, but which was substantially equivalent to a pre-May
1976 device. These devices are either Class I or Class II devices. Under the
510(k) submission process, the FDA will issue an order finding substantial
equivalence to a predicate device (pre-May 1976 or post-May 1976 device that was
substantially equivalent to a pre-May 1976 device) and permitting commercial
distribution of that device for its intended use. A 510(k) submission must
provide information supporting its claim of substantial equivalence to the
predicate device. FDA permits certain low risk medical devices to be marketed
without requiring the manufacturer to submit a premarket notification. In other
instances, FDA may require that a premarket notification not only be submitted,
but also be accompanied by clinical data. If clinical data from human experience
are required to support the 510(k) submission, these data must be gathered in
compliance with investigational device exemption (“IDE”) regulations for
investigations performed in the United States. The FDA review process for
premarket notifications submitted pursuant to section 510(k) takes on average
about 90 days, but it can take substantially longer if the agency has concerns,
and there is no guarantee that the agency will “clear” the device for marketing,
in which case the device cannot be distributed in the United States. Nor is
there any guarantee that the agency will deem the article subject to the 510(k)
process, as opposed to the more time-consuming, resource intensive and
problematic PMA process described below.




After
clearance or approval to market is given, the FDA and foreign regulatory
agencies, upon the occurrence of certain events, are authorized under various
circumstances to withdraw the clearance or approval or require changes to a
device, its manufacturing process or its labeling or additional proof that
regulatory requirements have been met.




A
manufacturer of a device cleared through a 510(k) submission must submit another
premarket notification if it intends to make a change or modification in the
device that could significantly affect the safety or effectiveness of the
device, such as a significant change or modification in design, material,
chemical composition, energy source or manufacturing process. Any change in the
intended uses of a 510(k) device requires an approval supplement or cleared
premarket notification. Exported devices are subject to the regulatory
requirements of each country to which the device is exported, as well as certain
FDA export requirements.




9


As a
company that manufactures medical devices, we are required to register with the
FDA. As a result, we and any entity that manufactures products on our behalf
will be subject to periodic inspection by the FDA for compliance with the FDA’s
Quality System Regulation requirements and other regulations. In the European
Community, we will be required to maintain certain International Organization
for Standardization (“ISO”) certifications in order to sell products and we or
our manufacturers undergo periodic inspections by notified bodies to obtain and
maintain these certifications. These regulations require us or our manufacturers
to manufacture products and maintain documents in a prescribed manner with
respect to design, manufacturing, testing and control activities. Further, we
are required to comply with various FDA and other agency requirements for
labeling and promotion. The Medical Device Reporting regulations require that we
provide information to the FDA whenever there is evidence to reasonably suggest
that a device may have caused or contributed to a death or serious injury or, if
a malfunction were to occur, could cause or contribute to a death or serious
injury. In addition, the FDA prohibits us from promoting a medical device for
unapproved indications.




The FDA
in the course of enforcing the FD&C Act may subject a company to various
sanctions for violating FDA regulations or provisions of the Act, including
requiring recalls, issuing Warning Letters, seeking to impose civil money
penalties, seizing devices that the agency believes are non-compliant, seeking
to enjoin distribution of a specific type of device or other product, seeking to
revoke a clearance or approval, seeking disgorgement of profits and seeking to
criminally prosecute a company and its officers and other responsible
parties.




Medicare
and other Third-Party Payments




A.      
Medicare Coverage




Inasmuch
as a percentage of the projected patient population that could potentially
benefit from our devices is elderly, Medicare would likely be a potential source
of reimbursement. Medicare is a federal program that provides certain hospital
and medical insurance benefits to persons age 65 and over, certain disabled
persons, persons with end-stage renal disease and those suffering from Lou
Gehrig’s Disease. In contrast, Medicaid is a medical assistance program jointly
funded by federal and state governments and administered by each state pursuant
to which benefits are available to certain indigent patients. The Medicare and
Medicaid statutory framework is subject to administrative rulings,
interpretations and discretion that affect the amount and timing of
reimbursement made under Medicare and Medicaid.




Medicare
reimburses for medical devices in a variety of ways depending on where and how
the device is used. However, Medicare only provides reimbursement if CMS
determines that the device should be covered and that the use of the device is
consistent with the coverage criteria. A coverage determination can be made at
the local level (“Local Coverage Determination”) by the Medicare administrative
contractor (formerly called carriers and fiscal intermediaries), a private
contractor that processes and pays claims on behalf of CMS for the geographic
area where the services were rendered, or at the national level by CMS through a
National Coverage Determination. There are statutory provisions intended to
facilitate coverage determinations for new technologies under the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) §§ 731 and
942. Coverage presupposes that the device has been cleared or approved by the
FDA and, further, that the coverage will be no broader than the FDA approved
intended uses of the device (i.e., the device’s label) as cleared or approved by
the FDA, but coverage can be narrower. In that regard, a narrow Medicare
coverage determination may undermine the commercial viability of a device. It is
unclear whether the therapies and treatments that would use our primary products
would be covered under Local or National Coverage Determinations.




Seeking
to modify a coverage determination, whether local or national, is a
time-consuming, expensive and highly uncertain proposition, especially for a new
technology, and inconsistent local determinations are possible. On average,
according to an industry report, Medicare coverage determinations for medical
devices lag 15 months to five years or more behind FDA approval for respective
devices. Moreover, Medicaid programs and private insurers are frequently
influenced by Medicare coverage determinations. Our inability to obtain a
favorable coverage determination may adversely affect our ability to market our
products and thus, the commercial viability of our products.




10


B.       
Medicare Reimbursement Levels




Even if
Medicare covers the procedure that uses our devices the level of reimbursement
may not be sufficient for commercial success. The Medicare reimbursement levels
for covered procedures are determined annually through two sets of rulemakings,
one for outpatient departments of hospitals under the Outpatient Prospective
Payment System (“OPPS”) and the other, for procedures in physicians’ offices
under the Resource-Based Relative Value Scales (“RBRVS”) (the Medicare fee
schedule). If the use of a device is covered by Medicare, a physician’s ability
to bill a Medicare patient more than the Medicare allowable amount is
significantly constrained by the rules limiting balance billing. For covered
services in a physician’s office, Medicare normally pays 80% of the Medicare
allowable amount and the beneficiary pays the remaining 20%, assuming that the
beneficiary has met his or her annual Medicare deductible and is not also a
Medicaid beneficiary. For services performed in an outpatient department of a
hospital, the patient’s co-payment under Medicare may exceed 20%, depending on
the service and depending on whether CMS has set the co-payment at greater than
20%. If a device is used as part of an in-patient procedure, the hospital where
the procedure is performed is reimbursed under the Inpatient Prospective Payment
System (“IPPS”). In general, IPPS provides a single payment to the hospital
based on the diagnosis at discharge and devices are not separately reimbursed
under IPPS.




Usually,
Medicaid pays less than Medicare, assuming that the state covers the service. In
addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures and the assumption by healthcare providers
of all or a portion of the financial risk. Efforts to impose greater discounts
and more stringent cost controls upon healthcare providers by private and public
payors are expected to continue.




Significant
limits on the scope of services covered or on reimbursement rates and fees on
those services that are covered could have a material adverse effect on our
ability to commercialize our devices and therefore, on our liquidity and
financial condition.




Anti-Fraud
and Abuse Rule




There are
extensive federal and state laws and regulations prohibiting fraud and abuse in
the healthcare industry that can result in significant criminal and civil
penalties that can materially affect us. These federal laws include, by way of
example, the following:




·
            The
      anti-kickback statute (Section 1128B(b) of the Social Security Act)
      prohibits certain business practices and relationships that might affect
      the provision and cost of healthcare services reimbursable under Medicare,
      Medicaid and other federal healthcare programs, including the payment or
      receipt of remuneration for the referral of patients whose care will be
      paid by Medicare or other governmental
programs;




·
            The
      physician self-referral prohibition (Ethics in Patient Referral Act of
      1989, as amended, commonly referred to as the Stark Law, Section 1877 of
      the Social Security Act), which prohibits referrals by physicians of
      Medicare or Medicaid patients to providers of a broad range of designated
      healthcare services in which the physicians (or their immediate family
      members) have ownership interests or with which they have certain other
      financial arrangements.




·
            The
      anti-inducement law (Section 1128A(a)(5) of the Social Security Act),
      which prohibits providers from offering anything to a Medicare or Medicaid
      beneficiary to induce that beneficiary to use items or services covered by
      either program;




·
            The
      False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person
      from knowingly presenting or causing to be presented false or fraudulent
      claims for payment to the federal government (including the Medicare and
      Medicaid programs); and




·
            The
      Civil Monetary Penalties Law (Section 1128A of the Social Security Act),
      which authorizes the United States Department of Health and Human Services
      to impose civil penalties administratively for fraudulent or abusive
      acts.




Sanctions
for violating these federal laws include criminal and civil penalties that range
from punitive sanctions, damage assessments, monetary penalties, imprisonment,
denial of Medicare and Medicaid payments or exclusion from the Medicare and
Medicaid programs, or both. These laws also impose an affirmative duty on those
receiving Medicare or Medicaid funding to ensure that they do not employ or
contract with persons excluded from the Medicare and other government
programs.




11


Many
states have adopted or are considering legislative proposals similar to the
federal fraud and abuse laws, some of which extend beyond the Medicare and
Medicaid programs, to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of whether the
service was reimbursed by Medicare or Medicaid. Many states have also adopted or
are considering legislative proposals to increase patient protections, such as
limiting the use and disclosure of patient specific health information. These
state laws also impose criminal and civil penalties similar to the federal
laws.




In the
ordinary course of their business, medical device manufacturers and suppliers
have been and are subject regularly to inquiries, investigations and audits by
federal and state agencies that oversee these laws and regulations. Recent
federal and state legislation has greatly increased funding for investigations
and enforcement actions, which have increased dramatically over the past several
years. This trend is expected to continue. Private enforcement of healthcare
fraud also has increased due in large part to amendments to the civil False
Claims Act in 1986 that were designed to encourage private persons to sue on
behalf of the government. These whistleblower suits by private persons, known as
qui tam relators, may be filed by almost anyone, including present and former
patients or nurses and other employees, as well as competitors. HIPAA, in
addition to its privacy provisions, created a series of new healthcare-related
crimes.




As
federal and state budget pressures continue, federal and state administrative
agencies may also continue to escalate investigation and enforcement efforts to
root out waste and to control fraud and abuse in governmental healthcare
programs. A violation of any of these federal and state fraud and abuse laws and
regulations could have a material adverse effect on a supplier’s liquidity and
financial condition. An investigation into the use of a device by physicians may
dissuade physicians from either purchasing or using the device. This could have
a material adverse effect on our ability to commercialize our
devices.




The
Privacy Provisions of HIPAA




HIPAA,
among other things, protects the privacy and security of individually
identifiable health information by limiting its use and disclosure. HIPAA
directly regulates “covered entities,” such as healthcare providers, insurers
and clearinghouses, and indirectly regulates “business associates,” with respect
to the privacy of patients’ medical information. All entities that receive and
process protected health information are required to adopt certain procedures to
safeguard the security of that information. It is uncertain whether we would be
deemed to be a covered entity under HIPAA and it is unlikely that we, based on
our current business model, would be a business associate. Nevertheless, we will
likely be contractually required to physically safeguard the integrity and
security of any patient information that we receive, store, create or transmit.
If we fail to adhere to our contractual commitments, then our physician or
hospital customers may be subject to civil monetary penalties, which could
adversely affect our ability to market our devices. Recent changes in the law
wrought by the American Recovery and Reinvestment Act of 2009, Pub. L. No.
111-5, 123 Stat. 115 (Feb. 17, 2009), may increase the likelihood that we would
be treated as a business associate thereby subjecting us to direct government
regulation, increasing our compliance costs and our exposure to civil monetary
penalties and other government sanctions.




Manufacturing




We have
no commercial manufacturing facilities and we do not intend to build commercial
manufacturing facilities of our own in the foreseeable future. All of our
current manufacturing is performed by Sing Lin under the aforementioned
agreement. Sing Lin and their manufacturing facilities must comply with FDA
regulations, current quality system regulations (referred to as QSRs), which
include current good manufacturing practices, or cGMPs, and to the extent
laboratory analysis is involved, current good laboratory practices, or
cGLPs.




Sales
& Marketing




We have
limited number of dedicated sales and marketing personnel, and our Chief
Operating Officer is presently leading our current marketing efforts. In
addition to direct sales efforts by our sales management personnel, our sales
and distribution network consists of independent sales representatives,
distributors, and a storefront demonstration and therapy center in Toronto,
Canada. We intend to expand our distributor and independent sale representative
networks and open additional demonstration and therapy centers in the US and
Canada. There can be no assurance that we will be able to enter into additional
distribution and representation agreements on terms acceptable to us or at all,
or that our sales and distribution network and demonstration centers will
generate significant sales.




12


Employees




The
Company currently employs eight employees on a full-time basis. Six are engaged
in general and administrative, marketing and distribution duties and two in
research and development. None of our employees are represented by a collective
bargaining agreement, and we believe relations with our employees are
good.




Executive
Officers of the Registrant




Marvin A.
Sackner, M.D. Dr. Sackner, 77, has served as a Director since he was
first elected as our Chairman of the Board, Chief Executive Officer and Director
in November 1989 and served as Chairman of the Board from November 1989 until
October 2008. He served as CEO from 1989 until 2002 and from December 2007 to
the present. Dr. Sackner co-founded Respitrace Corporation, a predecessor to the
Company, in 1977 and was the Chairman of its Board from 1981 until October 1989.
From 1974 until October 1991, Dr. Sackner was the Director of Medical Services
at Mount Sinai in Miami Beach, Florida. From 1973-1996, he served as Professor
of Medicine, University of Miami at Mount Sinai. Since 2004, he has been
Voluntary Professor of Medicine, Leonard Miller Medical School of University of
Miami. From 1979 to 1980, Dr. Sackner was the President of the American Thoracic
Society. Dr. Sackner was the Chairman of the Pulmonary Disease Subspecialty
Examining Board of the American Board of Internal Medicine from 1977 to 1980. In
2007, he was awarded an Honorary Doctorate Degree for "outstanding work in the
entire field of pulmonology and sleep disorders," by the University of Zurich
(Switzerland). Dr. Sackner holds 33 United States Patents and has written 223
scientific papers and four books.




Steven B.
Mrha. Mr. Mrha, 44, was appointed Chief Operating Officer effective
January 14, 2008. From 2005 to 2008, Mr. Mrha held the position of Vice
President, Sales & Marketing for IVX Animal Health (“IVX”), a subsidiary of
Teva Pharmaceuticals, Inc. From 1999 to 2005, Mr. Mrha held the same position
with DVM Pharmaceuticals (“DVM”) until the 2005 merger of DVM and Phoenix
Scientific which created IVX. From 1991 to 1999, Mr. Mrha held numerous
positions at DVM, including Territory Manager, Regional Manager, Director of
Corporate Training and Director of Marketing.




Adam S.
Jackson. Mr. Jackson, 47, was appointed Chief Financial Officer on May
12, 2008. From 2006 to 2008, Mr. Jackson served as Senior Vice President,
Finance for Levitt Corporation (“Levitt”), a New York Stock Exchange-traded real
estate development company (now Woodbridge Holdings Corp.). From 2003 to 2006,
Mr. Jackson served as Levitt’s Senior Vice President, Controller. From 2001 to
2003, Mr. Jackson served as Chief Financial Officer of Romika-USA, Inc., a
privately-held consumer goods manufacturing and distribution company. Mr.
Jackson has also served since March 2008 as the Chief Financial Officer of
SafeStitch Medical, Inc., a publicly-held developmental-stage medical device
company, and as Vice President, Finance of Aero Pharmaceuticals, Inc., a
privately-held pharmaceutical distribution company.




Item
      1A.
            Risk
      Factors.




Our
future operating results may vary substantially from anticipated results due to
a number of factors, many of which are beyond our control. The following
discussion highlights some of these factors and the possible impact of these
factors on future results of operations. If any of the following factors
actually occur, our business, financial condition or results of operations could
be materially harmed. In that case, the value of our common stock could decline
substantially.




13


Risks Relating to Our
Business.




Our
financial statements indicate that we may be unable to continue as a going
concern. We have a history of operating losses and we do not expect to become
profitable in the near future:




Our
consolidated financial statements for the years ended July 31, 2009 and 2008
were prepared on a “going concern” basis; however substantial doubt exists about
our ability to continue as a going concern as a result of recurring losses and
an accumulated deficit. We are not profitable and have been incurring material
losses. Our net losses for our fiscal years ended July 31, 2009, 2008 and 2007
were $1.8 million, $1.8 million and $1.4 million, respectively. As of July 31,
2009, we had an accumulated deficit of $19.8 million. Our revenues from 2005
through 2008 were primarily derived from royalties on sales of diagnostic
monitoring hardware and software licensed to two third parties (one of which is
no longer operating) and from sales of parts and services related to
acceleration therapeutics platforms used for research purposes. Although we have
obtained regulatory clearance to market our principal products in the US and
abroad, there can be no assurance that our products will achieve market
acceptance. Market acceptance of our products may depend upon: the timing of
market introduction of competitive products; the safety and efficacy of our
products; and the potential advantage or disadvantages of alternative
treatments. If our products fail to achieve market acceptance, we may not be
able to generate significant revenues or be profitable. Even if we achieve
profitability in the future, we may not be able to sustain profitability in
subsequent periods.




The
current worldwide economic crisis and concurrent market instability may
materially and adversely affect the demand for our products, as well as our
ability to obtain credit or secure funds through sales of our stock, which may
materially and adversely affect our business, financial condition and ability to
fund our operations:




The
current worldwide economic crisis may reduce the demand for new and innovative
medical devices, resulting in delayed market acceptance of our products. Such a
delay could have a material adverse impact on our business, expected cash flows,
results of operations and financial condition.




Additionally,
we have funded our operations to date primarily through private sales of our
common stock and through borrowings under credit facilities available to us from
stockholders and other individuals. The current economic turmoil and instability
in the world’s equity and credit markets may materially adversely affect our
ability to sell additional shares of our stock and/or borrow cash. There can be
no assurance that we will be able to raise additional working capital on
acceptable terms or at all, which may materially adversely affect our ability to
continue our operations.




Healthcare
policy changes, including pending proposals to reform the U.S. healthcare
system, may have a material adverse effect on us:




Healthcare
costs have risen significantly over the past decade. There have been and
continue to be proposals by legislators, regulators, and third-party payors to
keep these costs down. Certain proposals, if passed, may impose limitations on
the prices we will be able to charge for our products, or the amounts of
reimbursement available for our products from governmental agencies or
third-party payors. These limitations could have a material adverse effect on
our financial position and results of operations.




Recently,
President Obama and members of Congress have proposed significant reforms to the
U.S. healthcare system. Both the U.S. Senate and House of Representatives have
conducted hearings about U.S. healthcare reform. In the Obama administration’s
fiscal year 2010 federal budget proposal, the administration emphasized
maintaining patient choice, reducing inefficiencies and costs, increasing
prevention programs, increasing coverage portability and universality, improving
quality of care and maintaining fiscal sustainability. The Obama
administration’s fiscal year 2010 budget included proposals to limit Medicare
payments, reduce drug spending and increase taxes. In addition, some members of
Congress have proposed a government health insurance option to compete with
private plans and other expanded public healthcare measures. Various healthcare
reform proposals have also emerged at the state level. We cannot predict what
healthcare initiatives, if any, will be implemented at the federal or state
level, or the effect any future legislation or regulation will have on us.
However, an expansion in government’s role in the U.S. healthcare industry may
lower reimbursements for our products, reduce medical procedure volumes and
adversely affect our business, possibly materially.




14





The
terms of clearances or approvals and ongoing regulation of our products may
limit how we manufacture and market our products, which could materially impair
our ability to generate anticipated revenues:




Once
regulatory clearance or approval has been granted, the cleared or approved
product and its manufacturer are subject to continual review. Any cleared or
approved product may only be promoted for its indicated uses. Accordingly, it is
possible that our products may be cleared or approved for fewer or more limited
uses than we request or that clearance or approval may be granted contingent on
the performance of costly post-marketing clinical trials. In addition, if the
FDA or other non-U.S. regulatory authorities clear or approve our products, the
labeling, packaging, adverse event reporting, storage, advertising and promotion
for the products will be subject to extensive regulatory requirements. It is
possible that the FDA or other non-U.S. regulatory authorities may not approve
the labeling claims necessary or desirable for the successful commercialization
of our products. Further, regulatory agencies must approve our manufacturing
facilities before they can be used to manufacture our products, and these
facilities are subject to ongoing regulatory inspection. If we fail to comply
with the regulatory requirements of the FDA and other non-U.S. regulatory
authorities, or if previously unknown problems with our products, manufacturers
or manufacturing processes are discovered, we could be subject to administrative
or judicially imposed sanctions.




In
addition, the FDA and other non-U.S. regulatory authorities may change their
policies and additional regulations may be enacted that could prevent or delay
regulatory clearance or approval of our products. We cannot predict the
likelihood, nature or extent of government regulation that may arise from future
legislation or administrative action, either in the United States or abroad. If
we are not able to maintain regulatory compliance, we would likely not be
permitted to market our products and we may not achieve or sustain
profitability.




We
rely on third parties to manufacture and supply our products:




We do not
own or operate manufacturing facilities for clinical or commercial production of
our products. We have no experience in medical device manufacturing, and we lack
the resources and the capability to manufacture any of our products on a
commercial scale. We entered into a Product and Development and Supply Agreement
with Sing Lin Technology Co. Ltd. (“Sing Lin”) to, among other things,
manufacture all of our acceleration therapeutic platforms. If Sing Lin is unable
to produce our products in the amounts that we require, we may not be able to
establish a contract and obtain a sufficient alternative supply from another
supplier on a timely basis and in the quantities we require. We expect to depend
on Sing Lin and other third-party contract manufacturers for the foreseeable
future.




Our
ability to replace an existing manufacturer may be difficult because the number
of potential manufacturers is limited and the FDA must approve any replacement
manufacturer before it can begin manufacturing our product. It may be difficult
or impossible for us to identify and engage a replacement manufacturer on
acceptable terms in a timely manner, or at all.




Our
competitors may develop and market products that are more effective, safer or
less expensive than our products, negatively impacting our commercial
opportunities:




The life
sciences industry is highly competitive, and we face significant competition
from many medical device companies that are researching and marketing products
designed to address the same ailments we are endeavoring to address. The medical
devices that we have developed or are developing will compete with other medical
devices that currently exist or are being developed. Products we may develop in
the future are also likely to face competition from other medical devices and
therapies. Many of our competitors have significantly greater financial,
manufacturing, marketing and product development resources than we do. If our
competitors market products that are more effective, safer, easier to use or
less expensive than our products, or that reach the market sooner than our
products, we may not achieve commercial success. In addition, the medical device
industry is characterized by rapid technological change. It may be difficult for
us to stay abreast of the rapid changes in each technology. If we fail to stay
at the forefront of technological change, we may be unable to compete
effectively. Technological advances or products developed by our competitors may
render our technologies or products obsolete or less competitive.




If
we are unable to obtain and enforce patent protection for our products, our
business could be materially harmed:




We
currently hold four United States patents with respect to overall design and
specific features of our present and proposed products and have submitted
applications with respect to four foreign patents. The issuance of a patent does
not guarantee that it is valid or enforceable. Any patents we have obtained, or
obtain in the future, may be challenged, invalidated, unenforceable or
circumvented. Moreover, the United States Patent and Trademark Office (the
“USPTO”) may commence interference proceedings involving our patents or patent
applications. Any challenge to, finding of unenforceability or invalidation or
circumvention of, our patents or patent applications would be costly, would
require significant time and attention of our management and could have a
material adverse effect on our business.




15




Our
pending patent applications may not result in issued patents. The patent
position of medical device companies, including ours, is generally uncertain and
involves complex legal and factual considerations. The standards that the USPTO
and its foreign counterparts use to grant patents are not always applied
predictably or uniformly and can change. There is also no uniform, worldwide
policy regarding the subject matter and scope of claims granted or allowable in
medical device patents. Accordingly, we do not know the degree of future
protection for our proprietary rights or the breadth of claims that will be
allowed in any patents issued to us or to others.




If
we are unable to protect the confidentiality of our proprietary information and
know-how, the value of our technology and products could be adversely
affected:




In
addition to patent protection, we also rely on other proprietary rights,
including protection of trade secrets, know-how and confidential and proprietary
information. Adequate remedies may not exist in the event of unauthorized use or
disclosure of our confidential information. The disclosure of our trade secrets
would impair our competitive position and may materially harm our business,
financial condition and results of operations. To the extent that our employees,
consultants or contractors use technology or know-how owned by third parties in
their work for us, disputes may arise between us and those third parties as to
the rights in related inventions.




Our
commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third
parties:




Other
entities may have or obtain patents or proprietary rights that could limit our
ability to manufacture, use, sell, offer for sale or import products or impair
our competitive position. In addition, to the extent that a third party develops
new technology that covers our products, we may be required to obtain licenses
to that technology, which licenses may not be available or may not be available
on commercially reasonable terms, if at all. Our failure to obtain a license to
any technology that we require may materially harm our business, financial
condition and results of operations.




If
we become involved in patent litigation or other proceedings related to a
determination of rights, we could incur substantial costs and expenses,
substantial liability for damages or be required to stop our product development
and commercialization efforts:




Third
parties may sue us for infringing their patent rights. Likewise, we may need to
resort to litigation to enforce a patent issued or licensed to us or to
determine the scope and validity of proprietary rights of others. In addition, a
third party may claim that we have improperly obtained or used its confidential
or proprietary information. The cost to us of any litigation or other proceeding
relating to intellectual property rights, even if resolved in our favor, could
be substantial, and the litigation would divert our management’s efforts. Some
of our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater
resources.




We
will likely require additional funding, which may not be available to us on
acceptable terms, or at all. In addition, we may need to amend our Articles of
Incorporation to increase our number of authorized shares of Common
Stock:




We will
likely need to raise additional capital in order for us to continue our
operations as currently contemplated. Until we can generate a sufficient amount
of product revenue to finance our cash requirements, which we may never do, we
will need to finance future cash needs primarily through public or private
equity offerings, debt financings or strategic collaborations. We do not know
whether additional funding will be available on acceptable terms, or at all. In
order to raise additional capital we may need to amend our Articles of
Incorporation to increase our number of authorized shares of Common Stock, which
would require shareholder approval. We anticipate that shareholder approval of
such an amendment would be obtained; however, there can be no absolute assurance
that approval will be granted. If we are not able to secure additional funding
when needed, we may have to delay, reduce the scope of or eliminate our research
and development programs and operations. To the extent that we raise additional
funds by issuing equity securities, our stockholders may experience significant
dilution, and debt financing, if available, may involve restrictive covenants.
To the extent that we raise additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to our product
candidates or grant licenses on terms that may not be favorable to
us.




16




Risks Relating to Our
Stock.




We
do not anticipate paying dividends on our Common Stock in the foreseeable
future:




We have
not declared and paid cash dividends on our common stock in the past and we do
not anticipate paying any cash dividends in the foreseeable future. We intend to
retain all of our earnings, if any, for the foreseeable future to finance the
operation and expansion of our business. As a result, you may only receive a
return on your investment in our common stock if the market price of our common
stock increases.




Because
our Common Stock is a “penny stock,” it may be more difficult for investors to
sell shares of our Common Stock, and the market price of our Common Stock may be
adversely affected:




Our
Common Stock is a “penny stock” since, among other things, the stock price is
below $5.00 per share, it is not listed on a national securities exchange or
approved for quotation on the Nasdaq Stock Market or any other national stock
exchange and it has not met certain net tangible asset or average revenue
requirements. Broker-dealers who sell penny stocks must provide purchasers of
these stocks with a standardized risk-disclosure document prepared by the
Securities and Exchange Commission (“SEC”). This document provides information
about penny stocks and the nature and level of risks involved in investing in
the penny-stock market. A broker must also give a purchaser, orally or in
writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a
suitable investment for the purchaser and obtain the purchaser’s written
agreement to the purchase. Broker-dealers must also provide customers that hold
penny stock in their accounts with such broker-dealer a monthly statement
containing price and market information relating to the penny stock. If a penny
stock is sold to an investor in violation of the penny stock rules, the investor
may be able to cancel its purchase and get its money back.




If
applicable, the penny stock rules may make it difficult for investors to sell
their shares of our Common Stock. Because of the rules and restrictions
applicable to a penny stock, there is less trading in penny stocks and the
market price of our Common Stock may be adversely affected. Also, many brokers
choose not to participate in penny stock transactions. Accordingly, investors
may not always be able to resell their shares of our Common Stock publicly at
times and prices acceptable to them.




Our
stock price has been volatile and there may not be an active, liquid trading
market for our Common Stock:




Our stock
price has experienced significant price and volume fluctuations and may continue
to experience volatility in the future. Factors that have a significant impact
on the price of our common stock, in addition to the other issues described in
this report, include results of or delays in our pre-clinical and clinical
studies, announcements of technological innovations or new commercial products
by us or others, developments in patents and other proprietary rights by us or
others, future sales of our common stock by existing stockholders, regulatory
developments or changes in regulatory guidance, the departure of our officers,
directors or key employees, and period-to-period fluctuations in our financial
results. Also, you may not be able to sell your shares at the best market price
if trading in our stock in not active or if the volume is low. There is no
guarantee that an active trading market for our common stock will be maintained
on the OTC Bulletin Board Market.




17




Our
quarterly results of operations will fluctuate, and these fluctuations could
cause our stock price to decline:




Our
quarterly operating results are likely to fluctuate in the future. These
fluctuations could cause our stock price to decline. The nature of our business
involves variable factors, such as the timing of the research, development and
regulatory submissions of our devices that could cause our operating results to
fluctuate. As a result, in some future quarters our clinical, financial or
operating results may not meet the expectations of securities analysts and
investors which could result in a decline in the price of our
stock.




Item
      1B.
            Unresolved
      Staff Comments.




As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include information otherwise required by this
item.




Item
      2.
            Properties.




Our
principal corporate office is located at 4400 Biscayne Blvd., Miami, Florida. We
rent this space from Frost Real Estate Holdings, LLC, which is a company
controlled by Dr. Phillip Frost, one of our largest beneficial shareholders. We
currently lease approximately 1,800 square feet under the lease agreement, which
is for a five-year term that began on January 1, 2008.




We lease
approximately 5,200 square feet of space in Hialeah, Florida from an entity
controlled by Dr. Frost and Dr. Jane Hsiao, our Chairman, to house inventory. We
also lease approximately 1,100 square feet of space in Toronto, Canada in which
we operate our demonstration and therapy center.




Item
      3.
            Legal
      Proceedings.




None.




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




None.




18




PART
II




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




Recent
Sales of Unregistered Securities




On July
30, 2009 the Company issued 325,000 shares of its common stock upon exercise of
warrants at an exercise price of $0.15 per share for total consideration of
$49,000. The proceeds will be used for general working capital purposes. The
Company issued the above-described Common Stock to an accredited investor in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended and/or Regulation D promulgated under the
Securities Act of 1933. The exercised warrants restrict transfer of Common Stock
acquired upon exercise thereof unless an applicable exemption exists under the
securities laws, and a legend was placed on the stock certificates representing
the Common Stock issued upon exercise to the effect that the shares were not
registered and absent registration could only be transferred with an appropriate
exemption.




Market
for Common Stock




The table
below sets forth, for the respective periods indicated, the high and low bid
prices for the Company’s common stock in the over-the-counter market as reported
by the OTC Bulletin Board under the symbol NIMU.OB. The bid prices represent
inter-dealer transactions, without adjustments for retail mark-ups, mark-downs
or commissions and may not necessarily represent actual
transactions.




Quarter
      Ended
              
              High
              
              
              LowOctober 31,
      2007
              
              $
              1.06
              
              
              $
              0.75January 31,
      2008
              
              $
              0.81
              
              
              $
              0.43April
      30, 2008
              
              $
              0.64
              
              
              $
              0.41July 31,
      2008
              
              $
              0.57
              
              
              $
              0.36October 31,
      2008
              
              $
              0.61
              
              
              $
              0.29January 31,
      2009
              
              $
              0.46
              
              
              $
              0.27April
      30, 2009
              
              $
              0.40
              
              
              $
              0.26July 31,
      2009
              
              $
              0.40
              
              
              $
              0.30





Since our
inception, we have not paid any dividends on our Common Stock, and we do not
anticipate that we will pay dividends in the foreseeable future. At July 31,
2009, we had 1,561 shareholders of record based on information provided by our
transfer agent, American Stock Transfer & Trust Company. We believe that the
actual number of beneficial shareholders is considerably higher.




Equity
Compensation Plan Information




A
majority of our stockholders approved the Non-Invasive Monitoring Systems, Inc.
2000 Stock Option Plan (the “Stock Option Plan”) on March 28, 2001, which is our
sole equity compensation plan. We have reserved a total of 2,000,000 shares of
our common stock for issuance under the Stock Option Plan, subject to adjustment
for a stock split or any future stock dividend or other similar change in our
common stock or our capital structure. As of July 31, 2009, 1,251,000 options to
purchase shares of common stock have been granted under the Stock Option Plan. A
more detailed summary of the Stock Option Plan is contained in Note 4 to our
consolidated financial statements set forth under Item 8 to this Annual Report
on Form 10-K. The following table provides information about our equity
compensation plans as of July 31, 2009:




19




Number of securities
                          to be issued upon
                          exercise of
                          outstanding options,
                          warrants and rights
                          (a)
                      
                      
                      Weighted-average
                          exercise price of
                          outstanding
                          options, warrants
                          and rights
                          (b)
                      
                      
                      Number of securities
                          remaining available for
                          future issuance under
                          equity compensation plans
                          (excluding securities
                          reflected in column (a))
                          (c)Equity
      compensation plans approved by security holders(1)
                      
                      
                      1,251,000
                      
                      
                      $
                      0.49
                      
                      
                      
                      749,000Equity
      compensation plans not approved by security holders
                      
                      
                      1,085,831
                      
                      
                      $
                      0.66
                      
                      
                      
                      –Total
                      
                      
                      2,336,831
                      
                      
                      $
                      0.57
                      
                      
                      
                      749,000





(1)
            Non-Invasive
      Monitoring Systems, Inc. 2000 Stock Option
Plan.





Item
      6.
            Selected
      Financial Data.




As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include information otherwise required by this
item.




20




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




This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”), about our expectations, beliefs or intentions regarding our product
development efforts, business, financial condition, results of operations,
strategies or prospects. You can identify forward-looking statements by the fact
that these statements do not relate strictly to historical or current matters.
Rather, forward-looking statements relate to anticipated or expected events,
activities, trends or results as of the date they are made. Because
forward-looking statements relate to matters that have not yet occurred, these
statements are inherently subject to risks and uncertainties that could cause
our actual results to differ materially from any future results expressed or
implied by the forward-looking statements. Many factors could cause our actual
activities or results to differ materially from the activities and results
anticipated in forward-looking statements. These factors include those set forth
below as well as those contained in “Item 1A - Risk Factors” of this Annual
Report on Form 10-K. We do not undertake any obligation to update
forward-looking statements, except as required by applicable law. We intend that
all forward-looking statements be subject to the safe harbor provisions of the
PSLRA, to the extent applicable to issuers of penny stock. These forward-looking
statements are only predictions and reflect our views as of the date they are
made with respect to future events and financial performance.




Overview




We are
primarily engaged in the development, manufacture and marketing of non-invasive,
whole body periodic acceleration (“WBPA”) therapeutic platforms, which are
motorized platforms that move a subject repetitively from head to foot. Our
acceleration therapeutic platforms are the inventions of Marvin A. Sackner,
M.D., our founder, Chief Executive Officer and a director. Twenty-six peer
reviewed scientific publications attest to the benefits of whole body periodic
acceleration in animal and human research investigations. The application of
this technology causes release of beneficial substances such as nitric oxide
from the inner lining of blood vessels to the same extent as moderate to
strenuous exercise. These findings are not being claimed as an intended use of
the device for marketing purposes, but demonstrate a potential mechanism for its
benefits.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to accounts receivable, inventory, property and equipment, intangible
assets, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. A more detailed discussion on the
application of these and other accounting policies can be found in Note 2 in the
Notes to the Consolidated Financial Statements set forth in Item 8 of this
Annual Report on Form 10-K. Actual results may differ from these estimates under
different assumptions or conditions.




Results
of Operations




In
January 2005, we began developing the Exer-Rest® line of
acceleration therapeutic platforms, which were designed to be more efficient and
less expensive than the AT-101. The Exer-Rest®AT
platform was first available for delivery to certain locations outside of the
United States in October 2007. Prior to the first export sales of the
Exer-Rest® AT, we
continued to sell the AT-101 in certain locations outside of the United States.
In anticipation of the launch of the Exer-Rest line, in July 2006 we wrote down
as obsolete our existing inventory of AT-101 platforms and parts to zero value.
Our newest platforms, the Exer-Rest® SL and
TL, which have been developed under our agreement with Sing Lin, became
available for sale in October 2008. The Exer-Rest® line of
therapeutic platforms was cleared by the FDA for sale in the United States in
January 2009. We began our US and international sales activity with aggressive
marketing and promotional pricing beginning in February 2009 and opened our
first demonstration and therapy center in Toronto, Canada in April
2009.




21




Year
Ended July 31, 2009 Compared to Year Ended July 31, 2008




Gross revenues. Gross revenues
increased from $302,000 for the year ended July 31, 2008 to $546,000 for the
year ended July 31, 2009. This $244,000 increase primarily result from a
$284,000 increase in product sales, offset in part by a $37,000 decrease in
royalty income. Exer-Rest® platform
unit sales during the 2009 fiscal year increased 900% over the 2008 fiscal year,
primarily due to the availability of the new Exer-Rest® SL and
TL models and the clearance to market the Exer-Rest® in the
US. Royalty revenue in fiscal 2009 decreased approximately 14% from fiscal 2008
due to lower product sales by SensorMedics and VivoMetrics. VivoMetrics ceased
operations in July 2009 and filed for Chapter 11 bankruptcy protection in
October 2009. We expect fiscal 2010 royalty revenues to be significantly below
fiscal 2009 levels.




Cost of sales.Cost of sales
increased to $250,000 for the year ended July 31, 2009 from $19,000 for the year
ended July 31, 2008, primarily due to the increased number of units sold during
the year. Also included in this $231,000 increase was approximately $113,000 of
inventory valuation adjustments for damaged, obsolete and slow moving
inventory.




Selling, general and administrative
costs and expenses.Selling, general and administrative (“SG&A”)
costs and expenses were approximately $2.0 million for each of the years ended
July 31, 2009 and 2008. The $4,000 decrease in the year ended July 31, 2009 was
primarily attributable to lower severance and stock-based compensation costs,
offset by increased salaries and wages related to a full-year of employment of
administrative, sales and finance personnel added during fiscal 2008 and the
March 2009 establishment of the Toronto demonstration center. SG&A expense
includes stock based compensation expense, which totaled $189,000 for fiscal
2009, as compared to $314,000 for fiscal 2008. The decrease in stock-based
compensation was primarily due to a decrease in the number of options granted
during the year ended July 31, 2009. Also included in fiscal 2008 was $126,000
severance paid to our former Chief Executive Officer.




Research and development costs.Research and development costs decreased $2,000 from $178,000 for the
year ended July 31, 2008 to $176,000 for the year ended July 31, 2009. Research
and development costs in each of the 2009 and 2008 fiscal years consisted
primarily of costs related to obtaining FDA clearance to market the
Exer-Rest® in the
US and the placement of Exer-Rest® units in
research studies.




Total operating expenses.Total operating expenses increased $225,000 from $2.2 million for the
year ended July 31, 2008 to $2.4 million for the year ended July 31, 2009. This
increase is primarily attributable to the increase in cost of sales related to
higher sales volume, as well as higher SG&A expense and increased research
and development expense related to our pursuit of FDA clearance to market the
Exer-Rest®.




Other income and expense.Other income increased $49,000 from $12,000 for the year ended July 31,
2008 to $61,000 for the year ended July 31, 2009. The increase was primarily
attributable to $85,000 of foreign currency exchange gains at our Canadian
subsidiary, offset in part by a $19,000 increase in net interest expense and a
$17,000 loss on the disposal of certain Exer-Rest® AT units
previously included in fixed assets as demonstration units.




Liquidity
and Capital Resources




Our
operations have been primarily financed through private sales of our equity
securities. At July 31, 2009, we had cash of $886,000 and working capital of
$1.8 million. We expect these funds will be sufficient to expand our marketing
efforts in the US and Canada at least through the remainder of the 2009 calendar
year. If we are not able to generate significant revenue with these expanded
marketing efforts, we will likely be required to obtain additional external
financing to continue operations beyond the end of the 2010 fiscal year. No
assurance can be given that such additional financing will be available on
acceptable terms or at all. Our ability to sell additional shares of our stock
and/or borrow cash could be materially adversely affected by the recent economic
turmoil in the global equity and credit markets. Current economic conditions
have been, and continue to be, volatile and continued instability in these
market conditions may limit our ability to access the capital necessary to fund
and grow our business and to replace, in a timely manner, maturing
liabilities.




22




Net cash
used in operating activities decreased to $1.9 million for the year ended July
31, 2009 from $2.2 million for the year ended July 31, 2008. This $364,000
decrease was principally due to a decrease in inventory expenditures as advances
to Sing Lin were applied against inventory purchases.




Net cash
used by investing activities was $232,000 for the year ended July 31, 2009, due
primarily to the payment of the $171,000 balance due on the Exer-Rest®
production tooling, $26,000 for website development and $32,000 for leasehold
improvements and warehouse equipment. Net cash provided by investing activities
was $86,000 for the year ended July 31, 2008, due primarily to the redemption of
$400,000 in certificates of deposit held as collateral for bank notes, offset in
part by cash payments of $300,000 primarily for Exer-Rest®
tooling.




Net cash
provided by financing activities increased from $1.1 million for the year ended
July 31, 2008 to $2.9 million for the year ended July 31, 2009. This $1.8
million increase was principally due to the difference between the $1.5 million
raised by the April 2008 Series D Preferred Stock Offering described below and
the $2.8 million raised by the December 2008 and January 2009 Series D Preferred
Stock Offerings described below. Cash flows from financing activities were also
lower in 2008 due to the repayment of the $500,000 of bank notes secured by the
certificates of deposit described above.




Aggregate
collections of royalty payments from VivoMetrics and SensorMedics were $248,000
and $266,000 in 2009 and 2008, respectively. There can be no assurances that the
Company will continue to receive similar royalty payments, and we expect a
decline in royalty revenues in 2010 because VivoMetrics ceased operations in
July 2009 and has not made any royalty payments since that time. In 2009,
VivoMetrics accounted for approximately $39,000 of our royalty revenue and
$56,000 of our royalty collections. VivoMetrics filed for Chapter 11 bankruptcy
protection in October 2009. As of October 15, 2009, our outstanding receivable
from VivoMetrics totaled $10,000, which was fully reserved.




Under the
agreement with Sing Lin, we are committed to purchase approximately $2.6 million
of Exer-Rest® and
Somno-EaseTM units
within one year of acceptance of the final product, which acceptance occurred in
September 2008, and an additional $4.1 million and $8.8 million of products in
the second and third years following acceptance of the final product,
respectively. Under the Agreement, the Company must pay a portion of the product
purchase price at the time production orders are placed, with the balance due
upon delivery. Through July 31, 2009, we have paid Sing Lin $1.6 million in
connection with orders placed through that date, and we will be required to make
additional payments totaling approximately $98,000 upon taking delivery of the
units currently in production. We began taking delivery of units from Sing Lin
in October 2008 and we expect such deliveries to continue periodically
throughout the 2010 fiscal year. As of October 15, 2009, we had not placed
orders sufficient to satisfy our first-year purchase commitment under the
Agreement. Our discussions with Sing Lin are ongoing, and we expect our
commitments under the Agreement to be modified to reflect current market
conditions. There can be no assurance that the Agreement will be modified on
terms acceptable to us or at all, or that Sing Lin will not attempt to enforce
its rights under the Agreement.




At July
31, 2009, we had available Federal and State net operating loss carryforwards of
approximately $10.7 million which expire in various years through 2029. The net
operating loss carryforwards may be subject to limitation due to change of
ownership provisions under Section 382 of the Internal Revenue Code and similar
state provisions.




Series D Preferred Stock Offerings.In April 2008, we authorized a new series of our Preferred Stock, par
value $1.00 per share (the “Preferred Stock”), designated as Series D
Convertible Preferred Stock (the “Series D Preferred Stock”). Each holder of a
share of the Series D Preferred Stock has the right, at any time, to convert
such share of Series D Preferred Stock into shares of the Company’s common stock
at an initial rate of 5,000 shares of common stock per share of Series D
Preferred Stock. The Series D Preferred Stock has a $1,500 per share liquidation
preference, and is issued at $1,500 per share, which is equivalent to $0.30 per
share of Common Stock on an “as-converted” basis.




23




April 2008 Series D Preferred Stock
Offering. On April 7, 2008, we completed the sale of an aggregate of
1,000 shares of our Series D Preferred Stock to certain private investors
(collectively, the “Investors”) pursuant to a Stock Purchase Agreement entered
into on April 3, 2008 (the “Stock Purchase Agreement”). The Investors include
Marvin Sackner, a director and executive officer of the Company who also holds
more than 10% of the outstanding Common Stock; Steven Mrha, an executive officer
of the Company, and Frost Gamma Investments Trust (“Frost Gamma”), a holder of
more than 10% of the outstanding Common Stock (collectively, the “Related Party
Investors”). Dr. Jane Hsiao, who became a director and Chairman in October 2008,
is trustee of one of the Investors which is not one of the Related Party
Investors. The aggregate purchase price for the Series D Preferred Stock was
$1.5 million, of which $795,000 was paid by the Related Party Investors. The
April 7, 2008 closing price of the Common Stock on the over-the-counter bulletin
board was $0.53 per share, resulting in a $1,150 intrinsic value per share of
Series D Preferred Stock on the issue date. The $1.2 million aggregate intrinsic
value of the Series D Preferred Stock on the issue date was deemed a dividend
paid to the Investors on the closing date and as an increase in loss
attributable to common shareholders in the financial statements for the period
then ended.




December 2008 Series D Preferred
Stock Offering. On December 2, 2008, we completed the sale of an
aggregate of 491 additional shares of our Series D Preferred Stock to certain
investors pursuant to stock purchase agreements entered between December 1, 2008
and December 2, 2008 (the sale of 286 shares closed on December 1, 2008 and the
sale of 205 shares closed on December 2, 2008). These investors include Dr.
Sackner, Frost Gamma, Hsu Gamma Investments, LP (“Hsu Gamma”), an entity
controlled by our Chairman, and a director (collectively, the “New Related Party
Investors”). The aggregate purchase price for the Series D Preferred Stock was
$736,500, of which $382,500 was paid by the New Related Party Investors. Of the
$382,500 paid by the New Related Party Investors, $282,200 was paid from the
proceeds of their respective interests in the Revolver described below. (See
Note 6 to the accompanying financial statements.)The closing prices of the
Common Stock on the over-the-counter bulletin board on December 1 and 2, 2008
were $0.36 and $0.38 per share, respectively, resulting in a $168,000 aggregate
intrinsic value on the issue dates. The $168,000 aggregate intrinsic value of
the Series D Preferred Stock on the issue dates was deemed a dividend paid to
the investors on the closing dates and as an increase in loss attributable to
common shareholders in the financial statements for the period then
ended.




January 2009 Series D Preferred
Stock Offering. On January 28, 2009, we completed the sale of 700
additional shares of our Series D Preferred Stock to each of Frost Gamma and Hsu
Gamma (1,400 total shares) for aggregate proceeds of $2.1 million. The January
28, 2009 closing price of the Common Stock on the over-the-counter bulletin
board was $0.43 per share, resulting in a $650 intrinsic value per share of
Series D Preferred Stock on the issue date. The $910,000 aggregate intrinsic
value of the Series D Preferred Stock on the issue date was deemed a dividend
paid to the investors on the closing date and as an increase in loss
attributable to common shareholders in the financial statements for the period
then ended.




August 2008 Revolver Loan. On
August 28, 2008 we entered into a Note and Security Agreement (the “Agreement”)
with four persons (the “Lenders”), pursuant to which the Lenders granted us a
revolving credit line (the “Revolver”) in the aggregate amount of $300,000,
secured by all of the Company’s personal property. The Lenders included Dr.
Sackner, Frost Gamma and Hsu Gamma. We were permitted to borrow and reborrow
from time to time under the Revolver until October 31, 2008 (the “Maturity
Date”). The interest rate payable by us on amounts outstanding under the
Revolver was 11% per annum, and increased to 16% after the Maturity Date or
after an Event of Default. We were required to repay all amounts owing under the
Revolver by the Maturity Date, and amounts outstanding were prepayable at any
time. On August 29, 2008 we drew down $300,000 under the Revolver. The Revolver
was amended, effective October 31, 2008, to extend the Maturity Date until
November 30, 2008. All principal and interest outstanding under the Revolver as
of November 30, 2008 was repaid with proceeds from the sale of Series D
Preferred Stock on December 1, 2008 as described above. (See Notes 6 and 7 to
the accompanying consolidated financial statements.)




As of
September 30, 2009, we had cash and cash equivalents of approximately $672,000.
If we are unable to generate significant revenues from sales of Exer-Rest®
platforms, we will have insufficient funds to continue operations beyond the end
of the 2010 fiscal year without raising additional capital. There can be no
assurance that we will be able to raise such additional capital on terms
acceptable to us or at all.




24




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




As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include the information otherwise required by this
item.




Item
      8.
            Financial
      Statements and Supplementary Data.




Reports
      of Independent Registered Public Accounting Firms
                            27Consolidated
      Balance Sheets at July 31, 2009 and 2008
                            29Consolidated
      Comprehensive Statements of Operations for the years ended July 31, 2009
      and 2008
                            30Consolidated
      Statements of Changes in Shareholders’ Equity for years ended July 31,
      2009 and 2008
                            31Consolidated
      Statements of Cash Flows for the years ended July 31, 2009 and
      2008
                            32Notes
      to Consolidated Financial Statements
                            33




25




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


Non-Invasive
Monitoring Systems, Inc.


We have
audited the accompanying consolidated balance sheet of Non-Invasive Monitoring
Systems, Inc. and subsidiaries as of July 31, 2009 and the related consolidated
statements of operations, changes in shareholders’ equity and cash flows for the
year ended July 31, 2009. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.


We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audit
includes 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 audit provides a reasonable basis for our
opinion.


In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Non-Invasive Monitoring
Systems, Inc. and subsidiaries as of July 31, 2009 and the results of their
operations and their cash flows for the year ended July 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.


The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in the Note 1 to the
consolidated financial statements, the Company has experienced recurring net
losses, cash outflows from operating activities and has an accumulated deficit
and substantial purchase commitments that raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





/s/
      Morrison, Brown Argiz & Farra, LLPMorrison,
      Brown Argiz & Farra,
LLP


Miami,
Florida


October
28, 2009




26




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


Non-Invasive
Monitoring Systems, Inc.


We have
audited the accompanying balance sheet of Non-Invasive Monitoring Systems, Inc.
as of July 31, 2008 and the related statements of operations, changes in
shareholders’ equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.


We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audit
includes 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 audit provides a reasonable basis for our
opinion.


In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Non-Invasive Monitoring Systems,
Inc. as of July 31, 2008 and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.


The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in the Note 1 to the financial
statements, the Company has experienced recurring net losses, cash outflows from
operating activities and has an accumulated deficit and substantial purchase
commitments that raise substantial doubt about its ability to continue as a
going concern. Management’s plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





/s/
      Eisner, LLPEisner,
      LLP


New York,
New York


October
28, 2008
  27


NON-INVASIVE
MONITORING SYSTEMS, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and per share data)





July 31,2009
                      
                      
                      July 31,2008ASSETSCurrent
      assetsCash
                      
                      $
                      886
                      
                      
                      $
                      86Royalties
      and other receivables, net
                      
                      
                      60
                      
                      
                      
                      43Inventories,
      net
                      
                      
                      911
                      
                      
                      
                      173Advances
      to contract manufacturer
                      
                      
                      144
                      
                      
                      
                      659Prepaid
      expenses, deposits, and other current assets
                      
                      
                      75
                      
                      
                      
                      28Total
      current assets
                      
                      
                      2,076
                      
                      
                      
                      989Tooling
      and equipment, net
                      
                      
                      460
                      
                      
                      
                      470Total
      assets
                      
                      $
                      2,536
                      
                      
                      $
                      1,
      459LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesNotes
      payable – other
                      
                      $
                      34
                      
                      
                      $
                      19Accounts
      payable and accrued expenses
                      
                      
                      242
                      
                      
                      
                      474Customer
      deposits
                      
                      
                      9
                      
                      
                      
                      –Deferred
      warranty income
                      
                      
                      –
                      
                      
                      
                      2Total
      current liabilities
                      
                      
                      285
                      
                      
                      
                      495Total
      liabilities
                      
                      $
                      285
                      
                      
                      $
                      495Commitments
      and Contingencies (Note 10)
                      
                      
                      –
                      
                      
                      
                      –Shareholders'
      equitySeries
      B Preferred Stock, par value $1.00 per share; 100 shares authorized,
      issued and outstanding; liquidation preference $10
                      
                      
                      –
                      
                      
                      
                      –Series
      C Convertible Preferred Stock, par value $1.00 per share; 62,048 shares
      authorized, issued and outstanding; liquidation preference
    $62
                      
                      
                      62
                      
                      
                      
                      62Series
      D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares
      authorized; 2,891 and 1,000 shares issued and outstanding, respectively;
      liquidation preference $4,337
                      
                      
                      3
                      
                      
                      
                      1Common
      Stock, par value $0.01 per share; 100,000,000 shares authorized;
      68,385,637 and 68,039,065 shares issued and outstanding,
      respectively
                      
                      
                      684
                      
                      
                      
                      680Additional
      paid in capital
                      
                      
                      21,327
                      
                      
                      
                      18,256Accumulated
      deficit
                      
                      
                      (19,803
                      )
                      
                      
                      (18,035
                      )Accumulated
      other comprehensive loss
                      
                      
                      (22
                      )
                      
                      
                      –Total
      shareholders' equity
                      
                      
                      2,251
                      
                      
                      
                      964Total
      liabilities and shareholders' equity
                      
                      $
                      2,536
                      
                      
                      $
                      1,459





The accompanying notes are an integral
part of these consolidated financial statements.




28




NON-INVASIVE
MONITORING SYSTEMS, INC.


CONSOLIDATED
COMPREHENSIVE STATEMENTS OF OPERATIONS


Years
ended July 31, 2009 and 2008


(In
thousands, except share and per share data)





2009
                  
                  
                  2008RevenuesProduct
      sales, net
                  
                  $
                  325
                  
                  
                  $
                  41Royalties
                  
                  
                  219
                  
                  
                  
                  256Research,
      consulting and warranty
                  
                  
                  2
                  
                  
                  
                  5Total
      revenues
                  
                  
                  546
                  
                  
                  
                  302Operating
      costs and expensesCost
      of sales
                  
                  
                  250
                  
                  
                  
                  19Selling,
      general and administrative
                  
                  
                  1,949
                  
                  
                  
                  1,953Research
      and development
                  
                  
                  176
                  
                  
                  
                  178Total
      operating costs and expenses
                  
                  
                  2,375
                  
                  
                  
                  2,150Operating
      loss
                  
                  
                  (1,829
                  )
                  
                  
                  (1,848
                  )Other
      incomeInterest
      income (expense), net
                  
                  
                  (7
                  )
                  
                  
                  12Other
      income (expense)
                  
                  
                  68
                  
                  
                  
                  –Total
      other income
                  
                  
                  61
                  
                  
                  
                  12Net
      loss
                  
                  $
                  (1,768
                  )
                  
                  $
                  (1,836
                  )Other
      comprehensive lossForeign
      currency translation adjustment
                  
                  
                  (22
                  )
                  
                  
                  –Comprehensive
      net loss
                  
                  $
                  (1,790
                  )
                  
                  $
                  (1,836
                  )Net
      loss attributable to common shareholders and loss per common
      share:Net
      loss
                  
                  
                  (1,768
                  )
                  
                  
                  (1,836
                  )Deemed
      dividend on Series D Preferred Stock
                  
                  
                  1,078
                  
                  
                  
                  1,150Net
      loss attributable to common shareholders
                  
                  $
                  (2,846
                  )
                  
                  $
                  (2,986
                  )Weighted
      average number of common shares outstanding - basic and
      diluted
                  
                  
                  68,050,943
                  
                  
                  
                  67,673,063Basic
      and diluted loss per common share
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.04
                  )





The
accompanying notes are an integral part of these consolidated financial
statements.




29




NON-INVASIVE
MONITORING SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


Years
ended July 31, 2009 and 2008


(Dollars
in Thousands)





Preferred
      Stock
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  Accum-
                  
                  
                  Accumu-
                    lated
      Other
                    Compre-Series
      B
                  
                  
                  Series
      C
                  
                  
                  Series
      D
                  
                  
                  Common
      Stock
                  
                  
                  Paid
      in
                  
                  
                  ulated
                  
                  
                  hensiveShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Loss
                  
                  
                  TotalBalance
      at July 31, 2007
                  
                  
                  100
                  
                  
                  $
                  –
                  
                  
                  
                  62,048
                  
                  
                  $
                  62
                  
                  
                  
                  –
                  
                  
                  $
                  –
                  
                  
                  
                  67,293,734
                  
                  
                  $
                  673
                  
                  
                  $
                  16,374
                  
                  
                  $
                  (16,199
                  )
                  
                  $
                  –
                  
                  
                  $
                  910Issuance
      of  series D preferred stock
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,000
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,489
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  1,490Fair
      value of beneficial conversion feature of Series D Preferred
      Stock
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,150
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  1,150Deemed
      dividend to Series D Preferred Shareholders, charged to additional
      paid-in-capital in the absence of retained earnings
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (1,150
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  (1,150
                  )Common
      stock issued for cash on exercise of options
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  195,331
                  
                  
                  
                  2
                  
                  
                  
                  84
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  86Cashless
      exercise of options
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  550,000
                  
                  
                  
                  5
                  
                  
                  
                  (5
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  –Stock
      based compensation
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  314
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  314Net
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (1,836
                  )
                  
                  
                  –
                  
                  
                  $
                  (1,836
                  )Balance
      at July 31, 2008
                  
                  
                  100
                  
                  
                  $
                  –
                  
                  
                  
                  62,048
                  
                  
                  $
                  62
                  
                  
                  
                  1,000
                  
                  
                  $
                  1
                  
                  
                  
                  68,039,065
                  
                  
                  $
                  680
                  
                  
                  $
                  18,256
                  
                  
                  $
                  (18,035
                  )
                  
                  $
                  –
                  
                  
                  $
                  964Issuance
      of  series D preferred stock
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,891
                  
                  
                  
                  2
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2,835
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  2,837Fair
      value of beneficial conversion feature of Series D Preferred
      Stock
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,078
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  1,078Deemed
      dividend to Series D Preferred Shareholders, charged to additional
      paid-in-capital in the absence of retained earnings
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (1,078
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  (1,078
                  )Common
      stock issued for cash on exercise of options and warrants
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  338,333
                  
                  
                  
                  4
                  
                  
                  
                  47
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  51Cashless
      exercise of 13,333 options
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  8,239
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  –Stock
      based compensation
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  189
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  189Foreign
      currency translation adjustment
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (22
                  )
                  
                  $
                  (22
                  )Net
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (1,768
                  )
                  
                  
                  –
                  
                  
                  $
                  (1,768
                  )Balance
      at July 31, 2009
                  
                  
                  100
                  
                  
                  $
                  –
                  
                  
                  
                  62,048
                  
                  
                  $
                  62
                  
                  
                  
                  2,891
                  
                  
                  $
                  3
                  
                  
                  
                  68,385,637
                  
                  
                  $
                  684
                  
                  
                  $
                  21,327
                  
                  
                  $
                  (19,803
                  )
                  
                  $
                  (22
                  )
                  
                  $
                  2,251





The
accompanying notes are an integral part of these consolidated financial
statements.


30





NON-INVASIVE
MONITORING SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
ended July 31, 2009 and 2008


(Dollars
in Thousands)





2009
                                                
                                                
                                                2008Operating
      ActivitiesNet
      loss
                                                
                                                $
                                                (1,768
                                                )
                                                
                                                $
                                                (1,836
                                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Deferred
      warranty income
                                                
                                                
                                                (2
                                                )
                                                
                                                
                                                (4
                                                )Depreciation
      and amortization
                                                
                                                
                                                114
                                                
                                                
                                                
                                                6Stock
      based compensation expense
                                                
                                                
                                                189
                                                
                                                
                                                
                                                314Loss
      on disposal of assets
                                                
                                                
                                                17
                                                
                                                
                                                
                                                –Allowance
      for doubtful accounts
                                                
                                                
                                                10
                                                
                                                
                                                
                                                –Foreign
      currency transaction gain
                                                
                                                
                                                (85
                                                )
                                                
                                                
                                                –Changes
      in operating assets and liabilitiesAccounts
      and royalties receivable, net
                                                
                                                
                                                (24
                                                )
                                                
                                                
                                                5Inventories,
      net
                                                
                                                
                                                (711
                                                )
                                                
                                                
                                                (173
                                                )Advances
      to contract manufacturer
                                                
                                                
                                                515
                                                
                                                
                                                
                                                (659
                                                )Prepaid
      expenses, deposits and other current assets
                                                
                                                
                                                (47
                                                )
                                                
                                                
                                                1Accounts
      payable and accrued expenses
                                                
                                                
                                                (85
                                                )
                                                
                                                
                                                114Customer
      deposits
                                                
                                                
                                                9
                                                
                                                
                                                
                                                –Net
      cash used in operating activities
                                                
                                                
                                                (1,868
                                                )
                                                
                                                
                                                (2,232
                                                )Investing
      ActivitiesFixed
      asset purchases
                                                
                                                
                                                (232
                                                )
                                                
                                                
                                                (314
                                                )Certificates
      of deposit redeemed
                                                
                                                
                                                –
                                                
                                                
                                                
                                                400Net
      cash provided by (used in) investing activities
                                                
                                                
                                                (232
                                                )
                                                
                                                
                                                86Financing
      ActivitiesNet
      proceeds from issuance of common stock and exercise of options and
      warrants
                                                
                                                
                                                51
                                                
                                                
                                                
                                                86Net
      proceeds from issuance of preferred stock
                                                
                                                
                                                2,837
                                                
                                                
                                                
                                                1,490Net
      proceeds from issuance of notes payable
                                                
                                                
                                                363
                                                
                                                
                                                
                                                –Repayments
      of notes payable
                                                
                                                
                                                (348
                                                )
                                                
                                                
                                                (500
                                                )Net
      cash provided by financing activities
                                                
                                                
                                                2,903
                                                
                                                
                                                
                                                1,076Effect
      of exchange rate changes on cash
                                                
                                                
                                                (3
                                                )
                                                
                                                
                                                –Net
      increase (decrease) in cash
                                                
                                                
                                                800
                                                
                                                
                                                
                                                (1,070
                                                )Cash,
      beginning of year
                                                
                                                
                                                86
                                                
                                                
                                                
                                                1,156Cash,
      end of year
                                                
                                                $
                                                886
                                                
                                                
                                                $
                                                86Supplemental disclosureCash
      paid for interest
                                                
                                                $
                                                8
                                                
                                                
                                                $
                                                23Supplemental schedule of non-cash financing
      activities(Satisfaction)
      incurrence of liability for tooling development in
progress
                                                
                                                $
                                                (142
                                                )
                                                
                                                $
                                                142Transfer
      of demonstration units from inventory to fixed assets
                                                
                                                $
                                                ( 31
                                                )
                                                
                                                $
                                                –





The
accompanying notes are an integral part of these consolidated financial
statements.


31




NON-INVASIVE MONITORING
SYSTEMS, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.      ORGANIZATION
AND BUSINESS


Organization.Non-Invasive
Monitoring Systems, Inc., a Florida corporation (together with its consolidated
subsidiaries, the “Company” or “NIMS”), began business as a medical diagnostic
monitoring company to develop computer-aided continuous monitoring devices to
detect abnormal respiratory and cardiac events using sensors on the body’s
surface.  It has ceased to operate in this market and has licensed the
rights to its technology to the SensorMedics division of ViaSys Healthcare Inc.
(which is now a unit of Cardinal Health, Inc. (“SensorMedics”)), and to
VivoMetrics, Inc. (“VivoMetrics”).  The Company is now focused on
developing and marketing its Exer-Rest® line of
acceleration therapeutic platforms based upon unique, patented whole body
periodic acceleration (“WBPA”) technology.  The Exer-Rest® line of
acceleration therapeutic platforms currently includes the Exer-Rest® AT, SL
and TL models.


NIMS
received US Food and Drug Administration (“FDA”) clearance in January 2009 to
market the full Exer-Rest® line of
products as Class I (Exempt) Medical Devices as described in the Company’s
510(k) premarket notification submission.  The submission included 23
investigational and clinical studies on the vasodilatation properties of WBPA,
as well as a controlled, four week clinical trial in a group of patients with
chronic aches and pains carried out at the Center of Clinical Epidemiology and
Biostatistics at the University of Pennsylvania Medical School.  The
submission supported Exer-Rest® safety
and efficacy for the cleared intended uses as an aid to temporarily increase
local circulation, to provide temporary relief of minor aches and pains, and
local muscle relaxation.  The clearance was based upon the FDA’s
determination that the Exer-Rest® line of
devices was exempt from the premarket notification requirements of the Federal,
Food Drug and Cosmetic Act.  In June 2009, the FDA authorized the
expansion of intended use claims for the Exer-Rest® to
include a claim of reducing morning stiffness.  These authorizations
to market the Exer-Rest® in the
United States complement NIMS’ existing international clearance to market the
Exer-Rest® as a
class IIa medical device (CE120) in Canada, the United Kingdom, the European
Economic Area, India, the Middle East and certain other markets that recognize
FDA and/or CE certifications with the intended use described above plus the
claim of improving joint mobility.


Business.  The
Company receives revenue from royalties on sales of diagnostic monitoring
hardware and software by    SensorMedics and
VivoMetrics.  Additionally, the Company receives revenues from sales
of parts and service and from sales of acceleration therapeutics platforms used
for research purposes.  In fiscal year 2009, NIMS began commercial
sales of its third generation Exer-Rest®
therapeutic platforms.


During
the calendar years 2005 to 2007, the Company designed, developed and
manufactured the first Exer-Rest® platform
(now the Exer-Rest® AT), a
second generation acceleration therapeutics platform, and updated its operations
to promote the Exer-Rest®AT
overseas as an aid to improve circulation and joint mobility, and to relieve
minor aches and pains.


The
Company has developed a third generation of Exer-Rest®acceleration therapeutic platforms (designated the Exer-Rest®SL and
the Exer-Rest®TL) that
are being manufactured by Sing Lin Technologies Co. Ltd. (“Sing Lin”) based in
Taichung, Taiwan (see Note 10).


NIMS, an
ISO 13485 certified company, began marketing operations in the United States in
2009 upon receiving the FDA clearance described above.  The Company is
also permitted to sell Exer-Rest® in
Canada, the United Kingdom, the European Economic Area, India, the Middle East
and certain other markets that recognize FDA and/or CE certifications, and began
international marketing operations during 2008.


Sing Lin
also has distribution rights to the Company’s acceleration therapeutics
platforms in certain Far East markets.  The Company has also engaged
Sing Lin to build the Somno-EaseTM
platform, a variation of the Exer-Rest® that is
designed to aid patients with sleep disorders as well as provide feedback for
slow rhythmic breathing exercises for the relief of stress associated with daily
living.  The Company is also developing a further product line
extension called Exer-Rest® Plus, a
device that combines the features of the Exer-Rest® and
Somno-EaseTM for
future marketing in the United States and other markets.


The
Company’s financial statements have been prepared and presented on a basis
assuming it will continue as a going concern.  As reflected in the
accompanying consolidated financial statements, the Company had net losses in
the amount of $1.8 million for each of the years ended July 31, 2009 and
2008, and has experienced cash outflows from operating
activities.  The Company also has an accumulated deficit of $19.8
million as of July 31, 2009, and has substantial purchase commitments at July
31, 2009 (see note 10).  These matters raise substantial doubt about the
Company’s ability to continue as a going concern.


32


Although
the Company has commenced sales of the Exer-Rest® in the
United States and has raised approximately $2.8 million from the sales of its
Series D Preferred Stock in December 2008 and January 2009 (see Note 7), the
Company will likely need to generate additional funds during the next 12
months.  Absent any significant revenues from product sales,
additional debt or equity financing will be required for the Company to continue
its business activities, which are currently focused on the production,
marketing and commercial sale of the Exer-Rest®.  It
is management’s intention to obtain any additional capital needed to continue
its business activities through new debt or equity financing, but there can be
no assurance that it will be successful in this regard.  The
accompanying consolidated financial statements do not include any adjustments
that might be necessary from the outcome of this uncertainty.





2.      SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES


Consolidation.The
financial statements include the accounts of the Company for the year ended July
31, 2008 and for the year ended July 31, 2009 also include in consolidation its
wholly-owned subsidiaries, Non-Invasive Monitoring Systems of Florida, Inc.,
which has no current operations, and NIMS of Canada, Inc., a Canadian
corporation.  All inter-company accounts and transactions have been
eliminated in consolidation.


Use of
Estimates.  The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 financial statements and reported amounts of
revenues and expenses during the reporting period.  Such items include
input variables for stock based compensation.  Actual results could
differ from these estimates.


Cash and Cash
Equivalents.  The Company considers all highly liquid
short-term investments purchased with an original maturity date of three months
or less to be cash equivalents.  The Company includes overnight
repurchase agreements securing its depository bank accounts (sweep accounts) in
its cash balances.  At July 31, 2009, the Company had approximately
$821,000 on deposit in such sweep accounts.


Allowances for
Doubtful Accounts.  The Company provides an allowance for
royalties and other receivables it believes it may not collect in
full.  Receivables are written off when they are deemed to be
uncollectible and all collection attempts have ceased.  The amount of
bad debt recorded each period and the resulting adequacy of the allowance at the
end of each period are determined using a combination of the Company’s
historical loss experience, customer-by-customer analysis of the Company’s
accounts receivable each period and subjective assessments of the Company’s
future bad debt exposure.


Inventories.Inventories
are stated at lower of cost or market using the first-in, first-out method, and
are evaluated at least annually for impairment.  Inventories at July
31, 2009 and 2008 primarily consist of finished Exer-Rest® units
and purchased sub-assemblies to be used by the Company’s US-based contract
manufacturer in production of the Exer-Rest®
AT.  Provisions for potentially obsolete or slow-moving inventory are
made based on management’s analysis of inventory levels, historical obsolescence
and future sales forecasts.


Tooling and
Equipment.These assets are stated at cost and depreciated or
amortized using the straight-line method over their estimated useful
lives.




Long-lived
Assets.The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable.  In performing the review for recoverability, the Company
estimates the future undiscounted cash flows expected to result from the use of
the asset and its eventual disposition.  If the sum of the expected future
cash flows is less than the carrying amount of the assets, an impairment loss is
recognized as the difference between the fair value and the carrying amount of
the asset.


33




Income
Taxes.The Company provides for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”) using an asset and liability based
approach.  Deferred income tax assets and liabilities are recorded to
reflect the tax consequences in future years of temporary differences between
the carrying amounts of assets and liabilities for financial statement and
income tax purposes.  The deferred tax asset for loss carryforwards
and other potential future tax benefits has been fully offset by a valuation
allowance since it is uncertain whether any future benefit will be
realized.  The Company files its tax returns as prescribed by the laws
of the jurisdictions in which it operates.  Tax years ranging from
2005 to 2008 remain open to examination by various taxing jurisdictions as the
statute of limitations has not expired.  It is the Company’s policy to
include income tax interest and penalty expense in its tax
provision.


Revenue
Recognition.  Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, the goods are shipped and title
has transferred, the price is fixed or determinable, and the collection of the
sales proceeds is reasonably assured.  The Company recognizes royalties as
they are earned, based on reports from licensees.  Research and consulting
revenue and revenue from sales of extended warranties on therapeutic platforms
are recognized over the term of the respective agreements.




Advertising
Costs.The Company expenses all costs of advertising and promotions as
incurred.  Advertising and promotional costs for the years ended July
31, 2009 and 2008 totaled $43,000 and $3,000, respectively, and are included in
selling, general and administrative costs and expenses for all periods
presented.




Research and
Development Costs.  Research and development costs are expensed
as incurred, and primarily consist of payments to third parties for research and
development of the Exer-Rest® device
and regulatory testing costs to obtain FDA approval.




Warranties.  The
Company’s warranties are two years on all Exer-Rest® products
sold and are accrued based on management’s estimates and the history of warranty
costs incurred.  There were no material warranty costs incurred during
the years ended July 31, 2009 and 2008, and management estimates that the
Company’s accrued warranty expense at July 31, 2009 will be sufficient to offset
claims made for units under warranty.




Stock-based
compensation.The Company follows SFAS No. 123R, “Share Based Payment,” which
requires all share-based payments, including grants of stock options, to be
recognized in the income statement as an operating expense, based on their grant
date fair values.  The fair value of the Company’s stock option awards
is expensed over the vesting life of the underlying stock options using the
graded vesting method, with each tranche of vesting options valued
separately.  Stock-based compensation is included in selling, general
and administrative costs and expenses for all periods presented.




Fair Value of
Financial Instruments.  Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available to
management as of July 31, 2009 and 2008.  The respective carrying
value of certain on-balance-sheet financial instruments such as cash and cash
equivalents, royalties and other receivables, accounts payable, accrued expenses
and notes payable approximate fair values because they are short term in nature
or they bear current market interest rates.




Foreign Currency
Translation.  The functional currency for the Company’s foreign
subsidiary is the local currency.  Assets and liabilities are
translated at exchange rates in effect at the balance sheet date while income
and expense amounts are translated at average exchange rates during the
period.  The resulting foreign currency translation adjustments are
disclosed as a separate component of shareholders’ equity and other
comprehensive loss.  There were $22,000 of foreign currency
translation adjustments for the year ended July 31, 2009.




Comprehensive
Income (Loss).  Comprehensive income (loss) is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources, including foreign
currency translations.





3.      INVENTORIES




The
Company’s inventory consists of the following (in thousands):





July
      31, 2009
                  
                  
                  July
      31, 2008Work-in-progress,
      including sub-assemblies and spare parts
                  
                  $
                  11
                  
                  
                  $
                  66Finished
      goods
                  
                  
                  900
                  
                  
                  
                  107Total
      inventories
                  
                  $
                  911
                  
                  
                  $
                  173




The
Company recorded valuation adjustments to work-in-progress and finished goods
inventories of $55,000 and $58,000, respectively during the year ended July 31,
2009.  This $113,000 total adjustment is included in cost of sales in
the accompanying consolidated statements of operations.  No inventory
valuation adjustments were recorded during the year ended July 31,
2008.


34





4.      STOCK
BASED COMPENSATION




The
Company follows SFAS No. 123R, “Share Based Payment,” (“SFAS
No. 123R”) which requires a public entity to measure the cost of employee,
officer and director services received in exchange for an award of equity
instruments based on the grant-date fair value of the award.  The fair
value of the Company’s stock option awards is expensed over the vesting life of
the underlying stock options using the graded vesting method, with each tranche
of vesting options valued separately.  The Company recorded stock
based compensation of $189,000 and $314,000, respectively, for the years ended
July 31, 2009 and 2008.  All stock based compensation is included in
the Company’s selling, general and administrative costs and
expenses.




The
Company’s 2000 Stock Option Plan (the “Plan”), as amended, provides for a total
of 2,000,000 shares of Common Stock.  The Plan allows the issuance of
incentive stock options, stock appreciation rights and restricted stock
awards.  The exercise price of the options is determined by the
compensation committee of the Company’s Board of Directors, but incentive stock
options, if any, must be granted at an exercise price not less than the fair
market value of the Company’s Common Stock as of the grant date or an exercise
price of not less than 110% of the fair value for a 10%
shareholder.  Options expire up to ten years from the date of the
grant and are exercisable according to the terms of the individual options
agreement.




The
Company granted 340,000 and 908,500 stock options, respectively, during the
years ended July 31, 2009 and 2008.  The weighted average grant date
fair value of the options granted during 2009 was $0.249 per share and the
weighted average grant date fair value of the options granted during 2008 was
$0.517 per share.  The fair values of options granted are estimated on
the date of their grant using the Black-Scholes option pricing model based on
the assumptions included in the table below.  The expected term of
stock option awards granted is generally based upon the “simplified” method for
“plain vanilla” options discussed in SEC Staff Accounting Bulletin (“SAB”) No.
107, as amended by SAB No. 110.  The expected volatility is derived
from historical volatility of the Company's stock on the U.S. over-the-counter
bulletin board for a period that matches the expected term of the
option.  The risk-free interest rate is the yield from a Treasury bond
or note corresponding to the expected term of the option.  The Company
has not paid cash dividends and does not expect to pay cash dividends in the
future.  Forfeiture rates are based on management’s
estimates.  The fair value of each option granted during the years
ended July 31, 2009 and 2008 was estimated using the following
assumptions:





Year
      ended July 31, 2009
                
                Year
      ended July 31, 2008Expected
      volatility
                91.63%
      - 110.18%
                
                77.00%
      –  116.96%Expected
      dividend yield
                0.00%
                
                0.00%Risk-free
      interest rate
                1.50%
      - 2.83%
                
                2.45%
      – 4.23%Expected
      life
                4.0
      - 5.5 years
                
                3.0
      – 5.5  yearsForfeiture
      rate
                0.00%
      - 2.50%
                
                0.00%
      – 2.50%




A summary
of the Company’s stock option activity for the two years ended July 31, 2009 is
as follows:





Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
      average
                    remaining
                    contractual
      term
                    (years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOptions
      outstanding, July 31, 2007
                  
                  
                  2,886,161
                  
                  
                  $
                  0.376Options
      granted *
                  
                  
                  908,500
                  
                  
                  $
                  0.774Options
      exercised
                  
                  
                  (1,296,557
                  )
                  
                  $
                  0.321Options
      forfeited
                  
                  
                  (423,774
                  )
                  
                  $
                  0.334Options
      outstanding, July 31, 2008
                  
                  
                  2,074,330
                  
                  
                  $
                  0.593Options
      granted
                  
                  
                  340,000
                  
                  
                  $
                  0.338Options
      exercised
                  
                  
                  (26,666
                  )
                  
                  $
                  0.150Options
      forfeited
                  
                  
                  (50,833
                  )
                  
                  $
                  0.334Options
      outstanding, July 31, 2009
                  
                  
                  2,336,831
                  
                  
                  $
                  0.567
                  
                  
                  
                  3.40
                  
                  
                  $
                  66,166Options
      expected to vest, July 31, 2009
                  
                  
                  2,316,290
                  
                  
                  $
                  0.568
                  
                  
                  
                  3.37
                  
                  
                  $
                  65,380Options
      exercisable, July 31, 2009
                  
                  
                  1,839,831
                  
                  
                  $
                  0.589
                  
                  
                  
                  2.83
                  
                  
                  $
                  50,266





* 547,500
options were issued outside of the Company's 2000 Stock Option
Plan.


35




Of the
2,336,831 options outstanding at July 31, 2009, 1,251,000 were issued under the
2000 Plan and 1,085,831 were issued outside of shareholder approved
plans.  All of the options exercised, forfeited and expired during the
years ended July 31, 2009 and 2008 were granted outside of shareholder approved
plans.




During
the year ended July 31, 2009, the Company received $2,000 from an existing
option holder for the exercise of options to purchase 13,333 shares of Common
Stock, and 8,239 shares were issued to another option holder upon the cashless
exercise of 13,333 options.  During the year ended July 31, 2008, the
Company received $86,000 from existing optionholders for the exercise of options
to purchase 195,331 shares of Common Stock.  On January 24, 2008, Gary
Macleod, the Company’s former Chief Executive Officer and Director, provided the
Company with a notice of cashless exercise with respect to options to purchase
1,500,000 shares of common stock issued to him on November 11, 2005, which
vested in full upon his termination as Chief Executive Officer in December
2007.  On February 29, 2008, the Company entered into a Separation and
Release Agreement with Mr. Macleod (the “Separation
Agreement”).  Pursuant to the Separation Agreement, Mr. Macleod was
entitled to exercise options for 1,101,226 shares and received 550,000 shares
for such cashless exercise, and forfeited options to purchase 398,774 shares,
which if not forfeited would have resulted in an issuance of  an
additional 199,165 shares.  Mr. Macleod also forfeited options to
purchase 25,000 shares of the Company’s common stock awarded in October
2007.  The intrinsic value of the 26,666 options exercised during the
year ended July 31, 2009 was $8,000 on the dates exercised, and the intrinsic
value of the 1,296,557 options exercised during the year ended July 31, 2008 was
$406,000 on the dates exercised.  There was no tax effect on the
exercise of options in the consolidated statements of cash flows because the
Company has a full valuation allowance against its deferred income tax
assets.




A summary
of the status of the Company’s non-vested options and changes during the year
ended July 31, 2009 is presented below.





Stock
      Options
                
                
                Weighted
      Average
                    Grant
      Date Fair ValueUnvested
      at July 31, 2008
                
                
                476,000
                
                
                $
                0.500Options
      granted
                
                
                340,000
                
                
                $
                0.249Options
      vested
                
                
                (319,000
                )
                
                $
                0.473Unvested
      at July 31, 2009
                
                
                497,000
                
                
                $
                0.345




As of
July 31, 2009, there was approximately $91,000 of unrecognized costs related to
outstanding stock options.  These costs are expected to be recognized
over a weighted average period of 1.42 years.


The
following table sets forth the range of exercise prices, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price as of July 31, 2009:




Options
      Outstanding
                                      
                                      
                                      
                                      
                                      
                                      Options
      ExercisableWeighted
                                      
                                      
                                      WeightedNumber
      of
                                      
                                      
                                      Average
                                      
                                      
                                      Average
                                      
                                      
                                      Number
      of
                                      
                                      
                                      WeightedRange
      of
                                      
                                      Underlying
                                      
                                      
                                      Exercise
                                      
                                      
                                      Contractual
                                      
                                      
                                      Underlying
                                      
                                      
                                      AverageExercise
      Prices
                                      
                                      Shares
                                      
                                      
                                      Price
                                      
                                      
                                      Life
      (years)
                                      
                                      
                                      Shares
                                      
                                      
                                      Price15¢
      - 30¢
                                      
                                      
                                      253,331
                                      
                                      
                                      $
                                      0.182
                                      
                                      
                                      
                                      3.35
                                      
                                      
                                      
                                      253,331
                                      
                                      
                                      $
                                      0.18231¢
      - 60¢
                                      
                                      
                                      1,126,000
                                      
                                      
                                      $
                                      0.453
                                      
                                      
                                      
                                      3.59
                                      
                                      
                                      
                                      759,000
                                      
                                      
                                      $
                                      0.49161¢
      - 90¢
                                      
                                      
                                      957,500
                                      
                                      
                                      $
                                      0.802
                                      
                                      
                                      
                                      3.19
                                      
                                      
                                      
                                      827,500
                                      
                                      
                                      $
                                      0.803Total
                                      
                                      
                                      2,336,831
                                      
                                      
                                      $
                                      0.567
                                      
                                      
                                      
                                      3.40
                                      
                                      
                                      
                                      1,839,831
                                      
                                      
                                      $
                                      0.589


36





5.      ROYALTIES


The
Company is a party to two licensing agreements and receives royalty income from
the sale of its diagnostic monitoring hardware and software from SensorMedics
and VivoMetrics.


Royalty
income from these licenses amounted to $219,000 and $256,000 for the years ended
July 31, 2009 and 2008, respectively.  Royalties from SensorMedics
amounted to $180,000 and $184,000 for the years ended July 31, 2009 and 2008,
respectively.  Royalties from VivoMetrics amounted to $39,000 and
$72,000 for the years ended July 31, 2009 and 2008,
respectively.  VivoMetrics ceased operations in July 2009 and filed
for Chapter 11 bankruptcy protection in October 2009.  VivoMetrics has
not made a royalty payment since July 2009, and aggregate royalties receivable
at July 31, 2009 of $14,000 include a $10,000 allowance for doubtful accounts to
reserve all outstanding receivables from VivoMetrics.





6.      NOTES
PAYABLE




The
Company refinanced its then-existing bank debt in February 2007 by securing a
$500,000 line of credit, which was set to expire in March, 2008.  The
debt was initially collateralized by certificates of deposit in the amount of
$400,000 (which were classified as restricted cash), and bore interest at one
percent per annum below prime rate.  The Company retired $320,000 of
the outstanding debt in March 2008 by redeeming certificates of deposit totaling
$320,000.  The remaining $180,000 note payable was extended to May
2008, bore interest at a rate of 6.50%, and was collateralized by the remaining
$80,000 certificate of deposit in restricted cash.  The Company
retired this $180,000 balance in April 2008 with $100,000 cash and the proceeds
from the redemption of the final $80,000 certificate of deposit in restricted
cash.




On August
28, 2008 the Company entered into a Note and Security Agreement (the
“Agreement”) with four persons (the “Lenders”), pursuant to which the Lenders
granted the Company a revolving credit line (the “Revolver”) in the aggregate
amount of $300,000, secured by all of the Company’s personal
property.  The Lenders included a holder of more than 10% of the
outstanding Common Stock, a director and executive officer of the Company who
also holds more than 10% of the outstanding Common Stock and an entity
controlled by the Company’s Chairman.  The Company was permitted to
borrow and reborrow from time to time under the Revolver until October 31, 2008
(the “Maturity Date”).  The interest rate payable on amounts
outstanding under the Revolver was 11% per annum, and increased to 16% after the
Maturity Date or after an Event of Default.  All amounts owing under
the Revolver were required to be repaid by the Maturity Date, and amounts
outstanding were prepayable at any time.  On August 29, 2008 the
Company drew down $300,000 under the Revolver.  The Revolver was
amended, effective October 31, 2008, to extend the Maturity Date until November
30, 2008.  All principal and interest outstanding under the Revolver
as of November 30, 2008 was repaid with proceeds from the sale of Series D
Preferred Stock on December 1, 2008 as described in Note 7 below.




The
$34,000 and $19,000 notes payable balances at July 31, 2009 and 2008,
respectively, relate to the third-party financing of certain of the Company’s
insurance policies.  The notes outstanding as of July 31, 2009 are
self-amortizing, 7.69% installment loans which mature at various dates from
December 2009 to January 2010.





7.      SHAREHOLDERS'
EQUITY




During
the year ended July 31, 2009, the Company received $2,000 from an existing
option holder for the exercise of options to purchase 13,333 shares of Common
Stock, and 8,239 shares were issued to another option holder upon the cashless
exercise of 13,333 options.  The Company also received $49,000 from an
existing warrant holder for the exercise of warrants to purchase 325,000 shares
of Common Stock during the year ended July 31, 2009.  During the year
ended July 31, 2008, the Company received $86,000 from existing optionholders
for the exercise of options to purchase 195,331 shares of Common Stock, and
issued 550,000 shares of Common Stock to Mr. Macleod pursuant to the cashless
exercise described in Note 4, above.  No warrants were exercised in
the year ended July 31, 2008.


37




Series
D Convertible Preferred Stock.




In April
2008, the Company authorized a new series of its Preferred Stock, par value
$1.00 per share (the “Preferred Stock”), designated as Series D Convertible
Preferred Stock (the “Series D Preferred Stock”).  The Series D
Preferred Stock has no preference with respect to dividends to the Company’s
common stock, and is entitled to receive dividends when, as and if declared by
the Company’s Board of Directors, together with the holders of the common stock,
ratably on an “as-converted” basis.  Each holder of a share of the
Series D Preferred Stock has the right, at any time, to convert such share of
Series D Preferred Stock into shares of Common Stock at an initial rate of 5,000
shares of Common Stock per share of Series D Preferred Stock.  The
holders of the Series D Preferred Stock are entitled to vote, on an
“as-converted basis,” together with the holders of the Common Stock and holders
of any other series of Preferred Stock or other class of the Company’s capital
stock which are granted such voting rights as a single class on all matters,
except as otherwise provided by law.  In the event of any liquidation,
dissolution or winding up of the affairs of the Company, either voluntarily or
involuntarily, the holders of the Series D Preferred Stock will be entitled to a
liquidation preference of $1,500 per share of Series D Preferred Stock prior to
any distribution to the holders of the Common Stock.  The Series D
Preferred Stock ranks (1) pari
passu in respect of the preferences as to dividends, distributions and
payments upon the liquidation, dissolution or winding up of the Company to all
shares of Series C Preferred Stock, par value $1.00 per share, of the Company
and (2) senior in respect of the preferences as to dividends, distributions and
payments upon the liquidation, dissolution or winding up of the Company to all
shares of Common Stock.  The Series D Preferred Stock is not
redeemable.




April 2008
Offering.  On April 7, 2008, the Company completed the sale of
an aggregate of 1,000 shares of Series D Preferred Stock to certain private
investors (collectively, the “Investors”) pursuant to a Stock Purchase Agreement
entered into on April 3, 2008 (the “Stock Purchase Agreement”).  The
Investors include an executive officer of the Company, a holder of more than 10%
of the outstanding Common Stock and a director and executive officer of the
Company who also holds more than 10% of the outstanding Common Stock
(collectively, the “Related Party Investors”).  Dr. Jane Hsiao, who
became a director and Chairman in October 2008, is trustee of one of the
Investors which is not one of the Related Party Investors.  The
aggregate purchase price for the Series D Preferred Stock was $1,500,000, of
which $795,000 was paid by the Related Party Investors.




December 2008
Offering.  In December 2008, the Company sold an aggregate of
491 additional shares of its Series D Preferred Stock to certain private
investors at a price of $1,500 per share pursuant to Stock Subscription
Agreements entered between December 1, 2008 and December 2, 2008 (the sale of
286 shares closed on December 1, 2008 and the sale of 205 shares closed on
December 2, 2008).  The investors in the December 2008 Offering
include a director of the Company, an entity controlled by the Company’s
Chairman and certain of the Related Party Investors that participated in the
April 2008 Offering (collectively, the “December Related Party
Investors”).  The aggregate purchase price for the Series D Preferred
Stock was $736,500, of which $382,500 was paid by the December Related Party
Investors.  Of the $382,500 paid by the December Related Party
Investors, $282,200 was paid from the proceeds of their respective interests in
the Revolver described in Note 6 above.




January 2009
Offering.  On January 28, 2009, pursuant to Stock Subscription
Agreements accepted by the Company on that date, the Company completed the sale
of an aggregate of 1,400 additional shares of Series D Preferred Stock at a
price of $1,500 per share to certain of the Related Party Investors that
participated in the December 2008 offering described above.  The
aggregate price paid for the shares issued in the January 2009 offering was $2.1
million.




The
Series D Preferred Stock was issued in each of the above transactions at $1,500
per share, which is equivalent to $0.30 per share of Common Stock on an
“as-converted” basis.  The closing price of the Common Stock on the
over-the-counter bulletin board was $0.53, $0.36, $0.38 and $0.43, respectively,
on each of April 7, 2008, December 1, 2008, December 2, 2008 and January 28,
2009, resulting in beneficial conversion features of $1,150, $300, $400 and
$650, respectively, per share of Series D Preferred Stock on the respective
issue dates.  In accordance with the guidance in FASB Emerging Issues
Task Force Issue Nos. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio,” and 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments,”the $2.2 million aggregate beneficial
conversion feature of the Series D Preferred Stock on the issue dates was deemed
a discount on the issuance of the shares and was recorded as an increase to
additional paid in capital in the consolidated balance
sheets.  Because the Series D Preferred Stock was immediately
convertible to Common Stock, the portion of the $2.2 million aggregate intrinsic
value applicable to a closing date is deemed a dividend paid to the investors on
such closing date.  Such deemed dividends have been recorded as
increases in losses attributable to common shareholders and, in the absence of
retained earnings, as reductions of additional paid in capital.


The
Company has three classes of Preferred Stock.  Holders of Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are
entitled to vote with the holders of common stock as a single class on all
matters.


Series B
Preferred Stock is not redeemable by the Company, and has a liquidation value of
$100 per share, plus declared and unpaid dividends, if any.  Dividends
are non cumulative, and are at the rate of $10 per share, if
declared.


38


Series C
Preferred Stock is redeemable by the Company at a price of $0.10 per share upon
30 days prior written notice.  This series has a liquidation value of
$1.00 per share, plus declared and unpaid dividends, if
any.  Dividends are non-cumulative, and are at the rate of $0.10 per
share, if declared.  Each share of Series C Preferred Stock is
convertible into 25 shares of the Company’s common stock upon payment of a
conversion premium of $4.20 per share of common stock.  The conversion
rate and the conversion premium are subject to adjustments in the event of stock
splits, stock dividends, reverse stock splits and other events, as
defined.


Series D
Preferred Stock is not redeemable by the Company.  This series has a
liquidation value of $1,500 per share, plus declared and unpaid dividends, if
any.  Each share of Series D Preferred Stock is convertible into 5,000
shares of the Company’s common stock.  The conversion rate is subject
to adjustments in the event of stock splits, stock dividends, reverse stock
splits and other events, as defined.


No
preferred stock dividends have been declared as of July 31,
2009.


The
Company has no common stock warrants outstanding as of July 31,
2009.  At July 31, 2008, the Company had warrants to purchase
325,000 shares of common stock outstanding which had an expiration date of
August 17, 2009 and were exercisable at $0.15 per share.  All such
warrants were exercised on July 30, 2009.





8.      BASIC
AND DILUTED LOSS PER SHARE




Basic net
loss per common share is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding during
the period.  Diluted net loss per common share is computed giving
effect to all dilutive potential common shares that were outstanding during the
period.  Diluted potential common shares consist of incremental shares
issuable upon exercise of stock options and warrants and conversion of preferred
stock.  In computing diluted net loss per share for the years ended
July 31, 2009 and 2008, no dilution adjustment has been made to the weighted
average outstanding common shares because the assumed exercise of outstanding
options and warrants and the conversion of preferred stock would be
anti-dilutive.




Potential
common shares not included in calculating diluted net loss per share are as
follows:





July
      31, 2009
                
                
                July
      31, 2008Stock
      options
                
                
                2,336,831
                
                
                
                2,074,330Stock
      warrants
                
                
                –
                
                
                
                325,000Series
      C Preferred Stock
                
                
                1,551,200
                
                
                
                1,551,200Series
      D Preferred Stock
                
                
                14,455,000
                
                
                
                5,000,000Total
                
                
                18,343,031
                
                
                
                8,950,530





9.      RELATED
PARTY TRANSACTIONS




Dr.
Marvin A. Sackner, the Company’s CEO and director, formerly leased office space
to the Company on a month to month basis in North Bay Village, Florida under an
arrangement with the Company which was discontinued effective October 31,
2007.  The Company reimbursed Dr. Sackner for the cost of the space
monthly.  The amount reimbursed to Dr. Sackner by the Company for the
year ended July 31, 2008 was $5,000.




The
Company signed a five year lease for office space in Miami, Florida with a
company controlled by Dr. Phillip Frost, who is the beneficial owner of more
than 10% of the Company’s Common Stock.  The rental payments under the
Miami office lease, which commenced January 1, 2008, are approximately $4,000
per month for the first year and escalate 4.5% annually over the life of the
lease.  In the years ended July 31, 2009 and 2008, the Company
recorded rent expense related to the Miami lease of $49,000 and $28,000,
respectively.




The
Company signed a three year lease for warehouse space in Hialeah, Florida with a
company jointly controlled by the Dr. Frost and Dr. Jane Hsiao, the Company’s
Chairman.  The rental payments under the Hialeah warehouse lease,
which commenced February 1, 2009, are approximately $5,000 per month for the
first year and escalate 3.5% annually over the life of the lease.  The
Company recorded $29,000 of rent expense related to the Hialeah lease in the
year ended July 31, 2009.


39




Adam
Jackson, the Company’s Chief Financial Officer, also serves as the Chief
Financial Officer and supervises the accounting staffs of SafeStitch Medical,
Inc. (“SafeStitch”), a publicly-traded, developmental-stage medical device
manufacturer, and Aero Pharmaceuticals, Inc. (“Aero”), a privately held
pharmaceutical distributor.  The Company’s Chairman, Dr. Jane Hsiao,
also serves as Chairman of SafeStitch and President of Aero.  Director
Steven Rubin also serves as a director of SafeStitch and as director and
Secretary of Aero, and director Rao Uppaluri also serves as Treasurer of
Aero.  The total salaries of the accounting staffs of NIMS, SafeStitch
and Aero have been shared under a board-approved cost sharing arrangement since
March 2008.  The Company reimbursed Aero and SafeStitch aggregate fees
of $42,000 and $15,000 for the years ended July 31, 2009 and 2008, respectively,
for the sharing of costs under this arrangement.  These amounts have
been included in selling, general and administrative costs and expenses in the
accompanying consolidated statements of operations.  Aggregate
accounts payable to SafeStitch and Aero totaled approximately $3,000 at July 31,
2009.




Dr. Hsiao
is a director of Great Eastern Bank of Florida, a bank where the Company
maintains a bank account in the normal course of business.  As of July
31, 2009, the Company had approximately $846,000 on deposit with Great Eastern
Bank of Florida, including approximately $821,000 collateralized by repurchase
contracts for US Government securities.




On
January 24, 2008, Mr. Macleod provided the Company with a notice of cashless
exercise with respect to options to purchase 1,500,000 shares of common stock
issued to him on November 11, 2005, which vested in full upon his termination as
Chief Executive Officer in December 2007.  Pursuant to the Separation
Agreement described in Note 4 above, Mr. Macleod received only 550,000 shares
for such cashless exercise, instead of the 749,165 shares to which he would
otherwise have been entitled.  He also forfeited options to purchase
25,000 shares of our common stock awarded in October, 2007.  Pursuant
to the Separation Agreement and as provided for in his Employment Agreement
dated November 11, 2005, Mr. Macleod was entitled to one year’s
severance.  Such severance of $126,000 was paid in connection with his
termination as Chief Executive Officer in December 2007.  Mr. Macleod
also agreed to repurchase for approximately $12,000, furniture and equipment
previously sold to the Company at that price.  The Separation
Agreement also contained mutual releases and provided that Mr. Macleod would
resign as a Director of the Company, which he did on February 29,
2008.





10.    COMMITMENTS




Leases.




The
Company is obligated under various operating lease agreements for office,
warehouse and retail space.  Generally, the lease agreements require
the payment of base rent plus escalations for increases in building operating
costs and real estate taxes.  Rental expense under these operating
leases amounted to $106,000 and $82,000 for the years ended July 31, 2009 and
2008, respectively.At
July 31, 2009, the Company was obligated under non-cancellable operating
leases to make future minimum lease payments (excluding sales taxes) as
follows:





Year
      Ending July 31,2010
                
                $
                123,0002011
                
                
                127,0002012
                
                
                95,0002013
                
                
                24,000$
                369,000




Product
Development and Supply Agreement.




On
September 4, 2007, the Company executed a Product Development and Supply
Agreement (the “Agreement”) with Sing Lin Technologies Co. Ltd., a company based
in Taichung, Taiwan ("Sing Lin").  Pursuant to the Agreement, the
Company consigned to Sing Lin the development and design of the next generation
Exer-Rest®,
Somno-EaseTM and Exer-Rest® Plus
devices.  Sing Lin will also manufacture all of the Company’s
acceleration therapeutic platforms.  The Agreement commenced as of
September 3, 2007 and has a term that extends three years from the acceptance of
the first run of production units by NIMS.  Thereafter, the Agreement
automatically renews for successive one year terms unless either party sends the
other a notice of non-renewal.  Either party may terminate the
Agreement with ninety days prior written notice.  Upon termination,
each party’s obligations under the Agreement will be limited to obligations
related to confirmed orders placed prior to the termination
date.


40




Pursuant
to the Agreement, Sing Lin designed, developed and manufactured the tooling
required to manufacture the acceleration therapeutic platforms for a total cost
to the Company of $471,000.  Sing Lin will utilize the tooling in the
performance of its production obligations under the Agreement.  The
Company paid Sing Lin $150,000 of the tooling cost upon execution of the
Agreement and $150,000 upon the Company’s approval of the product prototype
concepts and designs.  The balance of the final tooling cost became
due and payable in September 2008 upon acceptance of the first units produced
using the tooling, and was paid in full during the year ended July 31,
2009.  These amounts have been recorded as tooling costs, and are
included in tooling and equipment, net.




Under the
Agreement, the Company also grants Sing Lin the exclusive distribution rights
for the products in certain countries in the Far East, including Taiwan, China,
Japan, South Korea, Malaysia, Indonesia and certain other
countries.  Sing Lin has agreed not to sell the Products outside its
geographic areas in the Far East.




The
Company has committed to purchase approximately $2.6 million of Exer-Rest® and
Somno-EaseTM units within one year of the September 2008 acceptance of the final
product.  Additionally, the Company has agreed to purchase $4.1
million and $8.8 million of Exer-Rest®,
Exer-Rest® Plus and
Somno-EaseTM products in the second and third years following such acceptance,
respectively.  These purchase commitment amounts are based upon
current product costs multiplied by volume commitments.  Through July
31, 2009, the Company had paid Sing Lin $1.6 million in connection with orders
placed through that date.  Of this amount, $144,000 is included in
advances to contract manufacturer in the accompanying consolidated financial
statements.  As of July 31, 2009, aggregate future purchase
commitments under the Agreement totaled approximately $13.9
million.  As of October 15, 2009, the Company had not placed orders
sufficient to satisfy its commitment to purchase a minimum number of units in
the first year after acceptance of the final product.  The Company’s
discussions with Sing Lin are ongoing, and the Company expects its commitments
under the Agreement to be modified to reflect current market
conditions.  There can be no assurance that the Agreement will be
modified on terms acceptable to the Company or at all, or that Sing Lin will not
attempt to enforce its rights under the Agreement.





11.    LONG-LIVED
ASSETS




The
Company’s long-lived assets include furniture and equipment, tooling, websites
and software, leasehold improvements, patents and trademarks and long-term
investments.  Tooling and equipment, net of accumulated depreciation,
consisted of the following at July 31, 2009 and 2008 (in
thousands):





Estimated
                  Useful
      Life
                
                July
      31,
                  2009
                
                
                July
      31,
                  2008Tooling
      and equipment
                5
      years
                
                $
                471
                
                
                $
                442Furniture
      and fixtures, leasehold improvements, office equipment and
      computers
                3 –
      5 years
                
                
                94
                
                
                
                51Website
      and software
                3
      years
                
                
                26
                
                
                
                –591
                
                
                
                493Less
      accumulated depreciation
                
                
                
                (131
                )
                
                
                (23
                )Tooling
      and equipment, net
                
                
                $
                460
                
                
                $
                470




Depreciation
expense was $114,000 and $6,000 during the years ended July 31, 2009 and 2008,
respectively.  Depreciation on the tooling commenced in August 2008
based upon an estimated useful life of five years.  Ten Exer-Rest® SL and
TL demonstration units are included in furniture and fixtures at an aggregate
cost of $31,000.  These units were placed in service in fiscal 2009,
and are being depreciated based upon a five-year estimated useful
life.  Five Exer-Rest® AT
demonstration units were previously included in furniture and fixtures at an
aggregate cost of $23,000.  All five of these units were disposed of
in the year ended July 31, 2009 and the Company recorded an aggregate $17,000
loss on the disposals, which is included in other expense in the accompanying
consolidated statements of operations.




Patents
and trademarks have been fully amortized as of October 31,
2007.  Amortization expense was $0 during each of the fiscal years
ended July 31, 2009 and 2008.


41




The
Company’s long-term investments consisted of 940,000 shares (approximately a 2%
interest) of LifeShirt.com, Inc. (now VivoMetrics, Inc.), a privately-held
company.  These shares were obtained as consideration for the
Company’s assignment of all of its rights, title and interest in certain patents
and intellectual property as well as a non-exclusive, worldwide license under
all of the Company’s patents and intellectual property for use in connection
with certain products to VivoMetrics.  The shares are carried at zero
value in the accompanying consolidated financial statements.  The
Company was informed that, in July 2008, VivoMetrics entered into a series of
debt and equity transactions with its largest creditor to effect a
recapitalization which diluted the Company’s holdings to the point where NIMS’
investment became worthless.





12.    INCOME
TAXES




The
Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”) using an asset and liability based
approach.  Deferred income tax assets and liabilities are recorded to
reflect the tax consequences in future years of temporary differences between
the carrying amounts of assets and liabilities for financial statement and
income tax purposes.  SFAS No. 109 provides that the Company recognize
income tax benefits for loss carryforwards.  The tax benefits
recognized must be reduced by a valuation allowance if it is more likely than
not that loss carryforwards will expire before the Company is able to realize
their benefit, or if future deductibility is uncertain.




Effective
August 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No.109” (“FIN
48”).  FIN 48 clarifies the accounting for uncertainties in income
taxes recognized in a company’s financial statements in accordance with SFAS No.
109 and prescribes a recognition threshold and measurement attribute for
financial disclosure of tax positions taken or expected to be taken on a tax
return.  In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  The application of FIN 48 did not impact
the Company’s financial position, results of operations or cash flows for the
years ended July 31, 2009 and 2008.




The
Company files its tax returns in the U.S. federal jurisdiction, Canada federal
jurisdiction and with various U.S. states and the Ontario province in
Canada.  The Company is subject to tax audits in all jurisdictions for
which it files tax returns.  Tax audits by their very nature are often
complex and can require several years to complete.  There are
currently no tax audits that have commenced with respect to income returns in
any jurisdiction.  Tax years ranging from 2005 to 2008 remain open to
examination by various taxing jurisdictions as the statute of limitations has
not expired.  Because the Company is carrying forward income tax
attributes, such as net operating losses and tax credits from 2004 and earlier
tax years, these attributes can still be audited when utilized on returns filed
in the future. It is the Company’s policy to include income tax interest
and penalties expense in its tax provision.




The
difference between income taxes at the statutory federal income tax rate and
income taxes reported in the consolidated statements of operations are
attributable to the following:


July
      31, 2009
                  
                  
                  July
      31, 2008Income
      tax benefit at the federal statutory rate
                  
                  
                  34.00
                  %
                  
                  
                  34.00
                  %State
      and local income taxes, net of effect of federal taxes
                  
                  
                  3.22
                  
                  
                  
                  3.61Expiration
      of net operating losses
                  
                  
                  (18.33
                  )
                  
                  
                  (33.85
                  )Other,
      net
                  
                  
                  (0.40
                  )
                  
                  
                  (0.14
                  )Increase
      in valuation allowance
                  
                  
                  (18.49
                  )
                  
                  
                  (3.62
                  )Provision
      for income tax
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %




The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets consist of the following (in thousands):





July
      31, 2009
                  
                  
                  July
      31, 2008Federal
      and State net operating loss
                  
                  $
                  4,038
                  
                  
                  $
                  3,975Foreign net operating
      loss
                  
                  
                  61
                  
                  
                  
                  –Stock-based
      compensation and other
                  
                  
                  359
                  
                  
                  
                  1534,458
                  
                  
                  
                  4,128Less:
      Valuation allowance
                  
                  
                  (4,458
                  )
                  
                  
                  (4,128
                  )Net
      deferred tax asset
                  
                  $
                  –
                  
                  
                  $
                  –




At July
31, 2009, the Company has available Federal and State net operating loss carry
forwards of approximately $10.7 million and Foreign net operating loss carry
forwards of approximately $0.2 million which expire in various years through
2029.  Total Federal and State net operating loss carry forwards
include approximately $2.0 million generated from the exercise of non-statutory
stock options.  The net operating loss carry forwards may be subject
to limitation due to change of ownership provisions under section 382 of the
Internal Revenue Code and similar state provisions.


42




A
valuation allowance is required to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.  After
consideration of all the evidence, both positive and negative, management has
determined that a full $4.5 million valuation allowance at July 31, 2009 ($4.1
million at July 31, 2008) was necessary.  The increases in the
valuation allowance for the years ended July 31, 2009 and 2008 were $330,000 and
$219,000, respectively.  Of the total increase in the valuation
allowance for the years ended July 31, 2009 and 2008, approximately $3,000 and
$153,000, respectively, was attributed to the exercise of non-statutory stock
options.




The
Company paid no income taxes in 2009 or 2008.




The
following table reconciles the Company’s losses before income taxes by
jurisdiction (in thousands):





Year
      Ended
                      July
      31, 2009
                    
                    
                    Year
      Ended
                      July
      31, 2008U.S.
                    
                    $
                    (1,578
                    )
                    
                    $
                    (1,836
                    )Foreign
                    
                    
                    (190
                    )
                    
                    
                    –Total
                    
                    $
                    (1,768
                    )
                    
                    $
                    (1,836
                    )





13.    EMPLOYEE
BENEFIT PLANS




Effective
July 2008, the Non-Invasive Monitoring Systems 401(k) Plan (the “401k Plan”)
permits employees to contribute up to 100% of qualified annual compensation up
to annual statutory limitations.  Employee contributions may be made
on a pre-tax basis to a regular 401(k) account, or on an after-tax basis to a
“Roth” 401(k) account.  The Company will contribute to the 401k Plan a
“safe harbor” match of 100% of each participant’s contributions to the 401k Plan
up to a maximum of 4% of the participant’s qualified annual
earnings.  The Company recorded approximately $15,000 of compensation
expense related to matching contributions to the 401k Plan for the year ended
July 31, 2009.  No matching contributions were included in
compensation expense for the year ended July 31, 2008.





14.    CONCENTRATIONS
OF RISK




Financial
instruments that potentially subject the Company to risk consist principally of
cash, royalties and other receivables, and purchases and advances to contract
manufacturer.




Cash.  The Company
at times may have cash deposits in excess of the Federal Deposit Insurance
Corporation (“FDIC”) limit.  The Company maintains its cash with banks
and deposits above the FDIC limit are maintained in sweep accounts
collateralized by overnight repurchase agreements.  The Company has
not experienced losses on these accounts and management believes that the
Company is not exposed to significant risks on such accounts.




Royalties and Other
Receivables.  The Company currently grants credit to a limited
number of customers, substantially all of whom are corporations and medical
providers located throughout the United States and Canada.  The
Company typically does not require collateral from these customers.




Purchases and Advances to Contract
Manufacturer.  Virtually 100% of the Company’s active inventory
is acquired from Sing Lin pursuant to the Agreement.  Advances and
accounts payable to Sing Lin at July 31, 2009 were approximately $144,000 and
$18,000, respectively.  Should Sing Lin be unable or unwilling to
deliver inventory orders to the Company, the loss of funds advanced and delayed
product deliveries could have a material adverse effect on the Company’s
consolidated financial position, results of operations and
liquidity.  In the event of a delivery interruption, the Company would
have the right to procure its products from other vendors, however Sing Lin
currently maintains custody of the Company’s specialized tooling, which could
adversely impact the Company’s ability to reallocate production to such other
vendors.  The Company believes its relationship with Sing Lin is good
and that it is highly unlikely that it will refuse to fill future
orders.


43





15.    RECENT
ACCOUNTING PRONOUNCEMENTS




Effective
August 1, 2008, the Company adopted SFAS 157, which defines fair value,
establishes a framework for measuring fair value and requires additional
disclosures about fair value measurements.  In February 2008, the
Financial Accounting Standards Board (“FASB”) delayed the effective date of SFAS
157 for one year for all nonfinancial assets and nonfinancial liabilities,
except for those items that are recognized or disclosed at fair value in the
financial statements on a recurring basis.  Management has determined
that the adoption of SFAS 157 did not have a material impact on the Company’s
financial position and results of operations.




In April
2009, the FASB issued FASB Staff Position FAS-157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
157-4”).  FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS
157.  FSP FAS 157-4 supersedes FSP FAS 157-3 and provides additional
authoritative guidance in determining whether a market is active or inactive and
whether a transaction is distressed.  FSP FAS 157-4 is applicable to
all assets and liabilities (i.e. financial and nonfinancial) and will require
enhanced disclosures.  FSP FAS 157-4 will be effective for the
Company’s fiscal year beginning August 1, 2009.  The Company does not
expect the adoption of FSP FAS 157-4 to have a material impact on its
consolidated financial statements.




Effective
August 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities- including an amendment of FASB Statement
115” (“SFAS 159”).  This statement provides companies with an
option to report selected financial assets and liabilities at fair
value.  The Company has not elected to use the fair value option
allowed by SFAS 159.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Non-Controlling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51” (“SFAS No. 160”).  This statement requires that
noncontrolling or minority interests in subsidiaries be presented in the
consolidated statement of financial position within equity, but separate from
the parents’ equity, and that the amount of the consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income.  SFAS No. 160 will be effective for the Company’s fiscal year
beginning August 1, 2009.  Currently, the Company does not anticipate
that this statement will have a significant impact on its financial
statements.




In
June 2007, the FASB ratified Emerging Issues Task Force Issue
No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities” (“EITF 07-3”).  EITF 07-3
requires non-refundable advance payments for goods and services to be used in
future research and development activities to be recorded as an asset and the
payments to be expensed when the research and development activities are
performed.  EITF 07-3 became effective for the Company’s fiscal year
beginning August 1, 2008.  Management has determined that the
application of this standard has not had a significant impact on its financial
statements.




In
December 2007, the FASB ratified the consensus reached on Emerging Issues Task
Force Issue No. 07-1, “Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property” (“EITF 07-1”).  EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties.  EITF 07-1 will be effective for the
Company’s fiscal year beginning August 1, 2009.  The Company is currently
evaluating the potential impact of this standard on the financial
statements.




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2”) and (“FSP FAS
124-2”).  FSP FAS 115-2 and FSP FAS 124-2 provide additional guidance
to provide greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to improve presentation and disclosure
of other than temporary impairments in the financial statements.  FSP
FAS 115-2 and FSP FAS 124-2 will be effective for the Company’s fiscal year
beginning August 1, 2009.  The Company is currently evaluating the
potential impact of the adoption of FSP FAS 115-2 on its consolidated financial
statements.




In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments” (“FSP FAS 107-1”) and (“APB
28-1”).  FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of
Financial Instruments”, to require disclosures about fair value of
financial instruments in interim as well as in annual financial statements and
amends APB Opinion No. 28 “Interim Financial
Reporting”, to require those disclosures in interim financial
statements.  FSP FAS 107-1 and APB 28-1 will be effective for the
Company’s fiscal year beginning August 1, 2009.  The Company is
currently evaluating the potential impact of the adoption of FSP FAS 107-1 on
its consolidated financial statements.


44




Effective
July 31, 2009, the Company adopted SFAS No. 165, “Subsequent
Events.”  SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or ready to be issued.  The
adoption of SFAS 165 has not had a material impact on the Company’s consolidated
financial statements.  The Company has evaluated subsequent events
through October 28, 2009, which is the date the financial statements were
available to be issued.




In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation
No. 46(R)” (‘Consolidation of Variable Interest Entities’) (“SFAS
167”).  These amendments primarily include: (i) amending the
guidance for determining whether an entity is a variable interest entity
(“VIE”); and (ii) amending the criteria for identification of the primary
beneficiary of a VIE.  SFAS No. 167 also requires the Company to
continually reassess whether the Company is the primary beneficiary of a VIE and
requires certain enhanced disclosures in the financial statements about the
Company’s relationships with VIEs.  The amended provisions of SFAS
No. 167 are effective for the Company’s financial statements for the period
beginning on August 1, 2010, and earlier adoption is
prohibited.  The Company does not believe that adoption of the amended
provisions of SFAS No. 167 will have a material effect on the Company’s
consolidated financial statements.




In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162” (“SFAS No. 168”).  SFAS
No. 168 replaces SFAS No. 162 and establishes the FASB Accounting Standards
CodificationTM (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in accordance with GAAP.  All
existing accounting standard documents are superseded by the Codification and
any accounting literature not included in the Codification will not be
authoritative.  However, rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be
sources of authoritative GAAP for SEC registrants.  SFAS No. 168 will
be effective beginning with the Company’s first fiscal quarter of
2010.  Therefore, all references made by it to GAAP in its
consolidated financial statements will use the new Codification numbering
system.  The Codification does not change or alter existing GAAP and,
therefore, it is not expected to have any impact on the Company’s consolidated
financial statements.


45





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




The
information required by Item 304(a) of Regulation S-K was previously
reported.  There are no disagreements or reportable events required to
be reported under Item 304(b) of Regulation S-K.




Item
      9A(T).
            Controls
      and Procedures.




The
Company’s management, with the participation of its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) or 15d-15(e)) as of July 31, 2009.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of that date, the Company’s disclosure controls and procedures were
effective as of the end of the period covered by this annual
report.  This annual report does not include an attestation report of
our registered public accounting firm, Morrison, Brown, Argiz & Farra, LLP,
regarding internal control over financial reporting.  Management's
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management's report in this annual
report.




Management’s
Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting.  Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.  Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




For the
period ended July 31, 2009, pursuant to Section 404 of the Sarbanes-Oxley Act of
2002, management (with the participation of our principal executive officer and
principal financial officer) conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Based on this
evaluation, management concluded that, as of July 31, 2009, our internal control
over financial reporting was effective.




Changes
in Internal Controls Over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting
during the last quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




Item
      9B.
            Other
      Information.




None.


46


PART
III




Item
      10.
            Directors,
      Executive Officers and Corporate
Governance.




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of July 31,
2009.





Item
      11.
            Executive
      Compensation.




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of July 31,
2009.





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




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of July 31,
2009.





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




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of July 31,
2009.





Item
      14.
            Principal
      Accountant Fees and Services.




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of July 31,
2009.


47


PART
IV




Item
      15.
            Exhibits,
      Financial Statement Schedules




(a) List
of documents filed as part of this report:




1.
Financial Statements:  The information required by this item is
contained in Item 8 of this Annual Report on Form 10-K.




2.
Financial Statement Schedules:  The information required by this item
is included in the consolidated financial statements contained in Item 8 of this
Annual Report on Form 10-K.




3.
Exhibits:  See Index to Exhibits.


48




SIGNATURES




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





NON-INVASIVE
      MONITORING SYSTEMS, INC.Date:  October
      28, 2009
              By:
              /s/ Marvin A. Sackner,
  M.D.Marvin
      A. Sackner, M.D.Chief
      Executive Officer and
President





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




Signature
              
              Title
              
              Date/s/
      Marvin A. Sackner, M.D.
              
              Chief
      Executive Officer and President (Principal
              
              October
      28, 2009Marvin
      A. Sackner, M.D.
              
              Executive
      Officer)/s/
      Jane H. Hsiao, Ph.D.
              
              Chairman
      of the Board of Directors
              
              October
      28, 2009Jane
      H. Hsiao, Ph.D./s/
      Taffy Gould
              
              Director
              
              October
      28, 2009Taffy
      Gould/s/
      Morton J. Robinson, M.D.
              
              Director
              
              October
      28, 2009Morton
      J. Robinson, M.D./s/
      Steven D. Rubin
              
              Director
              
              October
      28, 2009Steven
      D. Rubin/s/
      Subbarao Uppaluri
              
              Director
              
              October
      28, 2009Subbarao
      Uppaluri/s/
      Adam S. Jackson
              
              Chief
      Financial Officer (Principal Financial Officer)
              
              October
      28, 2009Adam
      S. Jackson


49





INDEX
TO EXHIBITS




The
following exhibits are filed as part of, or incorporated by reference into, this
Annual Report on Form 10-K.




Exhibit
                                                            No.
                                                          
                                                          Description of Exhibits3.1
                                                          
                                                          Articles
      of Incorporation, as amended (Incorporated by Reference from Exhibit 3.1
      to Form 8-K filed on April 8, 2008)3.2
                                                          
                                                          By-Laws
      (Incorporated by reference from Exhibit 3(b) to the Company’s Registration
      Statement on Form S-1 Filed May 15, 1999 (File
      No. 33-14451))3.1
                                                          
                                                          Articles
      of Amendment to Articles of Incorporation (Incorporated by Reference from
      Exhibit 3.1 to Form 8-K filed on December 3, 2008)10.1
                                                          
                                                          License
      Agreement dated as of May 22, 1996 between the Company and SensorMedics
      Corporation (Incorporated by reference from Exhibit 10.1 to Form 10-KSB/A
      filed on April 22, 2008)10.2
                                                          
                                                          Letter
      of Agreement dated April 21, 1999 between the Company and SensorMedics
      Corporation (Incorporated by reference from Exhibit 10.2 to Form 10-KSB/A
      filed on April 22, 2008)10.3
                                                          
                                                          Agreement
      Regarding Assignment of Patents and Intellectual Property dated August 14,
      2000 between the Company and LifeShirt.com, Inc. (Incorporated by
      reference from Exhibit 10.3 to Form 10-KSB/A filed on April 22,
      2008)10.4
                                                          
                                                          Amendment
      to Agreement Regarding Assignment of Patents and Intellectual Property
      dated December 23, 2000 between the Company and LifeShirt.com, Inc.
      (Incorporated by reference from Exhibit 10.4 to Form 10-KSB/A filed on
      April 22, 2008)10.5
                                                          
                                                          Form
      of Stock Purchase Agreement dated as of August 1, 2005 between the Company
      and various Investors (Incorporated by reference from Exhibit 4.1 to Form
      8-K filed on August 18, 2005)10.6
                                                          
                                                          Preferred
      Stock Purchase Agreement dated as of April 3, 2008 between the Company and
      the Investors named therein (Incorporated by reference from Exhibit 10.1
      to Form 8-K filed on April 8, 2008)10.7
                                                          
                                                          Form
      of Preferred Stock Purchase Agreements dated as of December 1and 2, 2008
      between the Company and the Investors named therein (Incorporated by
      reference from Exhibit 10.1 to Form 8-K filed on December 3,
      2008)10.8
                                                          
                                                          Preferred
      Stock Purchase Agreement dated as of January 29, 2009 between the Company
      and the Investors named therein (Incorporated by reference from Exhibit
      10.1 to Form 8-K filed on April 8, 2008)10.9
                                                          
                                                          Product
      Development and Supply Agreement executed September 4, 2007 between Sing
      Lin Technologies Ltd and the Company (Incorporated by reference from
      Exhibit 10.1 to Form 10-QSB/A filed on April 22, 2008) (Confidentiality
      Treatment has been granted for portions of this
Exhibit)10.10
                                                          
                                                          Note
      and Security Agreement dated as of August 28, 2008 between the Company and
      various lenders (incorporated by reference from Exhibit 10.1 to the Form
      8-K filed September 12, 2008)10.11
                                                          
                                                          Offer
      Letter from the Company to Steven B. Mrha dated December 21, 2007 and
      executed on December 22, 2007 detailing the terms of employment of Mr.
      Mrha (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on
      December 27, 2007)10.12
                                                          
                                                          Offer
      Letter from the Company to Adam S. Jackson dated March 11, 2008
      (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on May
      15, 2008)10.13
                                                          
                                                          Offer
      Letter from SafeStitch Medical, Inc. to Adam S. Jackson, dated March 11,
      2008 (incorporated by reference to the Current Report on Form 8-K filed by
      SafeStitch Medical, Inc. on April 4, 2008)10.14
                                                          
                                                          2000
      Stock Option Plan (Incorporated by reference from the Company’s
      Information Statement on Schedule 14C filed April 5, 2001)(SEC Accession
      No.
      0000950170-01-000484)10.15
                                                          
                                                          Separation
      and Release Agreement delivered February 29, 2008 between the Company and
      Gary Macleod (incorporated by reference from Exhibit 10.1 to the Form 8-K
      filed on March 4, 2008)10.16
                                                          
                                                          Employment
      Agreement dated November 10, 2005 between the Registrant and Gary Macleod
      (Incorporated by reference from Exhibit 10.2 to Form 8-K filed on March 4,
      2008).10.17
                                                          *
                                                          Lease
      Agreement dated January 1, 2008 between the Registrant and Frost Real
      Estate Holdings, LLC.10.18
                                                          *
                                                          Lease
      Agreement dated February 1, 2009 between the Registrant and Hialeah
      Warehouse Holdings, LLC.14.1
                                                          *
                                                          Code
      of Ethics16.1
                                                          
                                                          Letter
      from Eisner LLP dated May 15, 2009 (Incorporated by reference from Exhibit
      16.1 to Form 8-K filed on May 15,
2009).


50





21
                      *
                      Subsidiaries
      of the Company31.1
                      *
                      Certification
      of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14 and
      15d-14 of the Securities Exchange Act of 1934.31.2
                      *
                      Certification
      of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and
      15d-14 of the Securities Exchange Act of 1934.32.1
                      *
                      Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                      *
                      Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





*
            Filed
      herewith


51