UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
20-F




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





OR




ý
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 For the fiscal year ended December 31,
2008




OR




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




OR




 ̈
              SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934Date
      of event requiring this shell company report __________For
      the transition period from __________ to
  __________





Commission
File Number 333-144993


____________________









CELL KINETICS
LTD.


(Exact name of
Registrant as specified in its charter)




Israel


(Jurisdiction
of incorporation or organization)





2
Yodfat Street, Lod, 71291, Israel


(Address
of principal executive offices)





Dr.
Asaf Ben-Arye, President and CEO


Cell
Kinetics Ltd.


2
Yodfat Street, Lod, 71291, Israel


Telephone:
972 8 918 8670


Facsimile:
972 8 915 0787


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





Securities
registered or to be registered pursuant to Section 12(b) of the Act:
None





Securities registered or to be
registered pursuant to Section 12(g) of the Act:  None





Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act:Ordinary Shares, nominal value NIS 0.01 per
share











Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:  16,500,000 Ordinary Shares, nominal value NIS 0.01 per
share





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




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




Note –
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.





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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):   Large accelerated filer o     Accelerated
filer o     Non-accelerated
filer x




Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:    U.S. GAAP
xInternational
Financial Reporting Standings o    Other
o





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





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













TABLE OF
CONTENTS


PagePART
      IITEM
      1
                IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
                1ITEM
      2
                OFFER
      STATISTICS AND EXPECTED TIMETABLE
                1ITEM
      3
                KEY
      INFORMATION
                1ITEM
      4
                INFORMATION
      ON THE COMPANY
                10ITEM
      4A
                UNRESOLVED
      STAFF COMMENTS
                17ITEM
      5
                OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                17ITEM
      6
                DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                24ITEM
      7
                MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                31ITEM
      8
                FINANCIAL
      INFORMATION
                33ITEM
      9
                THE
      OFFER AND LISTING
                33ITEM
      10
                ADDITIONAL
      INFORMATION
                34ITEM
      11
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                45ITEM
      12
                DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                45PART
      IIITEM
      13
                DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                45ITEM
      14
                MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                45ITEM
      15
                CONTROLS
      AND PROCEDURES
                45ITEM
      15T
                CONTROLS
      AND PROCEDURES
                46ITEM
      16
                [RESERVED]
                46ITEM
      16A
                AUDIT
      COMMITTEE FINANCIAL EXPERT
                46ITEM
      16B
                CODE
      OF ETHICS
                47ITEM
      16C
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                47ITEM
      16D
                EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                47ITEM
      16E
                PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS
                47PART
      IIIITEM
      17
                FINANCIAL
      STATEMENTS
                47ITEM
      18
                FINANCIAL
      STATEMENTS
                47ITEM
      19
                EXHIBITS
                48





Forward-Looking
Statements




This
report on Form 20-F includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934.  Words such
as “will,” “may,” “expects,” “anticipates,” “approximates,” “believes,”
“estimates,” “intends” and “hopes” and variations of such words and similar
expressions are intended to identify such forward-looking statements. We have
based these statements on our current expectations and projections about future
events. These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in these statements. These
risks and uncertainties include those set forth under “Risk Factors.” The
forward-looking statements contained in this annual report include, among
others, statements about:




·
            the
      development and commercialization schedule for our CKChip technology and
      products;


·
            the
      expected market acceptance of our CKChip technology and
      products;


·
            rapid
      technological change;


·
            our
      intellectual property;


·
            the
      timing and availability of our
products;


·
            our
      business strategy; and


·
            general
      economic conditions.




Except
for our ongoing obligations to disclose material information under the federal
securities laws, we are not obligated to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this annual report might not
occur.




Use
of Certain Terms




In this
report, “we,” “us,” “our,” and the “Company” refer to Cell Kinetics
Ltd.  References to “$” and “U.S. dollars” are to the lawful currency
of the United States of America.







PART
I




ITEM
1.  IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISORS




Not
applicable.




ITEM
2.  OFFER STATISTICS AND
EXPECTED TIMETABLE




Not
applicable.




ITEM
3.  KEY
INFORMATION




A. Selected Financial
Data




This
selected financial data is presented in accordance with generally accepted
accounting policies in the United States (“U.S. GAAP”).  All financial
statements included in this annual report and all financial information released
in Israel is presented solely under U.S. GAAP. The selected financial data, set
forth in the table below, have been derived from our audited historical
financial statements for each of the years from 2004 to 2008. The selected
statement of operations data for the years 2006, 2007 and 2008, and the selected
balance sheet data at December 31, 2007 and 2008, have been derived from our
audited financial statements set forth in “Item 18 – Financial Statements.” The
selected statement of operations data for the years 2004 and 2005, and the
selected balance sheet data at December 31, 2004, 2005 and 2006, has been
derived from our previously published audited financial statements, which are
not included in this Annual Report on Form 20-F. This selected financial data
prior to July 26, 2007 has been derived from our audited financial statements,
which reflect our operations as if we had been a separate legal entity from the
inception of Medis El Ltd., our direct parent company (“Medis El”), in July
1992. For the periods prior to July 26, 2007, our financial statements have been
prepared on a carve-out basis and accordingly, through such date, have been
derived from the historical results of operations and historical bases of assets
and liabilities of  Medis El and Medis Technologies Ltd., our indirect
parent (“Medis”), and our accounts from the inception of our operations in May
2006. Such carve out summary financial information may not be indicative of
future performance. You are encouraged to read the selected financial data set
forth below in conjunction with our financial statements and related notes and
the section entitled “Operating and Financial Review and Prospects,” all of
which are included elsewhere in this annual report.




Statement
of Operations Data:


For
      the Year Ended December 31,2004*
                      
                      
                      2005*
                      
                      
                      2006*
                      
                      
                      2007*
                      
                      
                      2008Revenues
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      21,000Cost
      of Revenues
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      14,000Gross
      profit
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      7,000Operating
      expenses:Research
      and development costs, net
                      
                      $
                      944,000
                      
                      
                      $
                      826,000
                      
                      
                      $
                      1,079,000
                      
                      
                      $
                      1,182,000
                      
                      
                      $
                      1,191,000General
      and administrative expenses
                      
                      
                      1,272,000
                      
                      
                      
                      922,000
                      
                      
                      
                      698,000
                      
                      
                      
                      901,000
                      
                      
                      
                      1,219,000Total
      operating expenses
                      
                      
                      2,216,000
                      
                      
                      
                      1,748,000
                      
                      
                      
                      1,777,000
                      
                      
                      
                      2,083,000
                      
                      
                      
                      2,410,000Interest
      expense (income)
                      
                      
                      14,000
                      
                      
                      
                      23,000
                      
                      
                      
                      33,000
                      
                      
                      
                      13,000
                      
                      
                      
                      (22,000
                      )Net
      loss
                      
                      $
                      (2,230,000
                      )
                      
                      $
                      (1,771,000
                      )
                      
                      $
                      (1,810,000
                      )
                      
                      $
                      (2,096,000
                      )
                      
                      $
                      (2,381,000
                      )Basic
      and diluted net loss per share(1)
                      
                      $
                      (.13
                      )
                      
                      $
                      (.11
                      )
                      
                      $
                      (.11
                      )
                      
                      $
                      (.13
                      )
                      
                      $
                      (.12
                      )Weighted
      average number of ordinary shares used in computing basic and diluted net
      loss per share(1)
                      
                      
                      16,722,973
                      
                      
                      
                      16,722,973
                      
                      
                      
                      16,722,973
                      
                      
                      
                      16,722,973
                      
                      
                      
                      20,170,258




- 1
-


Balance
Sheet Data:


As
      of December 31,2004*
                
                
                2005*
                
                
                2006*
                
                
                2007*
                
                
                2008Working
      capital(2)
                
                $
                (189,000
                )
                
                $
                (362,000
                )
                
                $
                (251,000
                )
                
                $
                (246,000
                )
                
                $
                793,000Total
      assets
                
                
                2,774,000
                
                
                
                2,692,000
                
                
                
                2,706,000
                
                
                
                2,929,000
                
                
                
                3,487,000Capital
      stock
                
                
                57,007,000
                
                
                
                58,639,000
                
                
                
                60,538,000
                
                
                
                62,595,000
                
                
                
                64,059,000Accumulated
      deficit
                
                
                (54,874,000
                )
                
                
                (56,645,000
                )
                
                
                (58,455,000
                )
                
                
                (60,551,000
                )
                
                
                (62,932,000
                )Total
      stockholders’ equity
                
                
                2,133,000
                
                
                
                1,994,000
                
                
                
                2,083,000
                
                
                
                2,044,000
                
                
                
                1,127,000


______________________


*
            For
      the periods prior to July 26, 2007, our financial statements, including
      the results of operations and cash flow, has been prepared on a carve-out
      basis from Medis El and Medis.


(1)
            Basic
      and diluted net loss per share and weighted-average number of shares used
      in computing basic and diluted net loss per share have been adjusted to
      give retroactive effect to the issuance of 15,500,000 of our ordinary
      shares to Medis El in connection with a July 2007 asset purchase
      agreement. Additionally, such amounts have been further adjusted to give
      retroactive effect to the quantity of shares issued to stockholders as a
      bonus element upon the completion of our January 2008 rights
      offering.


(2)
            Cash
      and cash equivalents balances have not been carved-out from Medis and
      Medis El financial statements. As such, working capital includes only
      those cash and cash equivalents balances held by us after commencement of
      our operations in May 2006.





B.
Capitalization and Indebtedness




Not
applicable.




C.
Reasons for the Offer and Use of Proceeds




Not
applicable.




D.
Risk Factors




If any of
the following risks actually occur, our business, financial condition or results
of operations would likely suffer. In this case, the market price of our
ordinary shares could decline, and you may lose all or part of your
investment




Risks Relating to Our
Financial Condition




Our
financial situation raises substantial doubt about our ability to continue as a
going concern





Since our
inception, we have sustained operating losses and have used cash in our
operations. Due to ongoing losses, our financial position has weakened.
Furthermore, we expect that we can no longer rely on additional financing from
Medis and Medis El, as their financial position has also weakened.





We need
additional financing in order to continue to fund our current operations, which
continue to show losses, and pay existing and future liabilities and other
obligations.  We are currently seeking additional funding from
strategic partners or financial investors in order to execute our business plan
and fund future operations. The satisfactory completion of these fund raising
efforts is essential to provide sufficient cash flow to meet current operating
requirements and remain a going concern. Our limited available cash resources
would be sufficient to continue operations only through October 2009. In
addition, we cannot give any assurance that we will in the future be able to
achieve a level of profitability from the sale of our products to sustain our
operations. Therefore, there is substantial doubt about our ability to continue
as a going concern.





We
have a history of operating losses, and we cannot assure you that we will
achieve future revenues or operating profits.




Historically,
we have incurred net operating losses each year since inception. We cannot
assure you that we will be able to develop substantial revenue sources or that
our operations will become profitable, even if we are able to further
commercialize our CKChip technology , products and applications including
potential future products and applications developed from this technology. If we
continue to suffer losses as wehad in the
past, you may not receive any return on your investment and may lose your entire
investment.




We are in
the early stages of commercialization of our first CKChip product and have
limited ability to generate revenue, and we can give no assurance that we will
be able to further develop our CKChip technology for commercial applications. As
a result, we may never be able to operate profitably. We are in the early stages
of market introduction of our first product and also in early stages of
development of additional products and applications and we may not receive
significant revenues from their commercial sale for




- 2
-


the next
several years, if at all. Our CKChip technology and products and any potential
applications and products that we may develop will require significant
additional effort and investment prior to material sales. We cannot assure you
that we will be able to develop any such commercially viable applications or
products, or that such applications or products will be capable of being
produced in commercial quantities at acceptable costs or be successfully
marketed. For that reason, we may not be able to generate revenues from
commercial production or operate profitably.




We
will require substantial additional funds to continue operating which may not be
available on acceptable terms, if at all.




We will
require substantial additional financing to remain in business.  Our
management continues to evaluate alternatives and sources for additional
funding, which may include public or private investors and strategic partners,
although there is no assurance that such sources will result in raising
additional capital. Lack of necessary funds may require us to delay, scale back
or eliminate our CKChip applications and product development programs, to
license such potential applications or products or our CKChip technologies to
third parties, to consider business combinations related to ongoing business
operations, or cease  our operations.  Lack of funds have
already forced us to limit the development of next generation projects related
to our CKChip technology and accessory elements, as well as to cease funding to
partner companies related to our previous plans to establish ourselves as a
medical device incubator, as described below.





In
addition, our cash requirements may vary materially from those now planned
because of results of research and development, potential relationships with
strategic partners, changes in the focus and direction of our research and
development programs, competition, litigation required to protect our
technology, technological advances, or the market acceptance of our CKChip
applications and products and other factors. Our current cash reserves are not
sufficient to fund our operations through material sales of our first
CKChip applications or products.





We
do not have sufficient cash resources to fund any prospective partner companies,
and do not expect to fund such activity in the future.





While it
was our intention to invest in early stage technologies such as we did with
Scorpion Surgical Technologies, we have decided due to our limited cash
resources to accord priority to the development and commercialization of our
CKChip technology and successive generations of CKChip applications and
products. Accordingly, at this time we are no longer investing in additional
early stage medical device enterprises and we do not expect to resume such
activity  in the future.  As a result, we may not be able to
diversify our investments or benefit from the possible spreading of risks or
offsetting of losses, unlike other larger and well-financed Israeli technology
incubators.




Risks
Relating to Our Cell Carrier Business





We
do not have sufficient manufacturing, marketing, distribution or sales
capabilities, which may limit our ability to generate revenues.





We have
not yet acquired large scale manufacturing capabilities, and our marketing,
distribution and product sales resources are very limited. We cannot assure you
that we will be able to develop any such resources successfully or as quickly as
may be necessary. The inability to do so may harm our ability to generate
revenues or operate profitably. Although we recently entered into a distribution
agreement with EuroClone S.p.A., our financial situation limits our ability to
perform under that agreement, which has an adverse effect on our ability to
generate revenues through the sale of our products in Italy.




Our
competition includes both public and private companies and academic
collaborators, many of which have significantly greater experience and financial
resources than we do.




The life
sciences research and clinical diagnostics markets are characterized by intense
competition. We believe that we directly compete with the technology developed
by a company previously known as Molecular Cytomics Inc., which developed and
commercialized the Live Cell Array through Nalge-nunc and Thermo-Fisher. Its
technology enables high content analysis of non-adherent cells such as human
blood, bone marrow and stem cells for research, drug discovery and clinical
diagnostics. We believe that part or all of the underlying technology of
Molecular Cytomics was derived through a collaboration with Bar Ilan University
or the scientist at the university who was the original inventor of the CellScan
technology. Accordingly, we may have legal claims against the university and/or
the company resulting from the rights granted to us under the original licensing
agreements with the university, but do not at this time expect to devote the
resources to determine whether to pursue those potential claims. We are also
aware of other entities that are in the process of development of technologies
addressing the need for multiple single cell capture and analysis such as an
academic collaboration at the Berkeley campus of the University of California,
which has developed a dynamic single cell culture array, and SC World Inc., a
Japanese biotechnology venture, that has been established to exploit micro-well
cell chip technology that can capture lymphocyte cells for potential development
of immunotherapeutic and immunodiagnostic tools. These technologies and




- 3
-


products,
if commercialized, would directly compete with our intended CKChip applications
and products.




We also
compete indirectly with a number of companies, both domestic and foreign, that
engage in more traditional methods for carrying out single cell analyses, by
means of microscope slides and culture microplates of various types. These
companies include CompuCyte Corporation, Cellomics, a business unit within the
Biosciences group of Thermo Fisher Scientific Inc., IBIDI and Chipman
Technologies Ltd.




We
can give no assurance that we will be able to successfully commercialize our CK
Chip technology or that we will be able to continue to further develop such
technology, which will prevent us from generating revenues, operating profitably
or providing you with any return on your investment.




Our
ability to operate profitably will depend on our being able to successfully
commercialize our CKChip technology and products.  We cannot assure
you that we will be able to successfully further develop our CKChip technology
for commercially viable applications, or that our initial and future generations
of Cell Carrier platform and related applications will result in applications or
products with any significant commercial utility. We anticipate that the
commercial sale of such applications or products would be our primary sources of
revenues. If we are unable to develop our technology into commercially viable
products, you will likely lose your entire investment in us. Our current and
prospective applications and products may not prove to be more effective or less
costly than other competitive solutions in cytometry. Accordingly, we may have
to delay or abandon efforts to research or develop our prospective applications
or products.




While we
believe that the marketing of research laboratory consumable kits only requires
perfunctory regulatory filings, regulatory approval may be required in the
future. We cannot assure you that we would obtain such approval or that our
products would be accepted in the marketplace.





To
be successful, our proposed applications and products must be accepted by the
life sciences research and diagnostic communities, which can be very slow to
adopt or unreceptive to new technologies and products.




Our
proposed applications and products and those developed with our subcontractors,
may not achieve market acceptance since life science researchers, medical
professionals and clinical diagnosticians, generally, may decide not to accept
and utilize these products. The applications and products that we developed and
we are attempting to develop represent substantial departures from established
cell testing methods and will compete with a number of more conventional means
of cell testing manufactured and marketed by major suppliers of laboratory
consumables. The degree of market acceptance of any of our developed
applications and products will depend on a number of factors,
including:




·
            our
      establishment and demonstration to the life science research and clinical
      diagnostic communities of the efficacy of our proposed
      products;


·
            our
      ability to create products that are superior to alternatives currently on
      the market; and


·
            our
      ability to establish in the life science research and clinical diagnostic
      communities the potential advantage of our products over historical
      testing methodologies such as microscope slides and
      microplatforms.




If the
life science research and clinical diagnostic communities do not accept our
current and proposed products and applications for any of the foregoing
reasons, or for any other reason, our business prospects would be materially
harmed.




We
may not be able to commercially develop our CKChip technology and proposed
product lines, which, in turn, would significantly harm our ability to earn
revenues and result in a loss of investment.




Our
ability to further  develop and commercialize our CKChip technology
will be dictated in large part by forces outside our control which cannot be
predicted, including, but not limited to, general economic conditions, the
success of our research, the availability of collaborative and strategic
partners, the availability of continued funding and technological or other
developments in the life sciences research and clinical diagnostics fields
which, due to efficiencies, technological breakthroughs or greater acceptance in
those industry, may render one or more areas of commercialization more
attractive, obsolete or competitively unattractive. It is possible that one or
more areas of commercialization will not be pursued at all if a collaborative or
strategic partner cannot be located. Our decisions regarding the ultimate CKChip
applications or products we pursue could have a significant adverse affect on
our ability to earn revenue if we misinterpret trends, underestimate development
costs and/or pursue wrong applications or products. Any of these factors either
alone or in concert could materially harm our ability to earn revenues and could
result in a loss of any investment in our securities.




If we are
unable to keep up with rapid technological changes in our field or compete
effectively, we will be unable to operate profitably. We are engaged in
activities in the life science research and clinical diagnostics fields, which
are characterized by extensive research efforts and rapid technological
progress. If we fail to anticipate or respond adequately to technological




- 4
-


developments,
our ability to operate profitably could suffer. We cannot assure you that
research and discoveries by other companies will not render our CKChip
technology or current or potential applications or products uneconomical or
result in products superior to those we develop or that any technologies,
applications or products we develop will be preferred to any existing or
newly-developed technologies, products or services.




We
may not be able to protect our proprietary technology, which could harm our
ability to operate profitably.




The life
sciences research and clinical diagnostics industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend, to a substantial degree, on our
ability to obtain and enforce patent protection for our products, preserve any
trade secrets and operate without infringing the proprietary rights of others.
We cannot assure you that:





·
            we
      will succeed in obtaining any additional patents in a timely manner or at
      all, or that the breadth or degree of protection of any of our existing
      patents or future patents that may be granted will protect our
      interests;


·
            the
      use of our technologies will not infringe on the proprietary rights of
      others;


·
            patent
      applications relating to our potential products or technologies will
      result in the issuance of any patents or that, if issued, such patents
      will afford adequate protection to us or not be challenged invalidated or
      infringed; and


·
            patents
      will not issue to other parties, and those parties may claim that our
      potential products or technologies infringe their
  patents.




In
particular, Molecular Cytomics Inc. has filed patent applications on its
products, some of which include claims directed to cell carriers having various
combinations of features. There is therefore a chance that once some of these
applications are granted as patents, Molecular Cytomics will assert that the
CKChip infringes one or more of the patent claims.





The
fields in which we intend to operate have been characterized by significant
efforts by considerable differences of opinion as to the value and legal
legitimacy of competitors’ purported patent rights and the technologies they
actually utilize in their businesses.




We
may not be able to adequately protect against piracy of intellectual property in
foreign jurisdictions.




Considerable
research in live cell analytical technologies and applications is being
performed in countries outside of Israel and the United States, and a number of
our competitors are located in those countries. We expect that the laws
protecting intellectual property in some of those countries, particularly
countries in Southeast Asia, including the People’s Republic of China, may not
provide protection for our trade secrets and intellectual property adequate to
prevent our competitors from misappropriating our trade secrets or intellectual
property. If our trade secrets or intellectual property are misappropriated in
those countries, we may be without adequate remedies to address the
issue.





Certain
of our technology is not protectable by patent.




Certain
parts of our know-how and technology are not patentable. To protect our
proprietary position in such know-how and technology, we intend to require all
employees, consultants, advisors and collaborators to enter into confidentiality
and invention ownership agreements with us. We cannot assure you, however, that
these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use
or disclosure. Further, in the absence of patent protection, competitors who
independently develop substantially equivalent technology may harm our
business.




Patent
litigation presents an ongoing threat to our business with respect to both
outcomes and costs.




We could
incur substantial litigation or interference costs in defending ourselves
against suits brought against us or in suits in which we may assert our patents
against others. If the outcome of any such litigation is unfavorable, our
business could be materially adversely affected. To determine the priority of
inventions, we may also have to participate in interference proceedings declared
by the United States Patent and Trademark Office, which could result in
substantial cost to us. Without additional capital, we may not have the
resources to adequately defend or pursue this litigation.





We
may become subject to regulatory approval.




While we
believe that the marketing of our product, a laboratory consumable kit for
research applications, only requires perfunctory regulatory filings, we may
become subject to laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, and the use and disposal of
hazardous or potentially hazardous substances used in connection with our
research and development work. In addition, the sale by us of any commercially
viable product will or may be subject to government regulation from several
standpoints, including manufacturing, advertising and promoting, selling and
marketing, labeling,




- 5
-


and
distributing.





We
may be unable to manufacture, or market or sell our proposed products if we are
unsuccessful in entering into strategic alliances or joint ventures with third
parties.




As we do
not presently have either a meaningful internal manufacturing or a meaningful
marketing capacity, we will have to develop such capabilities to accommodate to
larger scale production or, alternatively, rely upon strategic alliances and
joint ventures with third parties possessing these capabilities until we can
raise sufficient funds to perform these functions with our own personnel. We
cannot guarantee that we will be successful in raising sufficient funds to
establish our own manufacturing and marketing capabilities or, even if we are
successful in raising the requisite funds that we will be able to successfully
recruit and retain suitable manufacturing and marketing personnel. Further, we
cannot assure you that we will be able to enter into any such strategic
alliances or joint ventures or, if we are able to do so, that the terms thereof
will be beneficial to us.




Under
agreements with collaborators, we may rely significantly on such collaborators
to, among other things:




·
            fund
      research and development activities with
us;


·
            pay
      us fees upon the achievement of milestones;
and


·
            market
      with us any commercial products that result from our
      collaborations.




The
development and commercialization of current and potential CKChip applications
and products will be delayed if collaborators fail to conduct these activities
in a timely manner or at all. In addition, our collaborators could terminate
their agreements with us and we may not receive any development or milestone
payments. If we do not achieve milestones set forth in the agreements, or if our
collaborators breach or terminate their collaborative agreements with us, our
business may be materially harmed.




We
depend on key personnel for our continued operations and future success, and a
loss of certain key personnel could significantly hinder our ability to move
forward with our business plan.







Because
of the specialized nature of our business, we are highly dependent on our
ability to identify, hire, train and retain highly qualified scientific and
technical personnel for the research and development activities we conduct or
sponsor. The loss of one or more of certain of our key employees could be
significantly detrimental to us. Dr. Asaf Ben-Arye, our chief executive officer,
recently announced his resignation from the company, effective October
2009.  We do not yet know the effect on our company that Dr.
Ben-Arye’s resignation will have. Furthermore, due to our financial
situation, we may need to dismiss some or all of our employees in the near
future.





In
addition, recruiting and retaining qualified scientific and technical personnel
to perform research and development work is critical to our success. Any growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, regulatory compliance and marketing, will require the addition
of new management personnel and the development of additional expertise by
existing management personnel. There is intense competition for qualified
personnel in the areas of our present and planned activities, and there can be
no assurance that we will be able to continue to attract and retain the
qualified personnel necessary for the development of our business, or that we
can afford to pay any such personnel in light of our financial condition. The
failure to attract and retain such personnel or to develop such expertise would
adversely affect our business.





Our
reliance on the activities of our non-employee consultants and research
institutions, whose activities are not wholly within our control, may lead to
delays in development of our proposed products.




We rely
upon and have relationships with scientific consultants at academic and other
research institutions, some of whom will conduct research at our request, and
other consultants with expertise in clinical diagnostic applications and
laboratory consumables or other matters. These consultants are not our employees
and may have commitments to, or consulting or advisory contracts with, other
entities that may limit their availability to us. We have limited control over
the activities of these consultants and, except as otherwise required by our
collaboration and consulting agreements to the extent they exist, can expect
only limited amounts of their time to be dedicated to our
activities.




In
addition, if our finances allow, we intend to form research collaborations with
academic and other research institutions throughout the world.These research
facilities may have commitments to other commercial and non-commercial entities.
We have limited control over the operations of these institutions laboratories
and can expect only limited amounts of time to be dedicated to our research
goals.




- 6
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Risks Relating toourInvestmentin Scorpion Surgical
Technologies




There are
numerous risks regarding our investment in Scorpion Surgical Technologies, all
of which could adversely affect the value of our investment in Scorpion
or hamper our ability to maximize returns on our equity interests. These
risks include:




·
            We may
      not be able to further financially support Scorpion in the event the
      milestones pursuant to our Investment Agreement with it have been
      achieved, or otherwise. If we are unable or unwilling to provide Scorpion
      with such additional financing or any other additional financing that it
      may need, we may be exposed to a claim for breach of contract, our
      interests in it may be diluted or it may
fail.




·
            We
      have had limited experience in actively managing, operating or promoting
      medical device companies such as Scorpion, and if we cannot do so
      effectively, our business strategy with respect to it will
      fail.




·
            Scorpion
      has a history of operating losses, and may never be
      profitable.




·
            Scorpion will
      likely have substantial costs to develop and market its products, thereby
      incurring net losses, and will be unable to fund its cash needs from
      operations.




·
            Scorpion
      may fail if it does not adapt to the rapidly changing medical device
      marketplace.




·
            Scorpion could make business decisions that are not in our
      best interests or that we do not agree with, which could impair the value
      of our interests.




·
            We
      have acquired less than majority voting interest in Scorpion and may not
      be able to control significant business decisions. Further, we may not be
      able to maintain our initial ownership or control levels if Scorpion
      issues additional equity to other
parties.




·
            Scorpion’smanagement could
      have economic or business interests or objectives that are different than
      ours;




·
            Scorpion
      may  not take our advice with respect to the financial or
      operating difficulties it
  may  encounter.




·
            Scorpion
      will face competition, which could adversely affect its business,
      financial condition, results of operations and prospects for
      growth.




·
            Government
      regulations and legal uncertainties may place financial burdens on
      Scorpion’s business.




General Risks Relating to
Our Business




Our
insurance policies may be inadequate and potentially expose us to unrecoverable
risks.





We have
limited director and officer insurance and commercial insurance policies. Any
significant insurance claims would have a material adverse effect on our
business, financial condition and results of operations. Insurance availability,
coverage terms and pricing continue to vary with market conditions. We endeavor
to obtain appropriate insurance coverage for insurable risks that we identify;
however, we may fail to correctly anticipate or quantify insurable risks, we may
not be able to obtain appropriate insurance coverage, and insurers may not
respond as we intend to cover insurable events that may occur. We have observed
rapidly changing conditions in the insurance markets relating to nearly all
areas of traditional corporate insurance. Such conditions have resulted in
higher premium costs, higher policy deductibles, and lower coverage limits. For
some risks, we may not have or maintain insurance coverage because of cost or
availability.





Our
product liability insurance may prove to be inadequate, leaving us vulnerable to
future claims we will be unable to satisfy.




The
testing, manufacturing, marketing and sale of laboratory test kits, clinical
diagnostic products and medical devices entails an inherent risk of product
liability claims, and we cannot assure you that substantial product liability
claims will not be asserted against us. Our product liability insurance affords
us coverage of up to $10,000,000 per claim and $10,000,000 in the aggregate. In
the event we are forced to expend significant funds beyond our insurance
coverage on defending product liability actions, and in the event those funds
come from operating capital, we will be required to reduce our business
activities, which could lead to significant losses.




We cannot
assure you that adequate insurance coverage will be available in the future on
acceptable terms, if at all, or that, if available, we will be able to maintain
any such insurance at sufficient levels of coverage or that any such insurance
will provide adequate protection against potential liabilities. Whether or not a
product liability insurance policy is obtained or maintained in the future, any
product liability claim could harm our business or financial
condition.





- 7
-


We
presently have members of management, other key employees and consultants
located in various countries, which adds complexities to the operation of our
business.




We have
or may have members of management, other key employees and consultants located
in both Israel and the United States, which adds complexities to the operation
of our business as a result of such persons working in different time zones,
which makes it more time consuming and expensive to have face-to-face meetings.
We may become a passive foreign investment company which could result in adverse
U.S. tax consequences to U.S. Holders.




Depending
upon the value of our shares and the nature of our assets and income over time,
we could be classified as a passive foreign investment company (“PFIC”) by the
U.S. Internal Revenue Service for U.S. federal income tax purposes. We believe
that we should not classified as a PFIC and do not expect to become a PFIC in
the foreseeable future. However, we may become a PFIC in any year as PFIC status
is tested each year and depends on our assets and income in such
year.




If we
were classified as a PFIC in any taxable year in which you hold our shares and
you are a U.S. Holder (as defined under the section “Taxation — U.S. Federal
Income Tax Considerations”), you would generally be taxed at higher ordinary
income rates, rather than lower capital gain rates, if you dispose of our shares
for a gain in a later year, even if we are not a PFIC in that year. In addition,
a portion of the tax imposed on your gain would be increased by an interest
charge. Moreover, if we were classified as a PFIC in any taxable year, you would
not be able to benefit from any preferential tax rate with respect to any
dividend distribution that you may receive from us in that year or in any later
year. See “Taxation — U.S. Federal Income Tax Considerations — Taxation of U.S.
Holders — Passive Foreign Investment Company Rules.”




Our
results of operations could be negatively affected by potential fluctuations in
foreign currency exchange rates.




A portion
of our costs and expenses are denominated in foreign currencies. The principal
foreign currency applicable to our business is the New Israeli Shekel. As a
result, we have exposure to foreign currency exchange fluctuations. Recently,
the U.S. dollar has declined in relationship to the new Israeli Shekel, which
has increased certain of our operating and capital costs. Continued foreign
currency fluctuations could further impact our costs, as well as our ability to
achieve and maintain profitability as we continue to grow our
business.




Risks Relating to Operating
in Israel




We
conduct our operations in Israel and therefore our results may be adversely
affected by political, economic and military instability in
Israel.




Our
operations, substantially all of our assets, our network and some of our
suppliers are located in Israel. Accordingly, political, economic and military
conditions in Israel may directly affect our business. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place
between Israel and its Arab neighbors. Any hostilities involving Israel or the
interruption or curtailment of trade within Israel or between Israel and its
trading partners could adversely affect our operations and could make it more
difficult for us to raise capital. Since September 2000, terrorist violence in
Israel has increased significantly and negotiations between Israel and
Palestinian representatives have effectively ceased. The establishment in 2006
of a government in the Palestinian Authority by representatives of the Hamas
militant group has created additional unrest and uncertainty in the region.
Further, Israel was recently engaged in an armed conflict with Hezbollah, a
Lebanese Islamist Shiite militia group, which involved thousands of missile
strikes and disrupted most day-to-day civilian activity in northern Israel. Any
armed conflicts, terrorist activities or political instability in the region
would likely negatively affect business conditions and could harm our results of
operations.




Provisions
of Israeli law and our license may delay, prevent or impede an acquisition of
us, which could prevent a change of control.




Israeli
corporate law regulates mergers, requires tender offers for acquisitions of
shares above specified thresholds, requires special approvals for transactions
involving directors, officers or significant shareholders and regulates other
matters that may be relevant to these types of transactions. For example, a
merger may not be completed unless at least 50 days have passed from the date
that a merger proposal was filed by each merging company with the Israel
Registrar of Companies and at least 30 days from the date that the shareholders
of both merging companies approved the merger. In addition, a majority of each
class of securities of the target company is required to approve a
merger.




Furthermore,
Israeli tax law treats some acquisitions, particularly share-for-share swaps
between an Israeli company and a foreign company, less favorably than U.S. tax
law. Israeli tax law generally provides that a shareholder who exchanges our
shares for shares in a foreign corporation is treated as if the shareholder has
sold the shares. In such a case, the shareholder will generally be subject to
Israeli taxation on any capital gains from the sale of shares (after two years,
with respect to one half of the shares, and after four years, with respect to
the balance of the shares, in each case unless the shareholder sells such shares
at an earlier date), unless a




- 8
-


relevant
tax treaty between Israel and the country of the shareholder’s residence exempts
the shareholder from Israeli tax.




These
provisions could delay, prevent or impede an acquisition of us, even if such an
acquisition would be considered beneficial by some of our
shareholders.




It
may be difficult to enforce a U.S. judgment against our officers, our directors
and us or to assert U.S. securities law claims in Israel.




We are
incorporated in Israel. All of our executive officers and some directors reside
outside the United States and all of our assets are located outside the United
States. Therefore, it may be difficult to enforce a judgment obtained in the
United States, against us or any of these persons, in U.S. or Israeli courts
based on the civil liability provisions of the U.S. federal securities laws.
Additionally, it may be difficult for you to enforce civil liabilities under
U.S. federal securities laws in original actions instituted in
Israel.




The
Israeli government grants that we or our predecessor have received and may
receive in the future, require us to meet several conditions and may be reduced
or eliminated due to government budget cuts, and these grants restrict our
ability to develop products and transfer know-how outside of Israel and require
us to satisfy specified conditions.




Our
predecessor has received, and we have received in March 2009 and may receive in
the future, grants from the government of Israel through the Office of the Chief
Scientist of Israel’s Ministry of Industry, Trade and Labor, or the OCS, for the
financing of a portion of our research and development expenditures in Israel.
We have assumed our predecessor’s contingent obligation to pay royalties out of
future revenues to a maximum of $2,434,000 for the income of the CellScan system
and up to $240,000 for the CKChip and related accessories. When know-how or
products are developed using OCS grants, the terms of these grants restrict the
transfer of the know-how or development of the products out of Israel without
the prior approval of the OCS. There is no assurance that we will receive the
required approvals should we wish to transfer this technology or development out
of Israel in the future. In addition, these restrictions may impair our ability
to consummate a merger or similar transaction. If approval of the transfer of
know-how abroad is granted, it will be subject to various conditions, including
payment to the OCS of a percentage of the consideration paid to us or our
shareholders in the transaction in which the technology is transferred. Transfer
of development abroad is also subject to various conditions, including the
payment of increased royalties. In addition, any decrease of the percentage of
development performed locally, as originally declared in the application to the
OCS, may require us to notify, or to obtain the approval of the OCS, and may
result in increased royalty payments to the OCS. These restrictions may impair
our ability to sell our technology assets or to outsource or transfer
development, and the restrictions continue to apply even after we have repaid
the full amount of royalties payable for the grants. We cannot be certain that
any approval of the OCS will be obtained on terms that are acceptable to us, or
at all. Furthermore, in the event that we undertake a transaction involving the
transfer to a non-Israeli entity of technology developed with OCS funding
pursuant to a merger or similar transaction, the consideration available to our
shareholders may be reduced by the amounts we are required to pay to the OCS. If
we fail to comply with the conditions imposed by the OCS, including the payment
of royalties with respect to grants received, we may be required to refund any
payments previously received, together with interest and penalties.





Our
operations may be negatively affected by the obligations of our personnel to
perform military service.




Generally,
all non-exempt male adult citizens and permanent residents of Israel under the
age of 45 (or older, for citizens with certain occupations), including some of
our officers, directors and employees, are obligated to perform military reserve
duty annually, and are subject to being called to active duty at any time under
emergency circumstances. In the event of severe unrest or other conflict,
individuals could be required to serve in the military for extended periods of
time. In response to increases in hostilities, there have been periods of
significant call-ups of military reservists. Our operations could be disrupted
by the absence for a significant period of one or more of our officers,
directors or key employees due to military service. Any such disruption could
adversely affect our operations.




Your
rights and responsibilities as a shareholder will be governed by Israeli law and
differ in some respects from the rights and responsibilities of shareholders
under U.S. law.




We are
incorporated under Israeli law. The rights and responsibilities of holders of
our ordinary shares are governed by our amended and restated articles of
association and by Israeli law. These rights and responsibilities differ in some
respects from the rights and responsibilities of shareholders in typical U.S.
corporations. In particular, a shareholder of an Israeli company has a duty to
act in good faith toward the company and other shareholders and to refrain from
abusing his, her or its power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters. See
“Description of Share Capital” for a further discussion of shareholder rights
and responsibilities under Israeli law.




- 9
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ITEM
4.  INFORMATION ON THE
COMPANY




A.  History
and Development




We were
incorporated in Israel on May 23, 2002 and we commenced operations in May
2006.Our
principal executive offices are located at 2 Yodfat Street, Lod 71291, Israel
and our telephone number is 972-8-918-8667.Substantially all of
our assets and most of our officers and employees are located in
Israel.




Our
CKChip technology is a modification of the cell carrier grid used for ourCellScansystem, first developed
by scientists at Bar Ilan University in Israel to diagnose cancer based upon the
belief that disease can be detected by testing the response of the immune system
to antigens, which are immune system stimulants, for specific diseases. These
scientists believed that, using the CellScan technology, simple and effective
tests for breast cancer and other diseases could be developed. In 1991, Bar Ilan
granted Israel Aerospace Ltd. (formerly Israel Aircraft Industries Ltd.), one of
Medis’ principal stockholders, a perpetual worldwide license to develop,
manufacture and sell the CellScan. This license included all of Bar Ilan’s
intellectual property rights related to the CellScan. In 1992, Israel Aerospace
assigned all of its rights under this license to Medis El, then a majority owned
subsidiary of Medis.




From its
inception in 1992, Medis El attempted to develop, market and test the CellScan
as a machine to screen for and detect breast cancer by means of a blood test.
Medis El sold a small number of CellScans to various hospitals and institutions
around the world but, from inception, there were problems with an inconsistency
of testing results. In 1998, Medis El redesigned the CellScan to improve its
accuracy, repeatability and ease of handling, adding a new optical system and
new software.




In 1997,
Medis El concluded that the CellScan also had significant potential as an
alternative to flow cytometers for research applications in addition to its
originally conceived role of a breast cancer diagnostic tool. Further ongoing
research by Medis El’s scientists and engineers led to numerous improvements of
the CellScan, including the development and refinement of the Cell Carrier,
which is an integral component of the CellScan. In January 2006, Medis El
developed a coated version of the CellScan’s cell carriers, capable of holding
up to 10,000 individual cells and providing an opportunity for measuring the
reactions of different cells by the CellScan





Over the
past decade, Medis has increasingly devoted its efforts and financial resources
to the development of innovative liquid fuel cell solutions. These efforts,
combined with a realization that upgrading the CellScan for its originally
intended purpose would entail a major financial expenditure, as well as
regulatory and competitive uncertainties, led Medis to conclude that it would be
prudent and ultimately more rewarding to seek commercial exploitation of the
CellScan’s Cell Carrier technology for life sciences research and clinical
diagnostic applicationsas a separate
company.





At the
end of 2006 we initiated a new development plan including the modification of
the Cell Carrier to fit fluorescence microscopy. In addition we started
developing dedicated software that will support processing and analysis of data
acquired from studies performed with the CKChip.




As of
July 27, 2007, we entered into a service agreement with Medis El and Medis
pursuant to which they will provide us with administrative services, equipment
usage and facilities for a period of 18 months from the January 7, 2008
completion date of our rights offering. This agreement provides that Medis
El and Medis will charge us for such services at their cost, as a contribution
to our capital.




In
furtherance of Medis’ plan to commercialize the CKChip technology, Medis
transferred its CellScan and Cell Carrier related operations, including its
intellectual property rights relating to the CellScan and its Cell Carrier
technology, to us pursuant to an asset purchase agreement dated July 26, 2007 in
consideration of our issuance to Medis El of 15,500,000 of our ordinary
shares.Medis has
also granted us a five year right of first refusal upon all further medical
diagnostic opportunities that are sourced by, or presented to Medis.In addition, Medis has
agreed to provide to us a cash capital contribution of up to $1,500,000 over an
18 month period on an as needed basis commencing on the January 7, 2008
completion date of our rights offering. Medis has also agreed that, following
the completion of the 2008 rights offering, it will provide us with such office
and laboratory facilities as we may reasonably require to further the
commercialization of the Cell Carrier and to launch and operate our proposed
medical device incubator and will provide us with administrative and
professional services, at cost as a contribution to our capital, for a period of
not less than 18 months thereafter.  Medis has also committed to
provide us with additional financing to carry-out our operations through at
least January 7, 2009, if our other resources are insufficient for such period
of time. On June 30, 2008, Medis El provided funding to us in the amount
$1,500,000, pursuant to a non-interest bearing, unsecured promissory note, with
a due date of January 1, 2010 – subject to certain other repayment conditions
that are based on our receiving alternative sources of financing for our
operations or the sale of our business to or merger with a third
party.  At the option of Medis El, any remaining balance on the
promissory note may be contributed to our capital.




On
January 7, 2008, we completed a rights offering to Medis common stockholders
pursuant to which subscribers purchased




- 10
-


an
aggregate of 3,492,788 of our ordinary shares, at the subscription price of
$0.30 per share, for aggregate gross proceeds of $1,048,000, less offering
expenses of approximately $601,000.  Subscribers also received four
year warrants to purchase additional ordinary shares, at an exercise price of
$0.60 per share, at the rate of one such warrant for every two ordinary shares
purchased in the rights offering. Under the terms of the rights offering, record
holders of our outstanding common stock received, at no cost, one
nontransferable subscription right for every ten shares of our common stock held
by them as of the close of business on the record date, which was November 12,
2007. Upon the completion of the rights offering, we continued to own
approximate 82.5% of Cell Kinetics’ outstanding ordinary shares and subscribers
owned the balance.





B.  Business
Overview




The CKChipTechnologyandProduct
Line





Introduction




We are
seeking to commercially exploit what we believe to be a growing need to study
individual live cells through the development, marketing and sale of an improved
Cell Carrier under the “CKChipTM” product line.  This unique Cell
Carrier can accommodate large quantities of cells, each in individual wells, for
measuring reactions of living cells while the cells are in a static state for a
considerable period of time.  While our business model initially also
contemplated investing in early stage Israeli-based medical device company, and
pursuant to that model invested in Scorpion Surgical Technologies, due to our
financial situation, we are no longer making any such investments.




Our
CKChip is a platform static cytometry technology that enables the simultaneous
examination of many individual live cells using simple imaging methods such as
fluorescence microscopy. Whereas until now cells were fixed and stained for
microscopic examination, broken down for examination of their contents, or held
alive on micro-plates, the CKChipTM will enable the dispersion of a group of
living cells, each into its own micro-well for individual scrutiny
over time. We believe that our proprietary CKChipTM platform will address
the need for cell-based assays that are simple to use, providing continuous
recording of cellular activities with high sensitivity, reliability and medium
to high throughput screening.




Monitoring
of cells held on the CKChip is performed by means of fluorescence emission
detected microscopically, using an upright or inverted microscope, in
conjunction with common imaging software. As fluorescence imaging microscopes
are common in most life science and medical laboratories, we assume high
availability of such imaging modalities to almost every scientist and researcher
interested in using the CKChipTM .




Advances
in cell biology and medical research are driving the growing need for
technologies that enable the examination of dynamic molecular and physiological
processes in individual living cells over time.




We
believe that scientists today recognize that in order to advance the
understanding of biological processes and to carry out tests on them, it is
necessary to integrate separate functions into one complex
modulus.  The smallest living unit, the cell, plays a central role as
a functional system model for such tests. We believe that detailed quantitative
understanding of single cell basis and integration of various aspects of
cellular events become important tools for cell function analysis.




We
believe that the CKChip technology could be used for research purposes in
various scientific fields including immunology, cell biology, genetic
engineering, systems biology, cancer research, drug discovery and the analysis
of live cells.





Analysis
of Live Cells




Live cell
analysis is a growing field in life sciences and clinical medicine. This is due
to rapid advances in imaging microscopy and corresponding software now enabling
easier and more efficient live cell imaging procedures. New technologies are
expected to open up new possibilities in cell biology, drug discovery,
immunology, cancer, and stem cell research, expanding the current markets and
leading to new markets.




The
following live cell investigations are becoming increasingly important, and
we  believe that we bring an innovative and important tool for
research of cell behavior and cell function in a manner not available
before.





·
            Dynamic
      Imaging in Living Cells




Imaging
cells without killing them makes it possible to watch biology in action. Among
the real-time processes that can be recorded are the congregating of protein
complexes, microvilli responding to changes in osmotic pressure and viruses
preparing to infect a cell. Recently, observation and tracking of individual
proteins tagged with green fluorescent protein (GFP) in live cells has opened
new important possibilities for studying events occurring in living cells at the
level of single molecules, providing powerful




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-


means to
investigate the localization, movement, assembly, and activation that signaling
molecules undergo as the result of an external stimulus.




·
            Assessing
      Responses of Individual Cells





Assessing
single cells within a population of cells has become an invaluable measure for
evaluating immune response or suppression in many disease settings. For example,
production of various cytokines by immune cells (both intracellular and
secreted) helps define the nature of immune response in auto-immune disease and
in transplant and cancer patients.




·
            Gene
      Expression and Genetic Engineering




A key
goal of biology is to relate the expression of specific genes to a particular
cellular phenotype. However, current assays for gene expression destroy the
structural context.




We
believe that our proprietary CKChip platform will address the need for
cell-based assays that are simple to use, providing continuous recording of
cellular activities with high sensitivity, reliability and medium to high
content kinetic analysis and high content screening.




Current
Means of Cell Analysis




Two major
techniques are currently used for examining live cells:




·
            Microscopy, in which
      cells are held on a glass slide or in small wells in nutrient medium.
      Often groups of cells are held in a well in which they are free to move
      around in the microscopic field so that monitored cellular events reflect
      the average response of the group, rather than that of individual cells
      which may deviate far from the
average.




Microscopy
relies on software tools that enable the imaging and follow-up of specific
cells. These software packages are limited in their ability to identify and
follow up on targets containing a variety of cells, especially non adherent
cells that tend to move about the microscopic field. It is also difficult to
follow a large number of cells simultaneously and over time.





Flow cytometry is a technique
for counting and sorting microscopic particles, such as cells, suspended in a
stream of fluid. It allows simultaneous multi-parametric analysis of the
physical and/or molecular characteristics of cells as they flow through an
optical and/or electronic detection apparatus.





Flow
cytometry has been widely used for over 30 years but we believe it lacks a
number of capabilities and features needed in today’s life science and medical
diagnostics research We believe flow cytometry has distinct
limitations:





·
            Flow
      methods are limited to analyzing cells in fluids and the recorded cells
      are often discarded after
measurement;


·
            Cell-based
      assays requiring time resolution, such as enzyme kinetics or drug uptake
      and/or action, make no sense by flow methods as specific cells cannot be
      re-analyzed;


·
            It
      is difficult to use Flow cytometry to  determine sub-cellular
      localization of fluorochromes employed to study intracellular
      events;


·
            Flow
      cytometry is impractical for small cell numbers;
  and


·
            Flow
      cytometry equipment is a high-priced tool ($50,000 —
      $500,000).





Our
CKChip Technology




Our
CKChip is a platform static cytometry technology that enables the simultaneous
examination of many individual live cells using simple imaging methods such as
fluorescence microscopy. Whereas until now cells were fixed and stained for
microscopic examination, broken down for examination of their contents, or held
alive in groups on micro-plates, the CKChip enables the dispersion of whole
living cells, each into its own micro-well for individual scrutiny
over time. Both small and large numbers of cells can be simultaneously
monitored in up to 10,000 micro-wells. This proprietary system
enables:




·
            Imaging
      adherent as well as non-adherent live
cells;


·
            Revisiting
      and monitoring specific cells at designated
  “addresses;”


·
            Sequential
      manipulation of individual live
cells;


·
            Potential
      retrieval of specific cells; and


·
            Simultaneous
      monitoring of kinetic data of multiple individual
  cells.




- 12
-


The Cell
Carrier, is currently marketed on a limited basis according to our limited sales
force capability and we intend to continue to market it under the “CKChip” name.
This devise enables loading  cells onto the CKChip where each cell is
drawn/siphoned into a microwell and become trapped in its individual microwell.
for analysis, treatment or rinsing with multiple reagents. The location, or
“address”, of each microwell is registered, so that cells identified for special
attention during monitoring can be revisited and potentially retrieved for
further treatment and investigation




Monitoring
of cells held on the CKChip is performed by means of fluorescence emission
detected microscopically, using virtually any upright or inverted fluorescence,
in conjunction with common imaging software. As fluorescence imaging microscopes
are common in most life science and medical laboratories, anyone interested in
using the CKChip may be able to do so.





We
believe the CKChip has the following distinct advantages over other cytometric
technologies:




·
            ability
      to capture and register living cells at specific
  addresses;


·
            ability
      to monitor identifiable individual cells and rare
  events;


·
            ability
      to repeatedly monitor cells for acquisition of kinetic
    data;


·
            simultaneous
      and sequential monitoring of up to 10,000 cells by conventional imaging
      microscopy;


·
            enables
      characterization of specific cells within a heterogeneous cell
      population;


·
            manipulation
      and analysis of adherent and non-adherent living cells;
  and


·
            adding
      and rinsing reagents from living cells under
  observation.




Potential
Applications




We
believe that there are numerous potential applications for our CKChip
technology, such as:




·
            Clinical diagnostic / in vitro
      diagnostic market.  Clinical diagnostic / in vitro diagnostic
      tests are essential to the practice of health care worldwide: In clinical
      diagnostics, a biological sample is taken from the patient and sent to a
      medical laboratory for analysis using reagents and instrument developed by
      the in vitro
      diagnostic (IVD) industry. A wide range of increasingly sophisticated
      diagnostic tests exist, and are
used:




·  for
systematic screening of certain populations;


·  to
establish or confirm a diagnosis for a person presenting with clinical symptoms;
and


·  to
determine appropriate treatment and monitor its efficacy.




Diagnostic
tests are used for monitoring patient status and to follow the course of
treatment in cancer, chronic diseases and others.




·
            Enzyme Kinetics.Enzyme
      kinetics is the study of the rates of chemical reactions that are
      catalyzed by enzymes. These studies provide insights into the catalytic
      mechanism of enzymes, their role in metabolism, how their activities are
      controlled within cells and how drugs and poisons can inhibit their
      activities. These studies are important because they help to explain how
      enzymes work and may predict how enzymes behave in living
      organisms.




·
            Cytokine
      measurements.  Cytokines are extracellular signaling
      proteins or peptides that act as a local mediator in cell to cell
      communication. The communication involves regulating proliferation
      (division) and differentiation of cells. When these “social controls” on
      cell division fail, cancer and other diseases result and damage occurs to
      body tissues and organs. The study of cytokine reactions in cells plays an
      important role in understanding diseases and developing new drugs to
      combat them.




·
            Immunology.  Immunology
      research on medical problems is becoming increasingly complex, focusing on
      the regulation and control of immune responses that involve cytokines,
      receptors, signaling and other biochemical processes. Vaccines developed
      as a result of this research need to be tested in vivo but studies in
      mice and other laboratory animals often cannot be directly extrapolated to
      humans because of biological
differences.





Our
Products




Our
current products, as well as products in varied states of development, are
summarized below:





·
            Generation I (CCI) —
      The following are the current product lines available for sales and
      marketing under the CKChip brand name offering to basic grid types A-20
      for cells under 15 micrometer in size and A-50 for cells above 15
      micrometer in size .




- 13
-


o
            Starter
      Kit- Including cell loader, cover-slips, holder unit,
      vacuum-pen, 8 CKChip units and our “WELLS”
  software




o
            CKChip-R  -
      for upright and inverted fluorescence microscopy applications enabling
      repeated multi-live single cell monitoring, and  multiple
      rinsing of reagents and continues rinsing in upright microscopes
      only.




o
            CKChip
      – I
      - for
      upright and inverted fluorescence microscopy applications enabling
      repeated multi-live single cell monitoring, and multiple rinsing of
      reagents and continues rinsing in inverted microscopes
    only.




o
            DynamiCa
      kit – A dedicated kit for Ca flux measurements offering a simple platform
      that facilitates microscopic analysis of transient intracellular calcium
      levels.




o
            WELLS
      Software – A dedicated CKChip image analysis software providing software
      tools for researchers using the
CKChip.




o
            CKChip
      HM –  for high magnification
imaging.




The
following are products that we intend to develop provided that we can raise
adequate funds to maintain our operations:




·
            Generation II (CCT) — a
      transparent Cell Carrier that in addition to the features described above,
      is also suitable for light microscopy, reagent, chemical, and biological
      coating options. Subject to available funds, we are making an effort to
      introduce the first version of this product, which is in a development
      stage, during 2010.




·
            Generation III (CCM) —
      We expect the CCM will be offered with special kits to enable clinical
      diagnostic applications based on research currently in progress. We are
      currently performing feasibility test of the first clinical diagnostic
      application for the CCM.




Our
Marketing Strategy




We have
recently commenced the marketing of the CCI version, our first product. To this
end, we presented the CKChip ata
limited number of international congresses of cell biology and cytometry, as
well as in a series of scientific seminars presented at various universities and
academic institutions. In April 2008 we signed with Rikaken Co., Ltd. Japan, an
exclusive distribution agreement for marketing and distributing our CKChip in
Japan. This agreement was not extended after the initial term as provided
in the agreement because CKChip sales did not meet
expectations.





On May
10, 2009, we signed a distribution agreement exclusive for the territory of
Italy. The agreement was signed with EuroClone S.p.A., a company that
manufactures and distributes products for cell biology, molecular biology,
cytogenesis, genomics, proteomics and immunology. Our current financial
situation limits our ability to perform under this agreement





We are
making an effort to form research collaborations with academic and other
research institutions throughout the world. We believe that academic
institutions researchers exhibit a number of characteristics that can impact on
the success of novel technologies for cell analysis, such as:




·
            The
      academic community tends to operate in networks in which word of mouth
      supports the spread of a chosen
technology;


·
            Academic
      researchers are considered early adopters of new technology, relative
      to clinicians, allowing them to expand their research capabilities;
      and


·
            There
      is strong scientific focus on cell-based
  applications.




We are
hopeful that the CKChip’s exposure to academic institutions and researchers will
facilitate our demonstration of the CKChip’s capabilities in comparison to other
technologies and thereby enhance our efforts to position the CKChip as a unique
platform for cutting edge research in diverse fields.




We will
be able to continue to present our technology and increase our sales activities
only upon raising and securing adequate financing, of which we can give no
assurance of success.  These activities would include
presentations  at professional meetings, lectures and seminars direct
sales activities, public relations campaigns and others. We anticipate that
papers that we expect will be published by researchers in leading professional
journals will generate publicity and will boost awareness of the CKChip
technology.




Manufacturing
and Sales




The
assembly and packaging of our products is done in our facilities in Israel;
however, we do not presently have large scale internal manufacturing or a
meaningful sales capacity. We expect to seek to establish strategic
alliances and joint ventures with third




- 14
-


parties
possessing these capabilities until we can raise sufficient funds to perform
these functions with our own personnel.





Our sales
activity was relatively limited during 2008 due to budget constraints. We
focused on identifying target customers by analyzing their scientific work and
on optimizing our sales force ability to efficiently focus on customers with a
high probability to purchase our products. Using this sales strategy, we sold
$21,000 of our products to more than 10 customers in the academic research area.
However, we encountered difficulties in introducing our products to the market
because of the need for expensive market education, which substantially
influences the success of sales of our products at this stage.




In order
to maintain market awareness and overall control, we intend to be highly
involved in directing the sales force of our strategic partners to the extent
they will request and circumstances allow us.





We intend
to build direct communication and channels with our target customers to obtain
market feedback, enhance product quality, and facilitate product improvement and
new product development.




Research
and Development




Our
research and development programs are generally pursued by our employees and
consultants. The primary objectives of our research and development programs are
to advance the development of our Cell Carrier technology and CKChipTM products,
and to enhance the commercial value of our products and technology.




We have
incurred research and development costs of approximately $1,191,000, $1,182,000
and $1,079,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.




Recent
research and development initiatives include the following:




·
            We
      have recently invested substantial efforts in developing our transparent
      cell carrier, which was a challenging objective that required a series of
      prototype development and investigation of various potential designs that
      met product definitions and allowed an economical production process. Due
      to budget constraints, however, we were required to limit our efforts and
      decided upon a preferred first product design which may not be optimal in
      performance.




·
            We
      have also invested efforts in studying and developing specific coating
      capabilities on the cell carrier in order to expand its potential
      applications and product line range. While we made initial steps to
      establish the foundation for potential future products incorporating
      specific coatings of reagents chemicals and antibodies on the Cell
      Carrier, this activity was limited due to budget constraints as well.




·
            The
      current software that accompanies our products provides image analysis of
      data acquired from the microscope. We are currently working on the
      definition and development of data analysis software to enhance the
      ability of scientists using the Cell Carrier to retrieve and analyze
      imagery data in a user friendly efficient
way.




·
            We
      decided upon the first diagnostic clinical application to be developed
      based on our live cell monitoring ability. We are currently evaluating the
      feasibility of the protocol selected and we are also exploring means to
      optimize and establish stable test protocol.  In order to
      facilitate this research activity we are collaborating with clinicians,
      although budget constraints have limited the
  process.




Additionally,
we maintain a quality assurance system and we declare our products in accordance
with CE mark standards.




Investment in Scorpion
Surgical Technologies




While it
was our intention to develop a medical device incubator, we have decided to
accord priority to the development and commercialization of our CKChip
technology and successive generations of CKChip applications and products.
Accordingly, at this time we are no longer investing in early stage medical
device enterprises, and we do not expect to resume such activity in the
future.




We
previously invested in Scorpion Surgical Technologies, Ltd., a start-up company
in the field of orthopedic surgical instrumentation, with particular emphasis
upon spinal stabilization systems. Scorpion’s technology is intended to enhance
implant stability, increase implant strength as well as resistance to pull-out,
and improve bone implant interaction. Scorpion’s first product, presently in the
development stage, is a vertebral attachment system, indented to offer a
solution superior to pedicle screws and spinal stabilization. Scorpion received
approval for a $250,000 grant contingently repayable from future royalty
revenues only, from the Israeli Office of Chief Scientist, to further its
research and product development efforts.




In July
2007, we entered into an agreement with Scorpion pursuant to which we agreed to
acquire up to a 20% equity interest




- 15
-


in
Scorpion for $150,000. Under the agreement, we will acquire 20,000 shares of
Scorpion ratably based upon our payment of three equal installments of $50,000
each. The first payment was made in July 2007. The other two payments are
subject to the performance of milestones that provide for our completion of an
equity fund raising of at least $1,500,000 and Scorpion’s signing an agreement
with a medical research center for the performance of clinical trials, as well
as the fulfillment of several administrative conditions. These two additional
payments have not yet been made as management believes the milestones per the
agreement have not yet been achieved. We also have been given the right to
appoint a director to Scorpion’s board of directors, which is currently vacant.
See Item 7B. Related Party Transactions, for further information regarding our
agreement with Scorpion.





Dr.
Ben-Arye, who is a director and co-founder of Scorpion, did not participate in
the negotiation of the terms of our investment in Scorpion. Additionally, Dr.
Ben Arye has not and will not receive any portion of the payments that we have
made and will make to Scorpion in consideration of our equity
interest.




Licensed
Technology




Medis El
acquired the rights to the CellScan in August 1992 by assignment from IAI of a
license from Bar Ilan University (the “University”) to IAI. Medis El paid IAI
$1,000,000 in consideration of the assignment of the license and for certain
tooling and equipment. The license is a perpetual worldwide license to develop,
manufacture and sell the CellScan, and to sublicense the right to manufacture
and sell the device. The license includes all rights to the University’s
CellScan patents, know-how and inventions including any subsequently acquired,
and all improvements thereto. Medis El is obligated to pay the University a
royalty for a twenty-year period beginning in 1995. For the first ten years, the
royalty is at the rate of 6.5% of proceeds of sales (after deducting sales
commissions and other customary charges) and 4.5% on any fees received from
granting territorial rights. The royalty for the second ten-year period is 3.5%
on all revenues whether from sales or fees. In addition to such royalty
payments, we are required to grant $100,000 to the University during the first
year that our after-tax profits exceed $300,000. On July 26, 2007, Medis El
assigned all of its intellectual property rights to the CellScan, including the
Cell Carrier, to us and delegated to us its royalty payment
commitments.




Intellectual Property
Rights




We hold
one U.S. patent on our Cell Carrier technology, which expires in June 2021, This
patent is also valid in South Korea, Canada and Japan. We have
filed three additional applications under the Patent Cooperation Treaty relating
to anew version of
ourcell carrier
technology and one provisional application submitted to the U.S. Patent and
Trademark Office related to aspecific testing method.





We do not
believe that Bar Ilan’s patent rights with respect to the CellScan, which have
been assigned to us by Medis El, will be of material value to us in our future
efforts to commercialize and protect our Cell Carrier technology as the
underlying patents and attendant proprietary rights have expired.





Competition




The life
sciences research and clinical diagnostics markets are characterized by intense
competition. We believe that we directly compete with WBT (previously known as
Molecular Cytomics Inc)., which offers a microscope slide-based device that
contains thousands of micron-sized wells. Its technology enables high content
analysis of non-adherent cells such as human blood, bone marrow and stem cells,.
We are also aware of several other potentially competing technologies, among
them:




·
            An
      academic collaboration at the Berkeley campus of the University of
      California, which has developed a dynamic single cell culture array that,
      if commercialized, would directly compete with our current and future
      intended CKChip applications and
products.


·
            SC
      World Inc., a Japanese biotechnology venture, that has been established to
      exploit micro-well cell chip technology that can capture lymphocyte cells
      for potential development of immunotherapeutic and immunodiagnostic
      tools.





We also
compete indirectly with a number of companies, both domestic and foreign, that
engage in more traditional methods for carrying out single cell analyses, by
means of microscope slides and culture microplates of various types. These
companies include CompuCyte Corporation, Cellomics, a business unit within the
Biosciences group of Thermo Fisher Scientific Inc., IBIDI and Chipman
Technologies Ltd.





We will
seek to effectively compete based upon the unique features and capabilities of
our CKChip technology, the diversity of its applications and what we believe to
be costly and comparatively inefficient means of cell analysis currently in use
in our targeted markets.




- 16
-


Government
Regulation




While we
believe that the marketing of laboratory consumables for research applications
only requires perfunctory regulatory filings, we may become subject to laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, and the use and disposal of hazardous or
potentially hazardous substances used in connection with our research and
development work. In addition, the sale by us of any commercially viable product
will or may be subject to government regulation from several standpoints,
including manufacturing, advertising and promoting, selling and marketing,
labeling, and distributing.




Facilities




Medis
currently provides us with office and laboratory facilities of approximately 300
square meters at 2 Yodfat Street, Lod, Israel. These facilities are adequate for
our projected needs. Medis El charges us for these facilities at its cost as a
contribution to our capital and has agreed to do so through July  7,
2009. We may relocate our facilities if Medis El ceases to continue to support
us and we are unable to successfully raise adequate capital for maintaining our
operations.





Employees





As of
December 31, 2008, we had 10 full-time employees, including our chief executive
officer, and one part-time employee. We also use consultants from time to time
on full or part time schedule.  See “Major Shareholders and Related
Party Transactions—Related Party Transactions” for a description of
administrative services provided to us by Medis El.




Israeli
labor laws govern the length of the workday, minimum wages for employees,
procedures for hiring and dismissing employees, determination of severance pay,
annual leave, sick days and other conditions of employment. Israeli law
generally requires severance pay upon the retirement or death of an employee or
termination of employment. Furthermore, we and our employees are required to
make payments to the National Insurance Institute, which is similar to the U.S.
Social Security Administration. Such amounts also include payments by the
employee for health insurance. The total payments to the National Insurance
Institute are equal to approximately 17.7% of an employee’s wages (up to a
specified amount), of which the employee contributes approximately 12% and the
employer contributes approximately 5.7%.




Our
employees are not represented by any labor union. Since our inception, we have
not experienced labor-related work stoppages and believe that our relations with
our employees are good. However, due to our financial situation, we may need to
dismiss some or all of our employees in the near future.




ITEM
4A.                     UNRESOLVED STAFF
COMMENTS





Not
applicable.





ITEM
5.                      
OPERATING AND
FINANCIAL REVIEW AND PROSPECTS




Operating
Results




General




The
following operating and financial review and prospects should be read in
conjunction with “Selected Financial Data” and the financial statements and
accompanying notes appearing elsewhere in this annual report.




This
discussion contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of many important factors,
including those set forth under “Risk Factors” and elsewhere in this annual
report.




Introduction




We
commenced operations in May 2006 and we are focusing on the development and
commercialization of a cell carrier technology named CKChip that enables
trapping maintaining and monitoring thousands of individual live cells over
time.  Our CKChip is a platform static cytometry technology that
enables the simultaneous examination of cells using simple imaging methods such
as fluorescence microscopy. We believe that our proprietary CKChip platform will
address the need for cell-based assays that are simple to use, providing
continuous recording of cellular activities with high sensitivity, reliability
and medium to high content kinetic analysis and screening, in particular for
non-adherent live cells.




- 17
-


While it
was our intention is to develop a medical device incubator, we have decided to
accord priority to the development and commercialization of our CKChip
technology and successive generations of CKChip applications and products.
Accordingly, at this time we are no longer investing in early stage medical
device enterprises, and we do not expect to resume such activity in the
future.





As a
successor to the CellScan related operations of Medis El, our results of
operations, liquidity and capital resources and financial position include the
CellScan related operations of Medis El, as well as allocations of general and
administrative expenses from Medis El Ltd. and Medis, as if we had been a public
company from the inception of Medis El in July 1992.




Our
historical financial information included in our results of operations and
liquidity and capital resources have been taken from our financial statements,
which are included elsewhere in this annual report. Our financial statements are
intended to reflect our operations as if we had been a separate legal entity
from the inception of Medis El in July 1992 and have been derived from the
historical results of operations and historical bases of assets and liabilities
of Medis El and Medis and our own accounts after our commencement of operations
in May 2006. For the periods prior to July 26, 2007, our financial statements
have been prepared on a carve-out basis from Medis El and Medis. We believe that
the assumptions made and methodology used in preparing our financial statements
until such date are reasonable.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of
our financial statements requires us to make estimates, judgments and
allocations that affect the reported amounts of assets, liabilities and
expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate past judgments and our estimates, including those related to
revenue recognition, goodwill, stock options and deferred income taxes. We base
our estimates on historical experience and on various other assumptions that we
believe 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 apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our carve-out financial
statements.




Going
Concern





The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on recoverability and reclassification of assets or
the amounts and classification of liabilities should we be unable to
continue as a going concern. If the financial statements were prepared on a
liquidation basis, the carrying value of the assets and liabilities would
be adjusted to reflect the liquidation basis of accounting.





Basis
of Presentation




Our
financial statements prior to July 26, 2007 reflect our operations as if we had
been a separate legal entity from the inception of Medis El in July 1992 and
have been derived from the historical results of operations and historical bases
of assets and liabilities of Medis El and Medis and our accounts after our
commencement of operations in May 2006. For the periods prior to July 26, 2007,
our financial statements have been prepared on a carve-out basis from Medis El
and Medis. As such, in preparing our financial statements, we have made numerous
allocations of statement of operations and balance sheet items from Medis El
and, to a lesser degree, Medis. Such allocations, by necessity, require the use
of considerable judgment and estimates. Since allocations are such an important
part of the preparation of our financial statements, unreasonable judgment and
estimates in designing the methodology of allocation and/ or in applying such
methodology would likely have a material impact on our financial
statements.





Goodwill




We
consider accounting policies related to our goodwill to be critical due to the
estimation processes involved and the materiality to our financial statements.
As of December 31, 2008, the net book value of our goodwill was $2,212,000. Our
goodwill arose primarily as a result of two purchase accounting
transactions: Medis’ acquisition of the minority interest in Medis Inc. in
1997 and Medis’ exchange of its shares for the minority interest in
Medis El in 2000. In including our Goodwill in our financial statements, we
apply Staff Accounting Bulletin No. 54, which generally requires that the
push down basis of accounting be applied in the separate financial statements of
a subsidiary that is substantially wholly-owned by the parent
company.




- 18
-


Under Statement of Financial Accounting Standards No. 142
“Goodwill and Other Intangible Assets,” goodwill is subject to n annual
impairment test. The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what assumptions to use in
the calculation. The first step of the process consists of estimating the fair
value of our reporting unit based on a discounted cash flow model using revenue
and profit forecasts and comparing those estimated fair values with the carrying
values, which include goodwill. If the estimated fair value is less than the
carrying value, a second step is performed to compute the amount of the
impairment by determining an “implied fair value” of goodwill. We cannot predict
the occurrence of certain future events that might adversely affect the reported
value of goodwill. Such events include, but are not limited to, strategic
decisions made in response to economic and competitive conditions, the impact of
the economic environment on our potential client base, and material negative
change in relationship with significant clients. The “implied fair value” of our
reporting unit will be determined by our management and will generally be based
upon future cash flow projections for the reporting units discounted to present
value. We will use outside valuation experts when management considers that it
would be appropriate to do so.





Revenue
Recognition




We sell
our CKChip product mainly through direct sales, distributors and resellers
channels. We recognize revenues from product sales in accordance with Staff
Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements” (“SAB
104”) when delivery has occurred, persuasive evidence of an arrangement exists,
the vendor’s fee is fixed or determinable, no further obligation exists, and
collectability is reasonably assured. We recognize sales through distribution
channels when the reseller or distributor sells the product to
the end-user.




Our
revenue recognition policy took into consideration the creditworthiness and past
transaction history of each customer in determining the probability of
collection as a criterion of revenue recognition. This determination required
the exercise of judgment, which affected our revenue recognition. If we
determined that collection of a fee was not probable, we deferred the revenue
recognition.




We
generally do not grant a right of return to our customers. When a right of
return exists, we defer revenue until the right of return expires, at which time
revenue is recognized provided that all other revenue recognition criteria are
met.




Deferred
Income Taxes





We record
a valuation allowance to reduce our deferred tax assets to zero. In the event
that we were to determine that we are likely to be able to realize all or
part of our deferred tax assets in the future, an adjustment to
the deferred tax assets would be credited to operations in the period such
determination was made.





Effective
January 1, 2008, we adopted FASB Interpretation 48, “Accounting for Uncertainty
in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for recognizing
the benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on derecognition, measurement and
classification of income tax uncertainties, along with any related
interest and penalties. FIN 48 also includes guidance concerning accounting
for income tax uncertainties in interim periods and increases the level of
disclosures associated with any income tax uncertainties. The application of FIN
48 requires the exercise of judgment and the use estimates and, depending
on transactions and circumstances, could potentially have a significant
impact on our financial statements.




Stock
Options, Warrants and Restricted Stock




We
utilize stock options, warrants and restricted stock as an important means of
compensation for employees, directors and consultants and also warrants as
an instrument in our fund raising process. Accounting for such
options, warrants and restricted stock results in significant non-cash
charges to our operations. There are assumptions and estimates involved in
determining the value of such stock options, warrants and restricted stock and
the timing of related charges to our operations. These estimates and
assumptions include the expected term of the option, volatility of our
stock price, interest rates and expected forfeiture rates. The market price of
our stock also has a significant impact on charges we incur related to
stock options and warrants.




Recently
Enacted Accounting Pronouncements





In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how an acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest in the acquiree, (ii) recognizes and measures the
goodwill acquired in a business combination or a gain from a bargain purchase,
and (iii) determines what information to disclose to enable users of financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R will be applied prospectively to business combinations
that have an acquisition date on or after January 1, 2009. The impact of SFAS




- 19
-


141R on
our results of operations and financial condition will depend on the nature and
size of acquisitions, if any, subsequent to the effective date.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
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; and changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. We
are currently evaluating the potential impact, if any, of the adoption of SFAS
No. 160 on our consolidated financial statement.





In
February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13”, and FSP No. FAS 157-2, “Effective Date of FASB
Statement No. 157”. Collectively, the Staff Positions defer the effective date
of Statement 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value on a recurring basis at least annually,
and amend the scope of Statement 157. As described in paragraph 17 of Note B of
our financial statements included in this Annual Report, we adopted SFAS No. 157
and the related FASB staff positions except for those items specifically
deferred under FSP No. FAS 157-2.





In
December 2007, the FASB ratified EITF Issue No. 07-1 “Accounting for
Collaborative Arrangements” (“EITF 07-1”), which provides guidance regarding
financial statement presentation and disclosure of collaborative arrangements to
jointly develop, manufacture, distribute and market a product whereby the
collaborators will share, based on contractually defined calculations, the
profits or losses from the associated activities. The consensus requires
collaborators in such an arrangement to present the result of activities for
which they act as the principal on a gross basis and report any payments
received from, or made to other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational and consistently applied
accounting policy election. EITF 07-1 is effective for fiscal years beginning
after December 31, 2008, which will be our fiscal year 2009, and will be applied
as a change in accounting principle retrospectively for all collaborative
agreements existing as of the effective date. We are in the process of
evaluating the potential impact of adopting EITF No. 07-1 on our financial
statements.




Results Of
Operations




From the
inception of Medis El in July 1992 through December 31, 2008, the CellScan
related operations have generated an accumulated deficit of approximately
$62,932,000. We expect to incur additional operating losses through the end of
2009 and possibly thereafter, principally as a result of our continuing
anticipated research and development costs and general and administrative
expenses related to further development and commercialization of our CKChip
products.





Since
inception, we have sustained operating losses and has used cash in our
operations. During the year ended December 31, 2008, we used cash in operating
activities of $2,271,000, incurred a net loss of $2,381,000, and had a
total stockholders’ equity of $1,127,000 at December 31, 2008. These losses have
significantly weakened our financial position and available cash resources. In
addition to the above, the financial position of MTL and Medis El was also
weakened, and we expect that we can no longer rely on obtaining additional
financing from MTL and Medis El.




We
require additional financing in order to continue to fund our current
operations, which continue to show losses, and pay existing and future
liabilities and other obligations. We are currently seeking additional funding
from strategic partner or financial investors in order to enable execution of
our business plan and future operations. The satisfactory completion of these
fund raising efforts is essential to provide sufficient cash flow to meet
current operating requirements. Our limited available cash resources coupled
with cash expected to become available in the third quarter of 2009 under its
approved Chief Scientist of the Israel Ministry of Industry, Trade & Labor
research and development plan, would be sufficient to continue operations only
through October 2009. Furthermore, we cannot give any assurance that we will in
the future be able to achieve a level of profitability from the sale of our
products to sustain our operations. These conditions raise substantial doubt
about our ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on recoverability and reclassification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.




Year
ended December 31, 2008 compared to year ended December 31, 2007




Revenues
increased from zero for the year ended December 31, 2007 to $21,000 for the year
ended December 31, 2008, due to commencement of sales of our CKChip products
made during 2008. Cost of revenues increased from zero for the year ended
December 31, 2007 to $14,000 for the year ended




- 20
-


December
31, 2008. The increase is related to the cost of goods attributed to the above
sales. Cost of revenues as a percentage of revenues for the year ended December
31, 2008 was 67%.




We
sustained a net loss of $2,381,000 during the year ended December 31, 2008,
compared to $2,096,000 during the year ended December 31, 2007. The increase in
the net loss can primarily be attributed to an increase in marketing, general
and administrative expenses.




Our
research and development costs during the year ended December 31, 2008 amounted
to approximately $1,191,000, compared to approximately $1,182,000 during the
year ended December 31, 2007. Costs incurred during the year ended December 31,
2008 principally related to improvements of our current CKChip to fit extended
types of microscopes and validation of applications for life science research.
In addition, these costs relate to the development of our next generation
transparent cell carrier, studying and developing cell carrier
coatings, research related to the definition of cell based clinical
application, and in particular development of data analysis software to enhance
the ability of scientists using the Cell Carrier. The increases in 2008 can be
primarily attributed to increases in labor and related costs, depreciation and
other costs, partially offset by a decrease in material costs.




Our
marketing, general and administrative expenses during the year ended December
31, 2008 amounted to approximately $1,219,000, compared to approximately
$901,000 during the year ended December 31, 2007. The increase
of  $318,000 for the year ended December 31, 2008 is primarily
attributable to increases in labor and related costs of approximately $303,000,
primarily due to the recruitment of employees operating in the executions of
sales and marketing activities. In addition there is an increases in legal and
financial services costs of approximately $88,000, offset by decrease in other
G&A expenses of approximately $71,000.





Year
ended December 31, 2007 compared to year ended December 31, 2006




We did
not generate any revenue for the years ended December 31, 2006 or
2007.





We
sustained a net loss of $2,096,000 during the year ended December 31, 2007,
compared to $1,810,000 during the year ended December 31, 2006. The increase in
the net loss can primarily be attributed to an increase in research and
development costs and an increase in marketing, general and administrative
expenses.




Our
research and development costs during the year ended December 31, 2007 amounted
to approximately $1,182,000, compared to approximately $1,079,000 during the
year ended December 31, 2006. Costs incurred during the year ended December 31,
2007 principally related to improvement and modifications of our Cell Carrier
design to enable its use with standard fluorescence microscopes, as well as
development and validation of specific applications to be used with the Cell
Carrier in order to enhance introduction and commercialization of our Cell
Carrier - CKChipTM product line. Costs incurred during year ended December 31,
2006 related to the further refinement and assembly of the desktop CellScan,
various research activities (including initial steps in modifying the Cell
Carrier design to enable its use with standard fluorescence microscopes) and in
obtaining the CE mark and moving forward with our ISO application, as well as
clarifying other regulatory requirements needed for further commercialization of
our products. The increases in 2007 can be primarily attributed to increases in
labor and related costs, depreciation and other costs, partially offset by a
decrease in material costs. In July 2007, we entered into an agreement with
Scorpion Surgical Technologies, Ltd. to acquire up to a 20% aggregate interest
in Scorpion for a total investment of $150,000, of which $50,000 was paid in
July 2007.  We have recorded such investment in Scorpion as an
in-process research and development expense.




Our
marketing, general and administrative expenses during the year ended December
31, 2007 amounted to approximately $901,000, compared to approximately $698,000
during the year ended December 31, 2006. The increase of  $203,000 for
the year ended December 31, 2007 is primarily attributable to increases in labor
and related costs of approximately $97,000, increases in  non-cash
charges relating to the issuance of stock options of approximately $68,000,
increases in marketing costs of approximately $34,000 and increases in various
other SG&A cost categories of approximately $4,000.





As a
result of adopting SFAS 123(R) on January 1, 2006, our net loss for year
ended December 31, 2007 was $255,000 greater than if we had continued to account
for share-based compensation under Accounting Principles Board Opinion
No. 25 (“APB 25”). Basic and diluted net loss per share for the year
ended December 31, 2007 was $.01 greater than it would have been if we had
continued to account for share-based compensation under
APB 25.





As of
December 31, 2007, we had unrecognized compensation costs of approximately
$52,000 related to stock options accounted for in accordance with FASB Statement
No. 123 (revised 2004) “Share Based Payments,” which are expected to be
recognized in future periods (exclusive of amounts that may be allocated to us
by Medis El and by Medis).




Impact of Currency
Fluctuation and Inflation




The
financial statements of the company have been prepared in U.S. dollars, as the
dollar is its functional currency. Since the




- 21
-


Company’s
operations are funded in U.S. dollars and a substantial portion of its costs is
incurred in U.S. dollars, management believes that the dollar is the primary
currency of the economic environment in which the company operates. Thus, the
functional and reporting currency of the Company is the U.S.
dollar.




A portion
of our costs and expenses are denominated in foreign currencies. The most
significant foreign currency applicable to our business is the New Israeli
Shekel. As a result, we have exposure to foreign currency exchange fluctuations.
Recently, the U.S. dollar has declined in relationship to the new Israeli
Shekel, which has increased certain of our operating and capital costs.
Continued foreign currency fluctuations could further impact our costs, as well
as our ability to achieve and maintain profitability as we continue to grow our
business. We do not hedge our currency risk.




In the
early to mid 1980s, Israel’s economy was subject to a period of very high
inflation.  However, inflation was significantly reduced by the late
1980s due primarily to government intervention.  The annual rate of
inflation/(deflation) in Israel was 3.4% and 3.8% in 2007 and 2008,
respectively.  The dollar cost of our operations in Israel is
influenced by the extent to which any increase in the rate of inflation in
Israel is not offset (or is offset on a lagging basis) by devaluation of the NIS
in relation to the U.S. dollar.  For example, during the years 2007
and 2008, the appreciation of the NIS against the dollar, which amounted to 8.9%
and 1.1% accordingly, exceeded the inflation rate for the same periods, thereby
influencing our operating costs reported in U.S. dollars.




Liquidity
And Capital Resources




We and
our predecessor have historically financed our operations primarily through the
proceeds of investor equity financing and more recently through financing from
Medis and our January 2008 rights offering. Due to the financial position of
Medis and Medis El, we expect that we can no longer rely on either of them as a
financing source. We intend to rely on other sources of equity or debt financing
until such time as we are able to successfully commercialize our CKChip
products, of which we can give no assurance.





We
require additional financing in order to continue to fund our current
operations, which continue to show losses, and pay existing and future
liabilities and other obligations. We are currently seeking additional funding
from strategic partners or financial investors in order to execute our business
plan and fund future operations. The satisfactory completion of these fund
raising efforts is essential to provide sufficient cash flow to meet current
operating requirements and remain a going concern. Our limited available cash
resources coupled with cash granted to us by the Chief Scientist of the Israel
Ministry of Industry, Trade & Labor, described elsewhere in this Annual
Report, is expected to be sufficient to continue our operations only through
October 2009. Furthermore, we cannot give any assurance that we will in the
future be able to achieve a level of profitability from the sale of our products
to sustain our operations. These conditions raise substantial doubt about our
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments to reflect the possible future effects on
recoverability and reclassification of assets or the amounts and classification
of liabilities that may result from the outcome of this
uncertainty.




Our
working capital and capital requirements at any given time depend upon numerous
factors, including, but not limited to:




·
            the
      progress of CKChip research and development
  programs;




·
            the
      status of our CKChip technology and
products;




·
            the
      progress of our CKChip marketing/commercialization
  efforts;




·
            the
      degree of collaborative arrangements with third parties pertaining to our
      CKChip technology;




·
            the
      level of resources that we devote to the development of our Cell Carrier
      technologies, patents, marketing and sales
  capabilities;




·
            the
      extent of investments in Scorpion from time to time if finances
      allow;




·
            the
      level of our marketing, general and administrative expenses, other than
      those amounts charged to us by Medis El and Medis until July 9, 2009
      (which are treated as contribution to our capital);
  and




·
            Medis’
      ability to provide to us administrative services assistance beyond its
      contractual obligations.





In
furtherance of Medis’ plan to commercialize the CKChip technology, Medis
transferred its CellScan and Cell Carrier related business, including its
intellectual property rights relating to the CellScan and its Cell Carrier
technology, to us pursuant to an asset purchase agreement dated July 26, 2007 in
consideration of our issuance to Medis El of 15,500,000 of our ordinary shares.
Medis has also granted us a five year right of first refusal upon all further
medical diagnostic opportunities that are sourced by, or presented to Medis. In
addition, Medis has agreed to provide to us a cash capital contribution of up to
$1,500,000 over an 18 month period on an as needed basis commencing on the
January 7, 2008 completion date of our rights offering. Medis has also agreed
that, following the completion of such offering, it will provide us with such
office and laboratory facilities as we may reasonably require to further the
commercialization of the Cell Carrier and to launch and will provide us with
administrative and professional services, at




- 22
-


cost as a
contribution to our capital, for a period of not less than 18 months thereafter.
Medis has also committed to provide us with additional financing to carry out
our operations through at least January 7, 2009, if our other resources are
insufficient for such period of time. However, it is unlikely that Medis will be
able to continue to support us. On June 30, 2008, Medis El provided funding to
us in the amount $1,500,000, pursuant to a non-interest bearing, unsecured
promissory note, with a due date of January 1, 2010 – subject to certain other
repayment conditions that are based on our receiving alternative sources of
financing for our operations or the sale of our business to or merger with a
third party.  At the option of Medis El, any remaining balance to
the promissory note may be contributed to our capital. Also on June 30,
2008, we executed a second promissory note with Medis El in the amount of
$394,938, representing issuance costs related to our rights offering that MTL
and Medis El advanced on the Company’s behalf. Such promissory note is on
substantially the same terms as the promissory note described
above.




On
January 7, 2008, we completed a rights offering to Medis common stockholders
pursuant to which subscribers purchased an aggregate of 3,492,788 of our
ordinary shares, at the subscription price of $0.30 per share, for aggregate
gross proceeds of $1,048,000, less offering of approximately
$601,000.  Subscribers also received four year warrants to purchase
additional ordinary shares, at an exercise price of $0.60 per share, at the rate
of one such warrant for every two ordinary shares purchased in the rights
offering. Under the terms of the rights offering, record holders of our
outstanding common stock received, at no cost, one nontransferable subscription
right for every ten shares of our common stock held by them as of the close of
business on the record date, which was November 12, 2007. Upon the completion of
the rights offering, we continued to own approximate 82.5% of Cell Kinetics’
outstanding ordinary shares and subscribers owned the balance




During
the years ended December 31, 2006, 2007 and 2008, we recorded capital
contributions on our balance sheet for funding from Medis El and Medis
aggregating approximately $1,716,000, $1,802,000 and $961,000, respectively. For
2007 and 2008, such capital contributions include funds provided to us by Medis,
as well as amounts allocated to our operations by Medis El and Medis. In
addition, on June 30, 2008, Medis El provided funding to us in the amount of
$1,895,000, pursuant to non-interest bearing, unsecured promissory
notes.




During
the year ended December 31, 2008, net cash used in operating activities was
$2,271,000 compared to $1,723,000 for the year ended December 31, 2007. The
increase of $548,000 was primarily attributable to increases in net loss of
$285,000, as described more fully above, in addition to the decrease of $202,000
attributed to non-cash compensation expenses.




During
the year ended December 31, 2008, cash used in investing activities was
$25,000, compared to $97,000 during the year ended December 31, 2007. The
decrease of $72,000 was primarily attributable to a decrease in investments in
property and equipment of $22,000 and an investment of $50,000 in Scorpion in
2007, as described more fully above.




For the
year ended December 31, 2008, cash aggregating $3,347,000 was provided by
financing activities, compared to $1,805,000 for the year ended December 31,
2007. The cash provided by financing activities for the year ended December
31, 2008 represented funds provided to us by Medis and amounts allocated to our
operations by Medis El and Medis aggregating $2,461,000, and net proceeds from
the issuance of ordinary shares and warrants of $886,000. The cash provided
by financing activities for the year ended December 31, 2007 represented funds
provided to us by Medis and amounts allocated to our operations by Medis El and
Medis aggregating $1,846,000 partially offset by issuance cost on the rights
offering aggregating $41,000.





Our
failure to successfully further commercialize or sell our CKChip products may
materially adversely affect our ability to raise funds as needed. In any event,
it is difficult to make any reliable estimate of the funds required to complete
the development of our Cell Carrier technology or market and produce our CKChip
products.




Research and Development,
Patents and Licenses




We
incurred costs of approximately $1,191,000 during the year ended December 31,
2008, compared to costs of approximately $1,182,000 during the year ended
December 31, 2007. Costs incurred during the year ended December 31, 2008
include improvements of our current CKChip to fit extended types of microscopes
and validation of applications for life science research. In addition, these
costs relate to the development of our next generation transparent cell carrier,
studying and developing cell carrier coatings, research related to the
definition of cell based clinical application, and in particular development of
data analysis software to enhance the ability of scientists using the Cell
Carrier. Costs incurred during the year ended December 31, 2007 principally
related to refining our first version of our CKChip product to enable its use
with standard fluorescence microscopes. The increase can also be attributed to
our efforts in the development of the next generation Cell Carrier. In addition,
we developed and perform initial validation of a dedicated data analysis
software package that accompanies the CKChip and support the researchers in
using our CKChip. Furthermore, we have validated a series of specific
applications to be used with the CKChip in order to enhance its introduction and
commercialization. In July 2007, we entered into an agreement with Scorpion
Surgical Technologies, Ltd. to acquire up to a 20% aggregate interest in
Scorpion for a total investment of $150,000, of which $50,000 was paid in July
2007. We have recorded our investment in Scorpion as in-process research and
development expense.




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-


Off-Balance Sheet
Arrangements




We are
not a party to any material off-balance sheet arrangements.




Contractual
Obligations




The
following is a summary of our significant contractual obligations as of December
31, 2008:




Contractual
      Obligations
              
              Total
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
      and thereafterPurchase
      Obligations
              
              
              182,000
              
              
              
              182,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Other
      Long-Term Liabilities(1)
              
              
              158,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              16,000
              
              
              
              94,000Total
              
              $
              340,000
              
              
              $
              198,000
              
              
              $
              16,000
              
              
              $
              16,000
              
              
              $
              16,000
              
              
              $
              94,000


______________________


(1)
            Other
      Long-Term Liabilities represents our accrued severance pay as of December
      31, 2008. Since we do not expect a high level of employee turnover giving
      rise to the payment of significant amounts of severance obligations, we
      have included approximately 10% of the total liability in each of the
      years 2009 through 2012 and the remainder in 2012 and
      thereafter.





ITEM
6.                       
DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES




A.  Directors
and Executive Officers




The names
of our directors and executive officers and their respective ages and positions
are as follows:




Name
            Age
            PositionShmuel
      Peretz
            69
            Chairman
      of the Board of DirectorsDr.
      Asaf Ben-Arye
            47
            President
      and Chief Executive OfficerStephen
      N. Crea
            47
            Chief
      Accounting OfficerMitchell
      H. Freeman
            59
            DirectorLauri
      Hanover
            49
            Director
      (External Director)David
      Arie
            71
            Director
      (External Director)Daniel
      A. Luchansky
            50
            DirectorJaclynn
      Shweky
            42
            Director




Shmuel Peretz  Served as
president of Israel Aerospace Industries European division, between the years
1997-2002. Prior to that, Mr. Peretz served in several positions at Israel
Aerospace Industries, including Vice President (Finance) between the years
1992-1996, deputy Vice President (Finance) between the years 1985-1991,
Treasurer between the years 1983-1984 and Financial Representative in the United
States between 1979-1982. In addition, Mr. Peretz served as a director in
several companies, including Elta Ltd., Magal Ltd. and Belgium Advanced
Technology Systems (BATS). He was also a director of Medis from 1997 to 2003 and
of Medis El from 1992 to 2003. Mr. Peretz holds a B.A. in Economics and
Political Science from the Hebrew University in Jerusalem, and an MBA from the
New York Institute of Technology.




Dr. Asaf Ben-Arye has been our
President and Chief Executive Officer since May 2006. Dr. Ben-Arye’s broad
business experience includes the position of Country Manager for General
Electric Ultrasound Israel; Desk Manager Elbit Medical Services which involved
establishing and operating diagnostic medical centers; and being a Medical
Application Specialist with Elscint, Nuclear Medicine Division. He co-founded
and served as chief executive officer of Expandis, a start-up company dealing in
minimally invasive orthopedic surgical devices until May 2006, and continues to
serve it as a director. Dr. Ben-Arye is also a co-founder and director of
Scorpion Surgical Technologies, a start-up company in the field of orthopedic
surgical instrumentation. Dr. Ben-Arye received his Medical Degree in 1992 from
the Technion Israel Institute of Technology, a leading Israeli University. In
1997, Dr. Ben-Arye also received an MBA degree from the Technion.




Stephen N. Crea has served as
our Chief Accounting Officer since June 2009 and the Chief Financial Officer of
Medis since March 2009. From March 2008 until joining Medis, Mr. Crea was the
Chief Financial Officer and Treasurer of Risk Management Solutions, Inc., a
third party administrator of workers compensation claims, where he managed all
financial, treasury and human resource activities. Prior to that, from October
2006 until March 2008, Mr. Crea was the Chief Financial officer and Treasurer of
Cooperative Business International, Inc., an international trading and
processing company of commodities, where he managed all financial and treasury
activities. Prior to that, from March 2003 until October 2006, Mr. Crea was the
Chief Financial Officer and Treasurer of Select Sires, Inc., a developer and
marketer of artificial insemination genetics and related products and services
to the dairy and beef industries, where he managed all financial, treasury,
human resources and information systems activities. From February 1995 until
March 2003, he had increasingly senior roles, culminating in the position of
Vice President and Treasurer, at Insilco Technologies, Inc. and ThermaSys
Corporation. Insilco was then a global manufacturer of electronic interconnect
components




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-


and
ThermaSys was formerly Insilco’s automotive segment spun off from Insilco in
August 2000. From December 1984 until February 1995, he was employed at
Weyerhaeuser Company, a global forest products company, his most recent position
as Plant Superintendent.  Mr. Crea holds a degree in Accounting from
The Ohio State University and an MBA from the University of Nebraska -
Omaha.




Mitchell M. Freeman is a
consultant and private investor focused on strategic financial advisory
activities, business development and capital raising opportunities. From January
2003 to September 2005, he was Chief Executive Officer of Freeman Meyer and
Associates, LLC, a financial advisory and consulting firm specializing in
business development, turnarounds, strategic financial advisory assignments and
capital investment projects. In February 1994, Mr. Freeman founded Interactive
Ventures Incorporated, a value added reseller of interactive voice response
systems to the regional shopping center industry, and served as its Chief
Executive Officer until the sale of the business in February 2001. He was also a
founding director and shareholder of a major central station alarm company
providing high level security to commercial businesses in New York City, a
business that was sold in 1997. Mr. Freeman has served in other senior level
investment banking and management positions, primarily in investment banking and
real estate, at Fuji-Wolfensohn Inc., a joint venture between James D.
Wolfensohn, Inc., an international investment banking firm, and Fuji Bank;
Corporate Property Investors; Lazard Realty Inc. (a subsidiary of Lazard Freres
& Co. LLC); and J.P. Morgan Investment Management Inc. Mr. Freeman is a
founding member and Chairman of the Board of Replications Inc., a not-for-profit
education organization committed to replicating successful public schools in new
environments. He received a Masters degree in Business Administration from
Columbia University and holds a B.A. from George Washington University. Mr.
Freeman is currently a member of the Board of Director of Medis and serves as
its Chairman of its audit committee and serves as a member of its compensation
committee.




Daniel A. Luchansky has been
President and chief executive officer of DCL Holdings LLC, a privately held
alternative energy start-up focusing on the solar power and renewable energy
industries, since 2006. Mr. Luchansky has spent the past twenty-five years as an
investment professional involved in all aspects of asset management including
credit and equity analysis, as well as trading and portfolio management in a
broad range of asset classes. From 1986 to 2006, Mr. Luchansky served in various
capacities with Merrill Lynch Investment Managers and its successor, BlackRock,
Inc., most recently as a Director in charge of convertible investing for the
Americas Fixed Income Division. In this capacity, Mr. Luchansky was responsible
for making primary and secondary market investments in both public and private
companies issuing convertible securities, with holdings in excess of $650
million. Concurrently, Mr. Luchansky served as the senior analyst covering the
Oil and Gas and Alternative Energy sectors, with holdings in excess of $750
million. Previously, Mr. Luchansky was Senior Portfolio Manager for the Merrill
Lynch Convertible Fund, ML Convertible Holdings, the Global Convertible Fund,
and the offshore Convertible Securities Portfolio. He also served as co-manager
of the Merrill Lynch World Income Fund. He was responsible for initiating the
first convertible arbitrage program in several public mutual funds within the
Merrill Lynch Investment Managers complex in the early 1990’s. Also during this
period, Mr. Luchansky was instrumental in representing and protecting
stakeholders interests in several highly visible negotiations notably with Emmis
Communications, Wyndham International, Energy Corporation of America, Benton Oil
& Gas, and Alliant Computer. Mr. Luchansky was instrumental in the financing
which founded Allied Waste Industries, a leading pollution control company in
1993. Prior to joining Merrill Lynch, Mr. Luchansky was an Investment Officer,
equity analyst and credit analyst for First Fidelity Bank, a predecessor of
Wachovia Bank, including acting as co-manager of The Value Fund, a private
equity fund affiliated with First Fidelity Bank. Mr. Luchansky received his MBA
from Monmouth University and his B.S. from Kean University. Mr. Luchansky is a
member of the Board of Director of Medis.





David Arie served as Chief
Financial Officer of the Bedek Aviation Group of Israel Aerospace Industries
Ltd. from 1989 until 2003, when he retired. Between 1995 and 2003 Mr. Arie has
also served as a Director in two subsidiaries of Israel Aerospace Industries,
one incorporated in the U.S. and the other incorporated in France. Prior to that
time, Mr. Arie served as Chief Financial Officer at Elta Electronic Industries
Ltd., from 1978 through 1989 and as Elta’s controller from 1973 through 1978.
Mr. Arie previously served as Chief Financial Officer at Moldevski Brothers. Mr.
Arie studied Accounting in the Tel Aviv Branch of the Hebrew University of
Jerusalem.




Lauri A. Hanover is Vice
President and  Chief Financial Officer of Tnuva, Israel’s largest food
conglomerate, since May 2009. Prior to that, Ms. Hanover served as Chief
Executive Officer of Gross, Kleinhendler, Hodak, Halevy and Greenberg & Co.,
an Israeli law firm, since January 2008. Such firm acts as our outside Israeli
counsel. Prior to that, she served as Senior Vice President and Chief Financial
Officer of Lumenis Ltd. from 2004 through 2007 and as the Corporate Vice
President and Chief Financial Officer of NICE Systems Ltd. from 2000 to 2004.
She previously served as Executive Vice President and Chief Financial Officer of
Sapiens International Corporation N.V., from 1997 to 2000. From 1984 to 1997,
Ms. Hanover served in a variety of financial management positions, including
Corporate Controller at Scitex Corporation Ltd. and from 1981 to 1984 as a
financial analyst at Philip Morris Inc. (Altria). Since November 2003, Ms.
Hanover has served as an External Director of Ellomay Capital Ltd., formerly NUR
Macroprinters Ltd. until Ellomay Capital consummated the sale of its business to
Hewlett-Packard in February 2008. Ms. Hanover holds a Bachelor’s degree in
finance from the Wharton School of Business and a Bachelor’s degree from the
College of Arts and Sciences, both of the University of Pennsylvania. Ms.
Hanover also holds a MBA from New York University.




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-


Jaclynn Shweky is a partner at
Set To Celebrate, LLC, a business for retail and wholesale party décor since
2005. Between the years 2003–2005, she served as Vice President of Ricochet
Public Relations, a media relations firm specializing in technology and biotech.
Prior to that, between 2000 and 2003, she served as Development Team – Interim
Chief Operating Officer at Global Auction Network, a cross-platform,
transactional television network start-up. Between the years 1999-2000, Mrs.
Shweky served as President and Chief Operating Officer of The Telemedia
Accelerator, an incubator created by Bear Stearns to drive the growth of young
companies developing technology and content for digital broadband and
broadcasting. From 1997-1999, she was Associate Director of Strategic Product
Development for the Sarnoff Corporation (Previously RCA Laboratories),
responsible for finding commercial applications for technologies
developed under government contract. Prior to 1997, through a consulting firm
she founded, she built industry-specific project teams to develop business
plans, product development plans and growth strategies for small to
mid-sized companies. Mrs. Shweky holds a B.A. in Industrial Design from
Central St. Martins College, London, England.




Key Employees




Asaf Halamish, our Vice
President — Research and Development, has extensive management experience in the
development of new products and was the chief executive officer and co-owner of
a medical devices start-up. Previously he was director and manager of
engineering for one of Israel’s largest R&D companies. He has many years of
experience in managing research and development projects in Israel and abroad
and has served as a business development consultant to several Israeli high-tech
companies. Mr. Halamish has special expertise in plastic products for medical
applications. Mr. Halamish holds a degree in mechanical engineering from the
Technion – Israel Institute of Technology (Haifa) and an MBA from ISEMI,
Swinburne, Australia.




Yael Schiffenbauer, Ph.D., our
Laboratory Research Manager, has been employed at Medis El since 2000. During
that time, she was deeply involved in the development of the CellScan and Cell
Carrier. She supervised a number of projects and developed expertise in
fluorescence and analytical cytometry, immunology, autoimmune diseases, drug
allergy, and cancer research. She earned her M.Sc. in Chemistry and her Ph.D. in
Life Sciences from the Weizmann Institute of Science, specializing in the area
of magnetic resonance in biological systems. Her main areas of study were in
drug metabolism, hormonal effects, tumor implantation and
angiogenesis.





Chief
Scientific Advisor




Professor Gideon Berke is a
Professor of Immunology at the Department of Immunology and Cancer Research,
Weizmann Institute of Science. Professor Berke has wide expertise not only in
immunology, but also in cardiology, where he has investigated the mechanisms
underlying certain heart diseases resulting from an assault of lymphocytes on
the heart muscle cells, and oncology, collaborating in the development of a new
drug sensitivity test that evaluates the efficacy of an anti-cancer drug on
certain types of cancer prior to use with the aim of excluding drugs from the
treatment protocol if they are likely to be ineffective. He has experience in
fluorescence, molecular biology, transplantation, tumor immunology and in
autoimmunity. Professor Berke was one of the first researchers to generate
“killer lymphocytes” (cytolytic T lymphocytes) and to determine their mechanisms
of action at both the cellular and molecular levels. He is a renowned expert in
cell biology and immunology and has published more than 160 articles as well as
a book, Killer Lymphocytes, co-authored by W. R. Clark (Springer,
2005).




Between
1990 and 1993, Professor Berke served as Head of the Department of Cell Biology,
at the Weizmann Institute of Science. In addition to being one of the Weizmann
Institute’s leading scientists, Professor Berke was recently a visiting
professor at the Howard Hughes Medical Institute, Stanford University Medical
Center (2005); UCLA, Los Angeles, California (1978); the NCI-NIH, Bethesda,
Maryland (1988); the Mitsubishi Casei Institute, Japan (1992); IARC, Lyon,
France (2002), as well as several other positions as a visiting scientist at
leading institutions of higher learning all over the world. Professor Berke is a
graduate of Tel-Aviv University, Microbiology/Biochemistry (cum laude), and of
the Weizmann Institute of Science, where he was awarded the John F. Kennedy
Prize for Excellence in Studies from the Institute’s Feinberg Graduate School.
At the Weizmann Institute, Professor Berke is the incumbent of the Isaac and
Elsa Bourla Professorial Chair in Cancer Research.





B.  Executive
Officer and Director Compensation




Dr. Asaf
Ben-Arye is employed by us as our chief executive officer pursuant to an
employment agreement which provides for an annual base salary of $125,000
increasing to $156,000 upon the completion of our financing in excess of $4
million, based on the exchange rate between the USD and the NIS in effect as of
December 31, 2007. This salary may be increased at our discretion. Subject to
certain ceilings pursuant to Israeli tax ordinances, we will also pay
(i) an amount equal to 5% of such salary for insurance and/or a pension
fund, (ii) an amount equal to 8-1/3% of such salary towards a fund for
severance compensation, (iii) an amount equal to 1% of such salary towards
disability insurance, and (iv) an amount equal to 7-1/2% of such salary to
maintain a Keren Hishtalmut (Education) Fund. Pursuant to the employment
agreement, we also provide Dr. Ben-Arye with an automobile and the payment of
related expenses. The employment agreement provides for the grant to Dr.
Ben-Arye of options to purchase 2% of the issued shares (i.e., 330,000 shares)
at an exercise price of 0.01 NIS per share, with vesting dates between
December 31, 2006 and December 31, 2008 and an expiration date not
later than seven years after the options have vested. The employment agreement
may be terminated by




- 26
-


either
Dr. Ben-Arye or us at any time by giving the other party 120 days prior written
notice of such termination. On June 8, 2009, we announced that Dr. Ben-Arye
delivered a letter to our Board of Directors on June 7, 2009, stating that he is
resigning from all of his positions with our company. The resignation will
become effective four months from the resignation date. Our Board of Directors
is evaluating its options regarding our next steps.




We do not
at this time pay any cash compensation to our officers, including Stephen N.
Crea, and directors who are affiliated with Medis for their services as such.
Each of our external directors receive a fee in accordance with applicable
Israeli law and regulations promulgated thereunder in the amount of $2,318 for
each quarter of service.





In
October 2007, we granted options to purchase an aggregate of 145,000 of our
ordinary shares to executive officers and our directors. Such options are
exercisable at $.30 per share and expire seven years from the date of the grant.
Of such options granted, 20,000 granted to an executive officer vest in equal
installments on each of the first three anniversaries of the grant date. The
remaining 125,000 options granted to our directors vest quarterly in equal
installments on December 31, 2007, March 2008, June 2008 and September
2008.





In
October 2008, we granted options to purchase an aggregate of 175,000 of our
ordinary shares to our directors and external directors. Such options vest at
the end of each calendar quarter commencing December 31, 2008 and are
exercisable at  $0.51 per share.





In 2008
and 2007,we paid
Professor Berke, our chief scientific consultant, an aggregate of $33,000 and
$50,000, respectively, for his services.





C.   Board
Practices




Board of Directors and
Officers




Our board
of directors consists of six persons. Dr. Leonard Makowka, a member of our Board
of Directors since his appointment in July 30, 2007, resigned his position on
June 11, 2008 not due to a disagreement with us on any matter relating to our
operations, policies or practices Furthermore, Jacob S. Weiss was our Chairman
of the Board until his resignation from that position on December 1, 2008. Our
articles of association provide that our directors, apart from external
directors, are elected by a majority of the voting power represented at a
meeting of our shareholders and voting on the matter. Our articles of
association provide that we must have at least two directors.




Each
director (other than external directors) will hold office until the next annual
general meeting of our shareholders following his or her election and until his
or her successor shall be elected and qualified. The approval of at least a
majority of the voting rights represented at a general meeting and voting on the
matter is generally required to remove any of our directors from office (other
than external directors), provided that directors appointed by the board of
directors may also be removed by the board of directors. A majority of our
shareholders at a general meeting may elect directors or fill any vacancy,
however created, in our Board of Directors (other than external directors). In
addition, directors, other than an external director, may be appointed by a vote
of a majority of the directors then in office.




Our
articles of association provide, as allowed by Israeli law, that any director
may, by written notice to us, appoint another person who is not a director to
serve as an alternate director and may cancel such appointment. The term of
appointment of an alternate director is unlimited in time and scope unless
otherwise specified in the appointment notice, or until notice is given of the
termination of the appointment. No director currently has appointed any other
person as an alternate director. The Companies Law stipulates that a person who
serves as a director may not serve as an alternate director except under very
limited circumstances. An alternate director has the same responsibility as a
director.




Each of
our executive officers serves at the discretion of our Board of Directors and
holds office until his or her successor is elected or until his or her earlier
resignation or removal. On December 1, 2008, Israel Fisher, our Chief Financial
Officer, resigned from that position.  We have not appointed a Chief
Financial Officer to replace Mr. Fisher; however, we appointed Stephen N. Crea,
Medis’ Chief Financial Officer, as our Chief Accounting Officer. There are no
family relationships among any of our directors or executive
officers.




External
Directors




Qualifications
of External Directors




Under the
Companies Law, companies incorporated under the laws of the State of Israel with
shares listed on a stock exchange must appoint at least two external
directors. Our external directors are Ms. Lauri A. Hanover and Mr. David
Arie. They were




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-


each
elected to our Board at our 2008 Annual and Extraordinary General Meeting of
Shareholders held on October 7, 2008.




The
Companies Law provides that a person may not be appointed as an external
director if the person, or the person’s relative, partner, employer or any
entity under the person’s control, has or had during the two years preceding the
date of appointment an employment relationship or any affiliation with the
company or any entity controlling, controlled by or under common control with
the company. The term affiliation includes:




·
            an
      employment relationship;




·
            a
      business or professional relationship maintained on a regular
      basis;




·
            control;
      and




·
            service
      as an office holder, excluding service as a director in a private company
      prior to the first offering of its shares to the public if such director
      was appointed as a director of the private company in order to serve as an
      external director following the public
offering.




“Relative”
is defined as spouses, siblings, parents, grandparents, descendants, spouse’s
descendants and the spouses of each of these persons.




“Office
holder” is defined as a director, general manager, chief business manager,
deputy general manager, vice general manager, executive vice president, vice
president, other manager directly subordinate to the general manager or any
other person assuming the responsibilities of any of the foregoing positions,
without regard to such person’s title. Each person listed under “ — Directors
and Executive Officers”.




No person
can serve as an external director if his or her position or other business
interests create, or may create, a conflict of interest with his or her
responsibilities as an external director or may otherwise interfere with his or
her ability to serve as an external director. If all members of the board of
directors are of the same gender at the time the external directors are
appointed by a general meeting of our shareholders, then at least one of the
external directors must be of the other gender.




Our
external directors are required to possess professional qualifications as set
forth in the regulations promulgated under the Companies Law. In addition, our
board of directors is required to determine how many of our directors must have
financial and accounting expertise. In determining such number, the board of
directors must consider, among other things, the type and size of the company
and the scope and complexity of its operations.




Until the
lapse of two years from his or her termination of his or her office, we may not
engage an external director to serve as an office holder and cannot employ or
receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.




Election
of External Directors




External
directors are elected by a majority vote at a shareholders’ meeting, provided
that either:




·
            at
      least one-third of the shares of non-controlling shareholders voted at the
      meeting are voted in favor of the election of the external director
      (disregarding shares abstaining);
or


·
            the
      total number of shares of non-controlling shareholders voted against the
      election of the external director does not exceed one percent of the
      aggregate voting rights in the
company.




The
initial term of an external director is three years, and he or she may be
reelected to one additional term of three years by a majority vote at a
shareholders’ meeting. An external director may be removed only by the same
percentage of shareholders as is required for his or her election, or by a
court, and then only if he or she ceases to meet the statutory requirements for
his or her appointment or if he or she violates the duty of loyalty to the
company. If an external directorship becomes vacant and as a result we will then
have fewer than two external directors, our board of directors is required under
the Companies Law to call a shareholders’ meeting promptly to appoint a new
external director.




Each
committee of our board of directors that has the right to exercise powers
delegated by the board is required to include at least one external director and
our audit committee is required to include all of the external directors. Our
external directors are entitled to compensation as provided in regulations
adopted under the Companies Law and are otherwise prohibited from receiving any
other compensation, directly or indirectly, from us.





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-


Board
Committees




Our Board
of Directors is required under the Companies Law to establish an audit
committee. We have not at this time established an option or other
remuneration committee.




Audit
Committee




Under the
Companies Law, the board of directors of a public company must establish an
audit committee. The audit committee must consist of at least three directors
and must include all of the company’s external directors. The audit committee
may not include the chairman of the board, any director employed by the company
or providing services to the company on an ongoing basis, a controlling
shareholder or any of a controlling shareholder’s relatives. The rules of the
SEC also require that we disclose in our annual reports whether at least one
member of the audit committee is an “audit committee financial
expert.”




Our audit
committee provides assistance to our board of directors in fulfilling its legal
and fiduciary obligations in matters involving our accounting, auditing,
financial reporting and internal control functions by pre-approving the services
performed by our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal control over financial
reporting. The audit committee also oversees the audit efforts of our
independent accountants and takes those actions it deems necessary to satisfy
itself that the accountants are independent of management. Under the Companies
Law, an audit committee is required to identify deficiencies in the management
of the company, including by consulting with the internal auditor or the
independent accountants, and recommending remedial actions to the board of
directors, and would be responsible for reviewing and approving certain related
party transactions, as described below. The audit committee may not approve such
a related party transaction unless at the time of approval the two external
directors were serving as members of the audit committee and at least one of
them was present at the meeting at which the approval was granted.




Internal
Auditor




Under the
Companies Law, the board of directors of a public company must appoint an
internal auditor nominated by the audit committee. The role of the internal
auditor is to examine whether a company’s actions comply with applicable law and
orderly business procedure. Under the Companies Law, the internal auditor may
not be an interested party or an office holder, or a relative of any of the
foregoing, nor may the internal auditor be the company’s independent accountant
or its representative. An interested party is generally defined in the Companies
Law as a 5% or greater shareholder, any person or entity who has the right to
designate one director or more or the chief executive officer of the company or
any person who serves as a director or as the chief executive officer. We have
not yet appointed an internal auditor.





Fiduciary Duties of Office
Holders




The
Companies Law imposes a duty of care and a duty of loyalty on all office holders
of a company. The duty of care requires an office holder to act with the degree
of care with which a reasonable office holder in the same position would have
acted under the same circumstances. The duty of care includes a duty to use
reasonable means, in light of the circumstances, to obtain:




·
            information
      on the appropriateness of a given action brought for his or her approval
      or performed by virtue of his or her position;
  and


·
            all
      other important information pertaining to these
  actions.




The duty
of loyalty of an office holder includes a duty to act in good faith and for the
best interests of the company, including to:




·
            refrain
      from any conflict of interest between the performance of his or her duties
      in the company and his or her other duties or personal
      affairs;


·
            refrain
      from any activity that is competitive with the
  company;


·
            refrain
      from exploiting any business opportunity of the company to receive a
      personal gain for himself or herself or others;
  and


·
            disclose
      to the company any information or documents relating to the company’s
      affairs which the office holder received as a result of his or her
      position as an office holder.




Disclosure of Personal
Interests of an Office Holder




The
Companies Law requires that an office holder disclose any personal interest that
he or she may have and all related material information known to him or her
relating to any existing or proposed transaction by the company promptly and in
any event no later than the first meeting of the board of directors at which
such transaction is considered. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by
the office holder’s spouse, siblings, parents, grandparents, descendants,
spouse’s descendants and the spouses of any of these people.




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-


Under the
Companies Law, an extraordinary transaction is a transaction:




·
            other
      than in the ordinary course of
business;




·
            that
      is not on market terms; or




·
            that
      is likely to have a material impact on the company’s profitability, assets
      or liabilities.




Under the
Companies Law, once an office holder complies with the above disclosure
requirement, the transaction can be approved, provided that it is not adverse to
the company’s interest. A director who has a personal interest in a matter which
is considered at a meeting of the board of directors or the audit committee will
generally not be present at this meeting or vote on this matter unless a
majority of the directors or members of the audit committee have a personal
interest in the matter. If a majority of the directors have a personal interest
in the matter, the matter also requires approval of the shareholders of the
company. Under the Companies Law, unless the articles of association provide
otherwise, a transaction with an office holder, or a transaction with a third
party in which the office holder has a personal interest, requires approval by
the board of directors. If it is an extraordinary transaction or an undertaking
to indemnify or insure an office holder who is not a director, audit committee
approval is required, as well. Arrangements regarding the compensation,
indemnification or insurance of a director require the approval of the audit
committee, board of directors and shareholders, in that order. Our articles of
association provide that a non-extraordinary transaction with an office holder,
or with a third party in which an office holder has a personal interest, may be
approved by our board of directors or by our audit committee.




Personal Interests of aControllingShareholder




Under the
Companies Law, the disclosure requirements that apply to an office holder also
apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of a
company, including a shareholder that owns 25% or more of the voting rights if
no other shareholder owns more than 50% of the voting rights, but excluding a
shareholder whose power derives solely from his or her position on the board of
directors or any other position with the company. Accordingly, Medis, and
entities and persons that directly or indirectly control Medis, are considered
to be our controlling shareholders. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder or his or
her relative, who is an employee or director, require the approval of the audit
committee, the board of directors and a majority of the shareholders of the
company. In addition, the shareholder approval must fulfill one of the following
requirements:




·
            at
      least one-third of the shareholders who have no personal interest in the
      transaction and who vote on the matter must vote in favor of the
      transaction; or


·
            the
      shareholders who have no personal interest in the transaction who vote
      against the transaction may not represent more than 1% of the voting
      rights in the company.




D.  Employees




As of
December 31, 2008, we had 10 full-time employees, including our chief executive
officer, one full time consultant and one part-time consultant (our chief
scientific advisor). We also use consultants from time to time on full or part
time schedule. See “Major Shareholders and Related Party Transactions—Related
Party Transactions” for a description of administrative services provided to us
by Medis El.




Israeli
labor laws govern the length of the workday, minimum wages for employees,
procedures for hiring and dismissing employees, determination of severance pay,
annual leave, sick days and other conditions of employment. Israeli law
generally requires severance pay upon the retirement or death of an employee or
termination of employment. Furthermore, we and our employees are required to
make payments to the National Insurance Institute, which is similar to the U.S.
Social Security Administration. Such amounts also include payments by the
employee for health insurance. The total payments to the National Insurance
Institute are equal to approximately 17.7% of an employee’s wages (up to a
specified amount), of which the employee contributes approximately 12% and the
employer contributes approximately 5.7%.




Our
employees are not represented by any labor union. Since our inception, we have
not experienced labor-related work stoppages and believe that our relations with
our employees are good. However, due to our financial situation, we may need to
dismiss some or all of our employees in the near future.




E.  Share
Ownership




2007 Equity Incentive
Plan




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-


On July
29, 2007, our board of directors approved an equity incentive plan for our
employees, directors, consultants and advisors. The plan has an initial pool of
1,400,000 options or restricted shares, or restricted share units (RSUs) and is
intended to qualify for capital gains tax treatment under Section 102 of
the Israeli Income Tax Ordinance.




Under
Israeli law, there is no requirement to seek approval of our shareholders before
any increase in the number of shares that are reserved for issuance under
the plan  (assuming we have sufficient registered but unallocated share
capital). A resolution by the board of directors is sufficient. However, if
we elect to issue options meeting the requirements of other jurisdictions (e.g.,
issuing incentive stock options in the United States) shareholder approval may
be required.





Under the
plan, our board of directors (or, subject to applicable law, a designated
committee to which such authority may be delegated by our board of directors) is
authorized to determine the terms of the awards, including the identity of
grantees, the number of options or RSUs granted, the vesting schedule and the
exercise price.




Under the
plan, unvested options/restricted shares/RSUs terminate immediately upon
termination of employment or service. The plan defines events whereby the
vesting of options/RSUs granted may be accelerated, including a merger, a sale
of all or substantially all of our assets. The plan terminates at such time
after the tenth anniversary of the date of its adoption by our board of
directors no awards granted thereunder remain outstanding.




Options
Grants




The
employment agreement of Dr. Asaf Ben-Arye provides for the grant to Dr. Ben-Arye
of options to purchase 330,000 ordinary shares at an exercise price of 0.01 NIS
per share, with vesting dates between December 31, 2006 and
December 31, 2008 and an expiration date not later than seven years after
the options have vested.




In
October 2007, we granted options to purchase an aggregate of 506,750 of our
ordinary shares to employees, officers, directors and to a non-employee
consultant. Such options are exercisable at $.30 per share and expire seven
years from the date of the grant. Of such options granted, 381,750 granted to
employees, officers and to a non-employee consultant vest in equal installments
on each of the first three anniversaries of the grant date. The remaining
125,000 options granted to directors vest quarterly in equal installments in
December 31, 2007, March 2008, June 2008 and September 2008.





In
January 2008 we granted options to purchase an aggregate of 10,000 of our
ordinary shares to a non-employee consultant. The options expire seven years
from the date of the grant, vest in equal installments on each of the first
three anniversaries of the grant date and are exercisable at $.60 per
share.





In August
2008, we granted options to purchase an aggregate of 25,000 of our ordinary
shares to an employee. Such options vest over a period of three years, are
exercisable at $1.06 per share and expire seven years from the date of the
grant. As discussed above, in October 2008 we granted options to purchase an
aggregate of 175,000 shares of our ordinary shares to our directors and external
directors. Such options vest at the end of each of the four calendar quarter
commencing December 31, 2008 and are exercisable at $.51 per share.




Beneficial Interest of
Directors and Executive Officers




For a
description of the beneficial interests of our directors and executive officers
in our ordinary shares, see Item 7. “Major Shareholders and Related Party
Transactions” below.




ITEM
7.                      
MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS




A.  Major
Shareholders




Prior to
the January 7, 2008 completion of our rights offering, the only shares of our
capital stock outstanding were the 16,500,000 ordinary shares held by Medis El.
As a result of our rights offering, we issued an aggregate of 3,492,788 of our
ordinary shares and warrants to purchase an aggregate of 1,746,300 ordinary
shares. As of June 15,2009, we had outstanding
19,999,961 ordinary shares, of which 3,499,461 shares were held by 98 holders of
record in the United States.





The
following table sets forth, as of June 15, 2009, the beneficial ownership of
our ordinary shares by: (i) each of our executive officers and directors; (ii)
all of our executive officers and directors as a group; (iii) each beneficial
owner of more than 5% of our ordinary shares; and (iv) our former Chairman of
the Board and former Chief Executive Officer.





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-


Ordinary
      Shares Beneficially Owned(1)Name
      or Group
                
                Number
                
                PercentageMedis
      El Ltd.
                
                
                16,500,000
                (2)
                
                
                82.50
                %Jacob
      Weiss
                
                
                1,787
                (3)
                
                
                *Israel
      Fisher(4)
                
                
                —
                
                
                
                —Shmuel
      Peretz
                
                
                18,750
                (5)
                
                
                *Dr.
      Asaf Ben-Arye
                
                
                330,000
                (5)
                
                
                1.62
                %Mitchell
      H. Freeman
                
                
                37,500
                (5)
                
                
                *Jaclyn
      Shweky
                
                
                18,750
                (5)
                
                
                *Daniel
      A. Luchansky
                
                
                37,500
                (5)
                
                
                *David
      Arie
                
                
                18,750
                (5)
                
                
                *Lauri
      Hanover
                
                
                18,750
                (5)
                
                
                *All
      of our executive officers and directors as a group (nine
      persons)
                
                
                480,000
                (5)
                
                
                2.34
                %


__________


*
            Less
      than one percent (1%).


(1)
            “Beneficial
      Ownership” means the sole or shared power to direct the voting or
      investment of a security, including securities subject to options,
      warrants or other common stock equivalents which are exercisable or will
      be exercisable within 60 days of June 15,
2009.


(2)
            Medis
      El Ltd. is a wholly owned subsidiary of Medis Technologies
      Ltd.


(3)
            Mr.
      Weiss is our former Chairman of the Board. Includes warrants to acquire
      594 ordinary shares.


(4)
            Mr.
      Fisher is our former Chief Financial
Officer.


(5)
            Represents
      options to acquire our ordinary
shares.





Stephen
Crea, who was appointed as our Chief Accounting Officer subsequent to June 15,
2009, does not beneficially own any of our ordinary shares. All of our issued
and outstanding ordinary shares are duly authorized, validly issued, fully paid
and non-assessable. Our ordinary shares are not redeemable and do not have
preemptive rights.





B.  Related
Parties Transactions




License and Service Agreements—  In July 2007, we entered into a service agreement with Medis
El and Medis pursuant to which Medis El and Medis provide administrative
services, equipment usage and facilities to us in connection with the
carrying-out of our business. Medis El and Medis have agreed to charge us at
cost for such services provided, as a contribution to our capital, for a period
of 18 months from the January 7, 2008 rights offering completion
date.





Investment in Scorpion Surgical
Technologies, Ltd. — In July 2007, we entered into an agreement with
Scorpion Surgical Technologies, Ltd. (“Scorpion”), whereby we agreed to acquire
20,000 shares which represents a 20% equity interest in Scorpion for $150,000,
in three equal installments. The first 6,666 shares were acquired in July 2007,
upon our payment of the first $50,000 installment. The acquisition of the
remaining 13,334 shares and the final two payments are subject to the
performance of milestones that provide for our completion of an equity fund
raising of at least $1,500,000 and Scorpion signing an agreement with a medical
research center for the performance of clinical trials, as well as the
fulfillment of several administrative conditions. These two additional payments
have not yet been made as management believes the milestones per the agreement
have not yet been achieved. We were also given the right to appoint a director
to Scorpion’s board of directors, which directorship is currently vacant. After
completion of the second milestone payment, subject to the terms of the
agreement and for a period to end not later than March 31, 2009, the director
that we appoint will have a veto right with respect to the following matters:
issuance of securities, adoption of stock option plans, approval or modification
of annual budgets, related party transactions and other material transactions
outside the ordinary course of business. Additionally, we have been granted a
right of first refusal with respect to Scorpion’s next round of financing, for a
period of 24 months from the date of the agreement. Such right of first refusal
would allow us to acquire up to 75% of the securities offered based upon the
lower of a pre-money valuation set forth in a bona fide offer made to Scorpion
by a third party or a valuation of $3,500,000. Our chief executive officer is a
director and co-founder of Scorpion.




Funding Arrangements with Medis and
Medis El —
In July 2007, Medis agreed to provide to us a cash capital contribution of up to
$1,500,000 over an 18 month period on an as needed basis commencing on the
January 7, 2008 completion date of our rights offering. Medis has also agreed
that, following the completion of such offering, it will provide us with such
office and laboratory facilities as we may reasonably require to further the
commercialization of the Cell Carrier and to launch and operate our proposed
medical device incubator and will provide us with administrative and
professional services, at cost as a contribution to our capital, for a period of
not less than 18 months thereafter. Medis has also committed to provide us with
additional financing to carry out our operations through at least January 7,
2009, if our other resources are insufficient for such period of time. On June
30, 2008, Medis El provided funding to us in the amount $1,500,000, pursuant to
a non-interest bearing, unsecured promissory note, with a due date of January 1,
2010 – subject to certain other repayment conditions that are based on our
receiving alternative sources of financing for our operations or the sale or our
business to or merger with a third party.  At the option of Medis El,
any remaining balance on the promissory note may be contributed to our capital.
Also on June 30, 2008, we entered into a second promissory note with Medis El in
the amount of $394,938, representing issuance costs related to our rights
offering that Medis and Medis El advanced on our behalf.




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-


Such
promissory note is on substantially the same terms as the promissory note
described above.





ITEM
8.                        FINANCIAL
INFORMATION




A.  Consolidated
Statements and Other Financial Information




Financial
Statements




See Item
18.




Legal
Proceedings




We have
no material legal proceedings.




Dividend
Policy




To date,
we have not paid any dividends on our ordinary shares.  The payment of
dividends in the future, if any, is within the discretion of the Board of
Directors and will depend upon our earnings, our capital requirements and
financial condition and other relevant factors.  We do not anticipate
declaring or paying any dividend in the foreseeable future.




ITEM
9.                        THE OFFER AND
LISTING




On
January 7, 2008, we completed our rights offering, pursuant to which holders of
Medis common stock were offered the right to purchase our ordinary shares and
warrants to purchase our ordinary shares. On February 11, 2008, our ordinary
shares commenced trading on the OTC Bulletin Board under the ticker symbol of
CKNTF and on March 12, 2008, our warrants commenced trading on the OTC Bulletin
Board under the ticker symbol of CKNWF. None of our securities were traded in an
organized market prior to February 11, 2008. The following table sets forth, for
the referenced periods, the high and low closing market prices for our ordinary
shares on the OTC Bulletin Board:




High
                
                
                LowJune
      2009 (through June 9, 2009)
                
                $
                0.100
                
                
                $
                0.021May
      2009
                
                
                0.200
                
                
                
                0.100April
      2009
                
                
                0.110
                
                
                
                0.100March
      2009
                
                
                0.110
                
                
                
                0.060February
      2009
                
                
                0.750
                
                
                
                0.056January
      2009
                
                
                1.000
                
                
                
                0.210Year
      ended December 31, 2008
                
                
                2.87
                
                
                
                0.25Quarter
      ended December 31, 2008
                
                
                1.30
                
                
                
                0.25Quarter
      ended September 30, 2008
                
                
                2.87
                
                
                
                0.40Quarter
      ended June 30, 2008
                
                
                1.90
                
                
                
                0.50For
      the period from February 11 through March 31, 2008
                
                
                1.79
                
                
                
                0.40





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-


The
following table sets forth, for the referenced period, the high and low closing
market prices for our warrants on the OTC Bulletin Board:




High
                  
                  
                  LowJune
      2009 (through June 9, 2009)
                  
                  $
                  0.12
                  
                  
                  $
                  0.12May
      2009
                  
                  
                  0.12
                  
                  
                  
                  0.12April
      2009
                  
                  
                  0.25
                  
                  
                  
                  0.12March
      2009
                  
                  
                  0.12
                  
                  
                  
                  0.12February
      2009
                  
                  
                  0.20
                  
                  
                  
                  0.12January
      2009
                  
                  
                  1.05
                  
                  
                  
                  0.20Year
      ended December 31, 2008
                  
                  
                  2.45
                  
                  
                  
                  0.25Quarter
      ended December 31, 2008
                  
                  
                  1.20
                  
                  
                  
                  0.25Quarter
      ended September 30, 2008
                  
                  
                  2.45
                  
                  
                  
                  0.30For
      the period from June 9 through June 30, 2008
                  
                  
                  1.30
                  
                  
                  
                  0.35





ITEM
10.                      ADDITIONAL
INFORMATION




A.           Memorandum
and Articles of Association




General




We are
registered with the Israeli Registrar of Companies.  The registration
number issued to us by the Registrar of Companies is 51-323862-6.  The
objectives for which we were founded are set out in Section 4 of the Articles of
Association as follows: “The Company ’s objectives are to carry on any business,
and do any act, which is not prohibited by law and may also make contributions
of reasonable amounts to worthy causes, irrespective of whether such
contributions donation fall, or does not fall, within the Company’s usual
business conduct.”




Directors and Other Office
Holders




General




A
director’s ability to vote on a proposal, arrangement or contract in which the
director is materially interested is codified, along with the fiduciary duties
of all “office holders,” in the Israeli Companies Law.  Under the
Israeli Companies Law, the term “office holders,” is defined to mean, a
director, chief executive officer, chief business manager, deputy chief
executive officer, vice chief executive officer, any person acting in such
capacity even if under a different title, and any other manager directly
subordinate to the chief executive officer.  An office holder’s duties
include a duty of care and a duty of loyalty.  The duty of care
includes avoiding negligent acts and acting skillfully as a reasonable office
holder would act.  The duty of loyalty includes avoiding any conflict
of interest between the office holder’s position in the company and his personal
affairs, avoiding any  competition with the company, avoiding
exploiting any business opportunity of the company in order to receive personal
advantage for himself or others, and an obligation to reveal to the company any
information or documents relating to the company’s affairs which the office
holder has received due to his position as an office holder of the
company.




The
Israeli Companies Law requires that an office holder promptly disclose to the
company any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by the company.




In the
case of a transaction in which an office holder has a personal interest, that is
not an extraordinary transaction, as defined under the Israeli Companies Law,
and after the office holder complies with the above disclosure requirement, only
board approval is required unless our Articles of Association provide
otherwise.  If such transaction is an extraordinary transaction or if
we intend to provide an undertaking to indemnify, exempt or insure an office
holder who is not a director, with regard to his/her duties, then, in addition
to any approval of the board of directors and any other approval required, if
any, by the Articles of Association, such transaction must also be approved by
the audit committee prior to the approval by the board of directors, and, under
specified circumstances, by a meeting of the shareholders.  Members of
the board having a personal interest in the approval of a transaction brought
before the board of directors or the audit committee (other than a transaction
which is not an extraordinary transaction)  may not be present at the
discussion and may not vote on this matter unless most of the members of the
board or the audit committee, as applicable, have a personal interest in
approving the transaction, in which case such directors may participate in the
discussion and may vote thereon.




Arrangements
regarding the compensation of directors of a public company (whether in their
capacity as directors or in




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-


consideration
for the provision of other services) including an undertaking to indemnify,
exempt or insure such director require audit committee, board of directors and
shareholder approval.




External
Directors




Under the
Israeli Companies Law public companies are required to appoint two external
directors. Any committee having the power to act on behalf of the company’s
board (as opposed to an advisory committee) must have at least one external
director as a member.  All external directors must be members of the
Audit Committee.  An external director must be an individual resident
of Israel, who is qualified to serve as a director.  However,
companies such as ours whose shares have been offered to the public outside of
Israel may appoint external directors who are not residents of
Israel.  No person may be appointed as an external director if the
person or the person’s relative, partner, employer or any entity under the
person’s control, has or had, during the two year period preceding the date of
the person’s appointment to serve as external director, any affiliation with the
company or any entity controlling, controlled by or under common control with
the company.  The term “affiliation” includes:




·
            an
      employment relationship;




·
            a
      business or professional relationship maintained on a regular
      basis;




·
            control;
      and




·
            service
      as an office holder.




No person
may serve as an external director if the person’s position or other business
creates, or may create, a conflict of interest with the person’s
responsibilities as an external director or may otherwise interfere with the
person’s ability to serve as an external director.  A director of one
company may not be appointed as an external director of another, if at the same
time, a director of the other company serves as an external director of the
first company.  Other limitations exist with regard to various types
of memberships and positions, whose holders may not serve as external
directors.  If, at the time external directors are to be appointed,
all current members of the board of directors are of the same gender, then at
least one external director must be of the other gender.




The
Companies Law requires that at least one external director have financial and
accounting expertise and that the other external director meet certain
professional qualifications.  Certain regulations promulgated under
the Companies Law set out the conditions and criteria for a director qualifying
as having a “financial and accounting expertise” or a “professional
qualification”.  A director with financial and accounting expertise is
a director who, due to his education, experience and skills, possesses
capabilities relating to and an understanding of business and accounting matters
and financial statements, which enable him to understand in depth the company’s
financial statements and to initiate a debate regarding the manner in which the
company’s financial information is presented.  A director who meets
certain professional qualifications is a director who satisfies one of the
following requirements: (i) the director holds an academic degree in either
economics, business administration, accounting, law or public administration,
(ii) the director either holds another academic degree or has obtained other
high education in the company’s primary field of business or in an area that is
relevant to his position, (iii) the director has at least five years of
experience serving in one of the following capacities or an aggregate of at
least five (5) years of experience in two or more of the following capacities:
(a) a senior business management position of a company with a substantial scope
of business, (b) a senior position in the primary field of business of the
company or (c) a senior public administration position.  A proposed
external director must submit to the company a declaration as to his or her
compliance with the requirements for his or her election as an external director
(including with respect to such person’s financial and according expertise or
professional qualification).




External
directors are to be elected by a majority vote at a shareholders’ meeting,
provided that either:




·
            the
      majority of shares voted at the meeting, including at least one-third of
      the shares held by non-controlling shareholders voted at the meeting, vote
      in favor of election of the director;
or




·
            the
      total number of shares held by non-controlling shareholders voted against
      the election of the directors does not exceed one percent of the aggregate
      voting rights in the company.




The
initial term of an external director under the current law is three years
(extendable for an additional three years term). The approval of the general
meeting shall require that the majority of votes include one-third of the votes
of the non-controlling shareholders participating in such vote, or
alternatively, that the total number of shares held by non-controlling
shareholders voted against the election of the directors does not exceed one
percent of the aggregate voting rights in the company.  External
directors may be removed only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company.




An
external director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly in connection with services provided
by him/her  as an external director.




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-


Initial
External Directors should be appointed by a shareholders meeting to be convened
no later than three months after the date on which the company became a public
company as determined under Israeli law





Under the
Israeli Companies Law, the Articles of Association of a company may entitle a
director to appoint another person to serve as an alternate
director.  Our Articles entitle our directors by written notice to us
to make such an appointment and to cancel any such appointment.  Our
Articles also provide that any person may act as an alternate director. The
Israeli Companies Law now prohibits incumbent directors and persons already
acting as alternate directors from acting as alternate directors.




According
to our Articles of Association, unless the appointing director, by the
instrument appointing an alternate director or by written notice to the Company,
limits such appointment to a specified period of time or restricts it to a
specified meeting or action of the board of directors, or otherwise restricts
its scope, the term of appointment shall be for an indefinite period, and for
all purposes. To our knowledge, no director currently intends to appoint any
other person as an alternate director, except if the director is unable to
attend a meeting of the board of directors.




Internal Auditor and
Certified Public Accountant




Under the
Israeli Companies Law, the board of directors of a public company must appoint
an internal auditor, nominated by the audit committee.  The role of
the internal auditor is to examine, among other matters, whether the company’s
actions comply with the law and orderly business procedure.  Under the
Israeli Companies Law, the internal auditor may not be (a) an office holder (as
defined above), (b) a person who holds 5% or more of the company’s outstanding
share capital or voting rights, or a person who has the right to appoint one or
more directors or the chief executive officer, any director of the company and
the company’s chief executive officer, (c) a relative of the persons listed in
(a) and (b) above or (d) the company’s independent accountant or its
representative.  Although the Company became a public company on
February 11, 2008, it has not, to date, appointed an internal auditor, but
intends to do so as soon as finances allow.




In
addition, under the Israeli Companies Law, all companies must appoint a
certified public accountant to audit the company’s financial statements and to
report to the chairman of the board of directors any material improprieties that
it may discover with respect to the accounting control of the
company.




Indemnification, Insurance
and Exculpation of Directors and Officers




Under the
Israeli Companies Law, a company may indemnify an office holder in respect of
certain liabilities as detailed below either in advance of an event or following
an event provided a provisions authorizing such indemnification is inserted in
its articles of association.  Our articles of association contain such
an authorization.




Indemnification
may be provided against any monetary liability incurred in his or her capacity
as an office holder whether imposed on him or her or incurred by him or her in
favor of another person pursuant to a judgment, a settlement or an arbitrator’s
award approved by court. Indemnification may also be provided against reasonable
litigation expenses including attorneys’ fees, incurred by the office holder, in
proceedings instituted against him or her by the company, on its behalf or by a
third-party, or in connection with criminal proceedings in which the office
holder was acquitted, or as a result of a conviction for a crime that does not
require proof of criminal intent. In addition, a company may indemnify an office
holder against reasonable legal fees, including attorney’s fees, incurred by him
or her in consequence of an investigation or proceeding instituted against him
or her by an authority that is authorized to conduct such investigation or
proceeding, and that was resolved without an indictment against him or her and
without imposing on him or her financial obligation as an alternative of a
criminal proceeding, or that was resolved without filing an indictment against
him or her but with the imposition on him or her of a financial obligation as an
alternative to a criminal proceeding in respect of an offense that does not
require the proof of criminal intent.




The
indemnification undertaking must be limited to foreseeable events in light of
the company’s actual activities when the company undertook such indemnification,
and reasonable amounts or standards, as determined by the board of
directors.




A company
may obtain insurance for an office holder against certain liabilities incurred
in his or her capacity as an office holder provided a provision authorizing such
action is inserted in its articles of association.  These liabilities
include a breach of duty of care towards the company or a third-party, a breach
of duty of loyalty (provided that the office holder acted in good faith and had
reasonable cause to assume that the action taken by him shall not harm to
company) and any monetary liability imposed on the office holder in favor of a
third-party.




Under the
Companies’ Law, a company may not exculpate an office holder from liability for
a breach of the duty of loyalty of the office holder.  A company may
exculpate an office holder from liability to the company, in whole or in part,
for a breach of duty of care but only if a provisions authorizing such
exculpation is inserted in its articles of association. Our articles of
association provide




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-


for
exculpation in advance, to the extent permitted under Israeli law. A company may
not exculpate an office holder from a breach of duty of care concerning dividend
distribution or a purchase by the company of the company’s shares or shares of
other entities controlled by the company.




Under the
Israeli Companies Law, a company may not indemnify, insure or exculpate an
office holder against a breach of duty of care if committed intentionally or
recklessly (excluding mere negligence), or committed with the intent to derive
an unlawful personal gain, or against a fine or forfeit levied against the
office holder in connection with a criminal offense.




Currently,
we are included in our parent company’s insurance policy for our office holders
that provides coverage limited to $35,000,000 in aggregate for the policy period
ending on October 20, 2009.




Rights, Preferences,
Restrictions of Shares




We
currently utilize one type of share, this being ordinary
shares.  Subject to Israeli law, dividends may be declared by the
board.





Each
shareholder is entitled to one vote for each ordinary share held. Except for the
external directors, each director is elected to serve until the next annual
general meeting of shareholders and until his successor has been
elected.  Our Articles do not grant shareholders any rights to share
in our profits other than through dividends.  In the event that we go
into liquidation, any surplus is distributed to the shareholders in proportion
to the amount paid by each on account of the nominal value of the shares
paid.  No account is taken of any premiums paid in excess of the
nominal value.





The
directors may make calls upon shareholders in respect of sums unpaid on their
shares.  Our Articles contain no provisions which discriminate against
any existing or future shareholder as a result of said shareholder holding a
substantial number of shares.




The
change of the Company’s share capital by way of the creation of new shares, or
cancellation of unissued registered shares, with preferred or qualified rights,
requires a change of our Articles of Association and as such requires the vote
of a majority of the shareholders participating in the general meeting. If at
any time our share capital is divided into different classes of shares, we may
change the rights of shareholders by way of a resolution of the general meeting,
subject to the consent of the shareholders of the class whose rights are being
impaired by the proposed change.




Meetings of
Shareholders




An annual
general meeting must be held once in each year and not later than fifteen months
after the preceding annual general meeting.  All shareholders are
entitled to attend and vote or vote by proxy at annual general
meetings.  Notice of annual general meetings may be sent by us by
personal delivery, or by sending it by prepaid registered mail. Such notice may
be sent by cablegram, telex, facsimile or other electronic means provided
confirmation by registered mail as aforesaid.  Such notice should be
sent to shareholders at the address recorded in our records. Any general meeting
that is not an annual general meeting is called an extraordinary general
meeting.  All shareholders are entitled to attend and vote or vote by
proxy at extraordinary general meetings.




Our board
of directors may convene an extraordinary general meeting when and as it sees
fit.  In addition the Board must, according to statute, convene an
extraordinary general meeting if it receives a demand to do so from either (i)
at least two directors, (ii) at least one quarter of the directors of the Board
or (iii) one or more shareholders who hold (A) an aggregate of at least five
percent of our issued share capital and one percent of all voting rights, or (B)
at least five percent of all voting rights.  Any demand by a person or
persons, as described in (i), (ii) and/or (iii) of this paragraph, who wish to
demand that an extraordinary general meeting be convened must be made in writing
and sent to our registered office.




Subject
to the provisions of our articles of association, applicable law and
regulations, including applicable laws and regulations of any stock market on
which our shares are listed, notice of an annual general meeting and of an
extraordinary general meeting must be sent at least 21 days in advance to all
shareholders recorded in our register of shareholders.  Such notice
must include the place, date and hour of the meeting, the agenda for the
meeting, the proposed resolutions and instructions for proxy
voting.




The
determining date as to share ownership for purposes of attending and voting at a
general meeting shall be as set forth in the decision to convene a general
meeting but not earlier than 21 day before the scheduled general meeting date
and not later than 4 days prior to such scheduled meeting date.




Limitations of
Shareholders




No
limitations exist or are imposed by Israeli law or our constituent documents
with regard to the rights of non-resident or




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-


foreign
shareholders to hold or exercise voting rights except for shareholders who are
subjects of countries that are enemies of the State of Israel.




Limitations on a Change of
Control




There are
no provisions in our Articles or other constituent documents other than as
required by law that would have an effect of delaying, deferring or preventing a
change in control of us.




Provisions Relating to Major
Shareholders




We are
required by law to maintain a separate register of shareholders that hold five
percent, or over five percent, of either our issued shares or voting
rights.




The
Israeli Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes, inter alia, a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in the company, as it does to “office holders” in the
context of a related party transaction.  For the purposes of this
definition, the law deems two or more shareholders who hold voting rights in the
company and each of which has a personal interest in the approval of a
transaction being brought to the company for approval, as jointly holding such
shares.  See the section entitled “Directors-General” in this
report.  Extraordinary transactions with a controlling shareholder or
in which a controlling shareholder has a personal interest, and agreements
relating to employment and compensation terms of a controlling shareholder,
require the approval of the audit committee, the board of directors and the
shareholders of the company, in that order.




The
shareholder approval must either include at least one-third of the shares held
by disinterested shareholders who are present, in person or by proxy, at the
meeting, or, alternatively, the total shareholdings of the disinterested
shareholders who vote against the transaction must not represent more than one
percent of the voting rights in the company.  In addition, a private
placement of securities that provides twenty percent or more of the aggregate
voting rights in a company prior to the issuance where the consideration, or any
portion thereof, is not in cash or listed securities or not in reasonable market
standards, and that will increase the relative holdings of a shareholder that
holds five percent or more of the company’s outstanding share capital, assuming
the exercise of all of the securities convertible into shares held by that
person, or that will cause any person to become, as a result of the issuance, a
holder of more than five percent of the company’s outstanding share capital, or
that will cause any person to become, as a result of the issuance a controlling
shareholder, requires approval by the board of directors and the shareholder of
the company.




Under the
Israeli Companies Law, a shareholder has a duty to act in good faith towards the
company and the other shareholders and to refrain from abusing his power in the
company, including, among other things, voting in the general meeting of
shareholders on the following matters:




·
            any
      amendment to the Articles of
Association;




·
            an
      increase of the company’s authorized share
  capital;




·
            a
      merger; or




·
            approval
      of interested party transactions that require shareholder
      approval.




In
addition, any controlling shareholder and any shareholder who knows that his or
her vote can determine the outcome of a shareholder vote and any shareholder
who, under a company’s Articles of Association, can appoint or prevent the
appointment of an office holder, is under a duty to act with fairness towards
the company.  The Israeli Companies Law does not describe the
substance of this duty.




The
Companies Law provides that in the event of a breach of such duty of fairness
such breach shall be considered as a breach of contract, mutatis mutandis, while
taking into account the special position of such shareholder within the
company.




C.  Material
Contracts




Reference
is made to “Related Party Transactions” above for a description of certain of
our material contracts.





CellScan License— Medis El
Ltd acquired the rights to the CellScan in August 1992 by assignment from IAI of
a license from Bar Ilan University (the “University”) to IAI. Medis El paid IAI
$1,000,000 in consideration of the assignment of the license and for certain
tooling and equipment. The license is a perpetual worldwide license to develop,
manufacture and sell the CellScan, and to sublicense the right to manufacture
and sell the device. The license includes all rights to the University’s
CellScan patents, know-how and inventions including any subsequently acquired,
and all improvements thereto. Medis El is obligated to pay the University a
royalty for a twenty-year period beginning in 1995. For the first ten years, the
royalty is at the rate of 6.5% of proceeds of sales (after




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-


deducting
sales commissions and other customary charges) and 4.5% on any fees received
from granting territorial rights. The royalty for the second ten-year period is
3.5% on all revenues whether from sales or fees. In addition to such royalty
payments, we are required to grant $100,000 to the University during the first
year that our after-tax profits exceed $300,000. On July 26, 2007, Medis El
assigned all of its intellectual property rights to the CellScan, including the
Cell Carrier, to us and delegated its royalty payment commitments to us. No
royalties were required to be paid during the three years ended December 31,
2006, 2007 and 2008.




Other Royalties — In
consideration of grants by the State of Israel, Medis El is obligated to pay
royalties of 3% of sales of products developed with funds provided by the State
of Israel until the dollar linked amount equal to the grant payments received by
Medis El is repaid in full. Total grants received with respect to the CellScan
technologies, net of royalties paid as of December 31, 2002, aggregate
$2,434,000. On July 26, 2007, in connection with its transfer to us of its
intellectual property rights to the CellScan, including the Cell Carrier, Medis
El delegated its royalty payment commitments to us. No royalties were required
to be paid during the three years ended December 31, 2006, 2007 and
2008.




On March
2009, our research and development plan related to its CKChip technology was
approved by the Chief Scientist of the Israel Ministry of Industry, Trade &
Labor (“OCS”). Total grants approved with respect to CKChip and related
accessories aggregate up to $240,000. Under the OCS royalty-bearing
programs, we will not be obligated to repay any amounts received from the OCS if
we do not generate any income from the results of the funded research program.
If income is generated and the research program is successful, we are committed
to pay royalties at a rate of 3% to 5% of sales of the products arising from
such research program, up to a maximum of 100% of the amount received, linked to
the U.S. dollar (for grants received under programs approved subsequent to
January 1, 1999, the maximum to be repaid is 100% plus interest at
LIBOR).




D.  Israeli
Exchange Control Laws




The
Government of Israel has promulgated a general permit under the Israeli Currency
Control Law.  Pursuant to such general permit, substantially all
transactions in foreign currency are permitted.  Any dividends or
other distributions paid in respect of ordinary shares and any amounts payable
upon our dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident are
freely exchangeable into non-Israeli currencies at the appropriate rate of
exchange prevailing at the time of conversion, provided that Israeli income tax
has been paid on (or withheld from) such payments.  Because exchange
rates between the NIS and the U.S. dollar fluctuate continuously, U.S.
shareholders will be subject to any such currency fluctuation during the period
from when such dividend is declared through the date payment is made in U.S.
dollars.




E.  Taxation




Israeli Tax
Considerations




The
following is a summary of the principal tax laws applicable to companies in
Israel, with special reference to their effect on us. This section also contains
a discussion of certain Israeli tax consequences to persons holding ordinary
shares. This summary does not discuss all the acts of Israeli tax law that may
be relevant to a particular investor in light of his or her personal investment
circumstances or to certain types of investors subject to special treatment
under Israeli law, such as traders in securities or persons that own, directly
or indirectly, 10% or more of our outstanding voting share capital. To the
extent that the discussion is based on new tax legislation which has not been
subject to judicial or administrative interpretation, there can be no assurance
that the views expressed in this discussion will be accepted by the tax
authorities or the courts. The discussion should not be construed as legal or
professional tax advice and is not exhaustive of all possible tax
considerations.




Potential
investors are urged to consult their own tax advisors as to the Israeli or other
tax consequences of the purchase, ownership and disposition of ordinary shares,
including, in particular, the effect of any foreign, state or local
taxes.




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General




Generally,
Israeli companies are subject to corporate tax at the rate 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. In
addition, they are generally subject to capital gains tax at a rate of 25% on
capital gains derived after January 1, 2003, other than capital gains from the
sale of listed securities, which are generally subject to corporate tax at the
current rate of 27% (unless a company was not subject to the Inflationary
Adjustments Law (see below) or certain regulations prior to the time of
publication of a certain amendment to the Israeli tax laws (as further explained
below) in which case the tax rate is 25%).




Commencing
in 2008, we have elected to file our tax return under the Israeli Income Tax
Regulations 1986 (Principles Regarding the Management of Books of Account of
Foreign Invested Companies and Certain Partnerships and the Determination of
Their Taxable Income). We are not permitted to change such election for a period
of three years. Accordingly, commencing  in 2008, our results of
operations for tax purposes will be measured in U.S. dollars.





Law
for the Encouragement of Industry (Taxes), 1969




We
believe that we currently qualify as an Industrial Company within the meaning of
the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial
Encouragement Law”). The Industrial Encouragement Law defines an “Industrial
Company” as a company that is resident in Israel and that derives at least 90%
of its income in any tax year, other than income from defense loans, capital
gains, interest and dividends, from an enterprise whose major activity in a
given tax year is industrial production.




The
following are the principal corporate tax benefits that are available to an
Industrial Company:




·
            Amortization
      of the cost of purchased know-how and patents over an eight-year period
      for tax purposes.




·
            Accelerated
      depreciation rates on equipment and
buildings.




·
            Under
      specified conditions, an election to file consolidated tax returns with
      related Israeli Industrial
Companies.




·
            Expenses
      related to a public offering are deductible in equal amounts over three
      years.




Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. We cannot assure you that we
qualify or will continue to qualify as an Industrial Company or that the
benefits described above will be available in the future.





Capital
Gains Tax on Sales of Our Ordinary Shares




Israeli
law generally imposes a capital gains tax on the sale of any capital assets by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli resident companies, by
non-residents of Israel, unless a specific exemption is available or unless a
tax treaty between Israel and the shareholder’s country of residence provides
otherwise. In calculating capital gain, the law distinguishes between real gain
and inflationary surplus. The inflationary surplus is the portion of the total
capital gain equal to the increase in the relevant asset’s value that is
attributable to the increase in the Israeli CPI between the date of purchase and
the date of sale. The real gain is the excess of the total capital gain over the
inflationary surplus. A non-resident that invests in taxable assets with foreign
currency, or any individual that holds securities the price of which is stated
in foreign currency, may elect to calculate the amount of inflationary surplus
in that foreign currency.




Taxation
of Israeli Residents




As of
January 1, 2006, pursuant to an amendment of the Tax Ordinance, the tax rate
applicable to real capital gains derived from the sale of shares, whether listed
on a stock market or not, is 20% for Israeli individuals, unless such
shareholder claims a deduction for financing expenses in connection with such
shares, in which case the gain will generally be taxed at a rate of 25%.
Additionally, if such shareholder is considered to be a significant shareholder
at any time during the 12-month period preceding such sale, the tax rate will be
25%. For this purpose, a significant shareholder is one that holds, directly or
indirectly, including with others, at least 10% of certain means of control in a
company. Israeli companies are generally subject to the corporate tax rate (see
above) on capital gains derived from the sale of shares, unless such companies
were not subject to the Inflationary Adjustments Law (or certain regulations) at
the time of publication of the aforementioned amendment to the Tax Ordinance
that came into effect on January 1, 2006, in which case the applicable tax rate
is generally 25%.





Tax Benefits for Research and
Development.Israeli tax law allows, under specified
conditions, a tax deduction for expenditures, including capital expenditures, in
the year incurred relating to scientific research and development projects, if
the expenditures are approved by the relevant Israeli Government ministry,
determined by the field of research, and the research and development is for the
promotion of the company and is carried out by or on behalf of the company
seeking such deduction.




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However,
the amount of such deductible expenses shall be reduced by the sum of any funds
received through government grants for the finance of such scientific research
and development projects.  Expenditures not so approved are deductible over
a three-year period.




The
exercise of the warrant to purchase our ordinary shares by a Controlling
Stockholder may be subject to Israeli tax for deemed dividend or interest on the
profit gained, which profit is calculated as the difference between the exercise
price and the fair market value of our shares on the date of exercise. Upon such
exercise we may be required to withhold tax under Israeli law. A Controlling
Stockholder means a stockholder who holds, directly or indirectly through one of
our affiliates, at least 5% of our issued share capital or voting power or the
right to appoint an officer).





Taxation
of Non-Israeli Residents




Under the
Convention between the Government of the United States of America and the
Government of Israel with respect to Taxes on Income, as amended, referred to as
the U.S.-Israel tax treaty, the sale of our ordinary shares by a shareholder who
qualifies as a resident of the United States within the meaning of the
U.S.-Israel tax treaty and who is entitled to claim the benefits afforded to
such person by the U.S.-Israel tax treaty, referred to as a treaty U.S.
resident, and who holds its ordinary shares as a capital asset is also exempt
from Israeli capital gains tax unless either (i) the treaty U.S. resident
holds, directly or indirectly, shares representing 10% or more of our voting
power during any part of the 12-month period preceding such sale or
(ii) the capital gains arising from such sale are attributable to a
permanent establishment of the treaty U.S. resident that is located in Israel.
However, under the U.S.-Israel tax treaty, a treaty U.S. resident would be
permitted to claim a credit for taxes paid in Israel against the U.S. federal
income tax imposed on the sale, subject to the limitations in U.S. laws
applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to
U.S. state or local taxes. All tax rates, which apply to Israeli Residents,
apply to individuals and companies who are not Israeli residents, if such
individuals and companies are required to pay capital gains tax in Israel
according to the preceding paragraph.




Taxation
of Dividends Paid on Our Ordinary Shares




·
            Taxation
      of Israeli Residents




Israeli
resident individuals are generally subject to Israeli income tax on the receipt
of dividends paid on our ordinary shares at the rate of 20%, unless the
recipient is a significant shareholder (as defined above) in which case the
applicable tax rate will be 25%. The company distributing the dividend is
required to withhold tax at the source at the rate of 20%. Israeli resident
companies are generally exempt from income tax on the receipt of dividends from
another Israeli company, unless the source of such dividends is located outside
of Israel in which case tax will generally apply at a rate of 25%.




·
            Taxation
      of Non-Israeli Residents




Non-residents
of Israel are generally subject to Israeli income tax on the receipt of
dividends paid on our ordinary shares at the rate of 20% unless the recipient is
a significant shareholder in which case the applicable tax rate will be 25%. The
company distributing the dividend is required to withhold tax at the source at
the rate of 20%.




Under the
U.S.-Israel tax treaty, the maximum rate of tax withheld in Israel on dividends
paid to a holder of our ordinary shares who is a treaty U.S. resident is 25%.
Furthermore, the maximum rate of withholding tax on dividends that are paid in
certain circumstances to a U.S. corporation holding 10% or more of our
outstanding voting power throughout the tax year in which the dividend is
distributed as well as the previous tax year, is 12.5%.




A
non-resident of Israel who has dividend income derived from or accrued in
Israel, from which tax was withheld at source, is generally exempt from the duty
to file tax returns in Israel in respect of such income, provided such income
was not derived from a business conducted in Israel by such non-Israeli
resident.




United States Federal Income
Tax Considerations




Subject
to the limitations described in the next paragraph, the following discussion
describes the material United States federal income tax consequences to a holder
of the company’s ordinary shares, referred to for purposes of this discussion as
a “U.S. Holder,” that is:




·
            citizen
      or resident of the United States;


·
            corporation
      (or entity treated as a corporation for U.S. tax purposes) created or
      organized in the United States or under the laws of the United States or
      of any state;


·
            an
      estate, the income of which is includible in gross income for United
      States federal income tax purposes regardless of its source;
      or




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-


·
            a
      trust, if a court within the United States is able to exercise primary
      supervision over the administration of the trust and one or more U.S.
      persons have the authority to control all substantial decisions of the
      trust.




In
addition, certain material aspects of United States federal income tax relevant
to a holder other than a U.S. Holder, referred to as a “Non-U.S. Holder,” are
discussed below.




This
summary is for general information purposes only.  It does not purport
to be a comprehensive description of all of the tax considerations that may be
relevant to each person’s decision to purchase ordinary shares.




This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the “Code”), current and proposed Treasury regulations promulgated
thereunder, and administrative and judicial decisions as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.  This
discussion does not address all aspects of United States federal income taxation
that may be relevant to any particular shareholder based on such shareholder’s
individual circumstances.  In particular, this discussion considers
only U.S. Holders that will own ordinary shares as capital assets and does not
address the potential application of the alternative minimum tax or United
States federal income tax consequences to U.S. Holders that are subject to
special treatment, including U.S. Holders that:




·
            are
      broker-dealers or insurance
companies;


·
            have
      elected mark-to-market accounting;


·
            are
      tax-exempt organizations;


·
            are
      financial institutions or “financial services
  entities”;


·
            hold
      ordinary shares as part of a straddle, “hedge” or “conversion transaction”
      with other investments;


·
            own
      directly, indirectly or by attribution at least 10% of our voting
      power;


·
            have
      a functional currency that is not the U.S. dollar;
  or


·
            will
      own ordinary shares as capital
assets.




In
addition, this discussion does not address any aspect of state, local or
non-United States tax laws.




Additionally,
the discussion does not consider the tax treatment of persons who hold ordinary
shares through a partnership or other pass-through entity or the possible
application of United States federal gift or estate tax.




Each
holder of ordinary shares is advised to consult such person’s own tax advisor
with respect to the specific tax consequences to such person of purchasing,
holding or disposing of the company’s ordinary shares.




Distributions
on Ordinary Shares




As
discussed under “Dividend Policy” below, we have not declared or paid any cash
dividends on our ordinary shares to date and do not expect to pay any cash
dividends in the foreseeable future. Except as otherwise discussed below under “
— Passive Foreign Investment
Company Rules,” in the event that we make distributions on our ordinary
shares, such distributions will be treated as dividends for U.S. federal income
tax purposes, taxable to a U.S. Holder as ordinary dividend income, to the
extent of our current and accumulated earnings and profits for the year of
distribution. The amount of a distribution made on our common shares generally
will equal the amount of cash and the fair market value of any property
distributed and will also include the amount of any Israeli taxes withheld as
described below under “Israeli Tax Considerations — Taxation of Dividends Paid on Our
Ordinary Shares”. The amount treated as a dividend generally will not be
eligible for the dividends received deduction allowable to U.S. corporate
shareholders that receive dividends from certain U.S. corporations. In the case
of non-corporate U.S. Holders, the U.S. federal income tax rate of 15%
applicable to qualified dividends received in taxable years beginning prior to
January 1, 2011 may apply if certain conditions are met. However, if we were
classified as a passive foreign investment company in any taxable year, you
would not be able to benefit from the 15% preferential tax rate with respect to
any dividend distribution that you may receive from us in that year or in any
later year. See below under “ — Passive Foreign Investment Company
Rules”.




Distributions
in excess of our current and accumulated earnings and profits will reduce a U.S.
Holder’s tax basis in our ordinary shares (but not below zero). Any excess over
tax basis will be treated as a capital gain from the sale or exchange of a
capital asset and will be treated as described below under “ — Disposition of Ordinary Shares
or Warrants.”




Subject
to certain limitations, a U.S. Holder who pays (or has had withheld from
dividends) any Israeli taxes with respect to the ownership of our common shares
may elect to claim a credit for such foreign taxes paid or withheld against its
U.S. federal income tax liability. A U.S. Holder who does not make such an
election instead may deduct the Israeli tax paid or withheld, but only for the
year in which such U.S. Holder elects to do so with respect to all creditable
foreign taxes paid by such U.S. Holder. For U.S. foreign tax credit purposes,
dividends paid on our common shares generally will be treated as income from
sources outside the United States and as “passive income” (or “general income”
for certain U.S. Holders). The availability of the foreign tax credit is subject
to certain




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limitations.
The rules relating to the U.S. foreign tax credit are complex and each U.S.
Holder should consult its own financial advisor, legal counsel or accountant to
determine whether and to what extent it would be entitled to a foreign tax
credit.




Distributions
Paid in Foreign Currency




The
amount of a distribution paid to a U.S. Holder in foreign currency generally
will be equal to the U.S. dollar value of such distribution based on the
exchange rate applicable on the date of receipt. A U.S. Holder that does not
convert foreign currency received as a distribution into U.S. dollars on the
date of receipt generally will have a tax basis in such foreign currency equal
to the U.S. dollar value of such foreign currency on the date of receipt. Such
U.S. Holder generally will recognize ordinary income or loss on the subsequent
sale or other taxable disposition of such foreign currency (including an
exchange for U.S. dollars).




Disposition
of Ordinary Shares or Warrants




A U.S.
Holder generally will recognize U.S. source capital gain or loss on the sale or
other taxable disposition of our ordinary shares or warrants acquired upon the
exercise of the Subscription Rights and over-subscription privileges in an
amount equal to the difference, if any, between (i) the amount of cash plus
the fair market value of any property received and (ii) such U.S. Holder’s
tax basis in the ordinary shares or warrants sold or otherwise disposed of. Such
capital gain or loss will be long-term if the U.S. Holder’s holding period in
the ordinary shares or warrants is more than one year at the time of the sale or
other taxable disposition and will be subject to a maximum rate of 15% for tax
years beginning on or before December 31, 2010, in the case of non-corporate
U.S. Holders (including individuals). Normal graduated U.S. federal income tax
rates apply to short-term capital gains of a U.S. Holder. The deductibility of
capital losses is subject to limitations. Each U.S. Holder should consult its
own financial advisor, legal counsel, or accountant regarding the U.S. tax
consequences of any disposition of our ordinary shares or warrants.




Passive
Foreign Investment Company Rules




Special
U.S. federal income tax rules apply to a U.S. Holder that holds ordinary shares
or warrants in a foreign corporation that is classified as a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes. In general, we
will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year
in which such holder held our ordinary shares or warrants, either (i) at
least 75% of our gross income for such taxable year consists of passive income
(e.g., dividends,
interest, certain rents and royalties (other than rents and royalties derived
from the active conduct of a trade or business and not derived from a related
person), and gain from the sale or exchange of property that produces passive
income); or (ii) at least 50% of the average value of our assets in a
taxable year are held for the production of, or produce, passive income. For
purposes of applying the tests in the preceding sentence, we will be treated as
earning and owning our proportionate share of the income and assets,
respectively, of any subsidiary corporation in which we own, directly or
indirectly, at least 25% of the value of the subsidiary’s stock.




If a
foreign corporation is considered a publicly traded corporation for its entire
taxable year, the 50% asset test is based on the average fair market value of
its assets. Stock in a PFIC is considered publicly traded if such stock is
regularly traded on a national securities exchange that is registered with the
SEC or on NASDAQ, or an exchange or market that the U.S. Secretary of the
Treasury determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. The 50% asset test may
instead be based on the adjusted tax bases of the foreign corporation’s assets,
rather than fair market value, if the foreign corporation is not a publicly
traded corporation for a portion of its taxable year and either the foreign
corporation is a “controlled foreign corporation” under the Code or elects to
use the adjusted bases of its assets for purposes of this test. Although we
qualify as a “controlled foreign corporation,” the 50% asset test should apply
to us based on the fair market value of our assets. By reference to another Code
Section under the PFIC rules and its accompanying Treasury regulations, we
believe that our ordinary shares and warrants, which trade in the
over-the-counter market on the OTC Bulletin Board maintained by the NASD, should
qualify as publicly traded stock for this purpose because it should be treated
as “regularly traded” on one or more “qualified exchanges or other markets.”
However, we cannot be certain that our common shares and warrants will be
considered regularly traded for purposes of the 50% asset test under the PFIC
rules.




We
believe that we should not be a PFIC for 2008 and do not expect to become a PFIC
in the foreseeable future. However, the tests for determining PFIC status depend
upon a number of factors, some of which are beyond our control. It is also
difficult to make accurate predictions of future income and assets, which are
relevant to this determination. Moreover, we have invested in one early stage
Israeli-based medical device company but, to the extent such investment
represents less than a 25% stock interest by value, such investment will be
treated as a passive asset under the PFIC rules. If we own at least 25% of the
value of the stock of the medical device company, we will be deemed to own our
proportionate share of the assets and to have received our proportionate share
of the income of such company and other 25%-owned subsidiaries for purposes of
the PFIC tests described above. While we expect, for purposes of the PFIC rules,
that any company in which we own a 25% or greater stock interest by value will
be predominantly engaged in the active conduct of a medical device testing
business or, alternatively, that the passive income and assets of our direct and
indirect 25%-owned subsidiaries will be de minimis in each year of operations
relative to our overall income and assets, there can be no assurance that our
expectations are in fact correct or will be correct in the future. Accordingly,
there can be no assurance that we




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will not
be a PFIC.




If we
were to become a PFIC, distributions constituting “excess distributions” as
defined in Section 1291(b) of the Code and gains realized on the
disposition of our ordinary shares or warrants would be subject to special
taxation rules under Section 1291 of the Code. Under these special tax
rules, the excess distribution or gain will be allocated ratably over a U.S.
Holder’s holding period for the ordinary shares or warrants. The amount
allocated to the current taxable year and any taxable year prior to the first
taxable year in which we were a PFIC will be includable in the U.S. Holder’s
gross income for the current year as ordinary income. The amount allocated to
each other year will be subject to tax at the highest tax rate in effect for
that year and an interest charge generally applicable to underpayments of tax
will be imposed on the resulting tax attributable to each such year. If we are a
PFIC for any taxable year during which a U.S. Holder holds our ordinary shares
or warrants, we will continue to be treated as a PFIC with respect to such U.S.
Holder for all succeeding years during which such U.S. Holder holds our ordinary
shares or warrants, regardless of whether we continue to be a PFIC.




Alternatively,
a U.S. Holder of ordinary shares in a PFIC can in certain circumstances avoid
the rules described above by electing to treat us as a “qualified electing fund”
under Section 1295 of the Code or by making a mark-to-market election under
Section 1296 of the Code. The qualified electing fund election is made on a
shareholder-by-shareholder basis and can be revoked only with the consent of the
IRS. Under this option, a U.S. Holder must recognize its share of the PFIC’s
annual realized ordinary  earnings and net capital gain, and may make an
annual election, subject to certain limitations, to defer payment of current
taxes on its share of such ordinary earnings and capital gain subject, however,
to an interest charge. By making the qualified electing fund election, a U.S.
Holder generally would treat any gain realized on the disposition of the
ordinary shares as a capital gain. U.S. Holders should be aware, however, that
if we become a PFIC, we may or may not be able to satisfy record-keeping
requirements that are necessary to permit a U.S. Holder to make this qualified
electing fund election. A U.S. Holder may not make a qualified electing fund
election with respect to its ownership of a warrant (or the shares acquired
through exercise of a warrant if the warrant was issued when the foreign
corporation was a PFIC, unless such election for the newly acquired shares is
combined with a special purging election that creates a deemed sale of such
shares at their fair market value that is taxable to a U.S. Holder under the
special tax and interest charge rules described above under Section 1291 of
the Code).




U.S.
Holders who hold “marketable stock” of a PFIC may annually elect to mark such
stock to the market (a “mark-to-market election”). A U.S. Holder that makes a
mark-to-market election generally will not be subject to the rules of
Section 1291 of the Code discussed above. We believe that our ordinary
shares, which trade in the over-the-counter market, should qualify as marketable
stock because it should be treated as “regularly traded” on one or more
“qualified exchanges or other markets.” A U.S. Holder that makes a
mark-to-market election generally will take into account as ordinary income for
each taxable year in which we are a PFIC an amount equal to the excess of the
fair market value of the ordinary shares at the end of a year over such U.S.
Holder’s adjusted tax basis in the ordinary shares. Subject to certain
limitations, such U.S. Holder would also be allowed a deduction if the fair
market value of the ordinary shares at the end of a year was less than such U.S.
Holder’s adjusted tax basis in the ordinary shares. Any gain on the sale by such
U.S. Holder of our ordinary shares would also be treated as ordinary income.
Each U.S. Holder should consult its own tax adviser regarding the availability
of, and procedure for making, a mark-to-market election.




Non-U.S.
holders of Ordinary Shares




Except as
provided below, a Non-U.S. holder of ordinary shares will not be subject to U.S.
federal income or withholding tax on the receipt of dividends on, and the
proceeds from the disposition of, an ordinary share, unless, in the case of U.S.
federal income taxes, that item is effectively connected with the conduct by the
Non-U.S. holder of a trade or business in the United States and, in the case of
a resident of a country that has an income tax treaty with the United States,
that item is attributable to a permanent establishment in the United States or,
in the case of an individual, a fixed place of business in the United States. In
addition, gain recognized by an individual Non-U.S. holder on the disposition of
the ordinary shares will be subject to tax in the United States if the Non-U.S.
holder is present in the United States for 183 days or more in the taxable year
of the sale and other conditions are met.




Information
Reporting and Back-up Withholding




U.S.
Holders generally are subject to information reporting requirements with respect
to dividends paid in the United States on ordinary shares.  U.S.
Holders are also generally subject to back-up withholding on dividends paid in
the United States on ordinary shares unless the U.S. Holder provides IRS Form
W-9 or otherwise establishes an exemption.  U.S. Holders are subject
to information reporting and back-up withholding at a rate of 28% on proceeds
paid from the disposition of ordinary shares unless the U.S. Holder provides IRS
Form W-9 or otherwise establishes an exemption.




Non-U.S.
Holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the disposition of,
ordinary shares, provided that such non-U.S. certifies to its foreign status, or
otherwise establishes an exemption.




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The
amount of any back-up withholding will be allowed as a credit against a U.S. or
Non-U.S. Holder’s United States federal income tax liability and may entitle
such holder to a refund, provided that certain required information is furnished
to the IRS.




H.  Documents
on Display




We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission. You may read and copy any document we file
with the Securities and Exchange Commission without charge at the Securities and
Exchange Commission’s public reference room at 100 F Street, N.E., Washington,
D.C. 20549. Certain of our SEC filings are also available to the public at the
SEC’s website at http://www.sec.gov. 
Copies of such material may be obtained by mail from the Public Reference Branch
of the Securities and Exchange Commission at such address, at prescribed rates.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference room. In addition, all corporate documents
are available for review at our headquarters, 2 Yodfat Street, Global Park, Lod
71291, Israel.




As a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
Act.  In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.




ITEM
11.                      QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Market
risk represents the risk of changes in the value of our financial instruments
caused by fluctuations in interest rates, foreign exchange rates and equity
prices. We do not engage in trading market-risk instruments or purchase hedging
or “other than trading” instruments that are likely to expose us to market risk,
whether interest rate, commodity price or equity price risk. We have not
purchased options or entered into swaps or forward or futures contracts and do
not use derivative financial instruments for speculative trading
purposes.




The
financial statements of the company have been prepared in U.S. dollars, as the
dollar is its functional currency. Since the Company’s operations are funded in
U.S. dollars and a substantial portion of its costs is incurred in U.S. dollars,
management believes that the dollar is the primary currency of the economic
environment in which the company operates. Thus, the functional and reporting
currency of the Company is the U.S. dollar. As some of our expenses are incurred
in a different currency we are exposed to currency transactions
risk.  Our most significant currency exposure is to the New Israeli
Shekel. In periods when the U.S. dollar weakens against these other currencies,
our reported results of operations may be adversely affected.




ITEM
12.                      DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES




Not
applicable.




PART
II




ITEM
13.                      DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES




None.




ITEM 14.  MATERIAL MODIFICATIONS TO
THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS





Use
of Proceeds




On
January 7, 2008, we completed a rights offering to Medis common stockholders
pursuant to a Registration Statement on Form F-1 (File
No.:  333-144993), as amended, that was declared effective by the
Securities and Exchange Commission on November 5, 2007. Pursuant to the terms of
the rights offering, subscribers purchased, subsequent to the end of our most
recent fiscal year, an aggregate of 3,492,788 of our ordinary shares, at the
subscription price of $0.30 per share for gross proceeds of approximately
$1,048,000, less direct issuance costs of approximately $601,000. None of the
ordinary shares offered in the rights offering were purchased during our 2007
fiscal year. We have been using the net proceeds primarily to fund our ongoing
efforts to commercialize our CKChip applications and for general corporate
purposes.





ITEM
15.                      CONTROLS AND
PROCEDURES




Not
applicable.




- 45
-


ITEM
15T.                   CONTROLS AND
PROCEDURES




Disclosure
Controls and Procedures






We
carried out an evaluation, under the supervision and with the participation of
our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2008. Based on this evaluation, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures are effective to reasonably assure that
information required to be included in our periodic reports to the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time period specified in the SEC’s rules and forms and is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.





Management’s
report on internal control over financial reporting




Our
management, including our chief executive officer and our principal financial
officer, is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:




·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and




·
            provide
      reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use or disposition of our assets
      that could have a material effect on the financial
      statements.




Our
management recognizes that there are inherent limitations in the effectiveness
of any system of internal control over financial reporting, including the
possibility of human error and the circumvention or override of internal
control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation, and may not prevent or detect all misstatements. Further, because
of changes in conditions, the effectiveness of internal control over financial
reporting may vary over time.




Our
management, including our chief executive officer and our principal financial
officer, assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In conducting its assessment of internal
control over financial reporting, management based its evaluation on the
framework in “Internal Control –
Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our
management including our chief executive officer and our principal financial
officer has concluded based on its assessment, that our internal control over
financial reporting was effective as of December 31, 2008 based on these
criteria.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.




There
were no changes in our internal control over financial reporting that occurred
during the year ended December 31, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.




ITEM
16.                     [RESERVED]




ITEM
16A.                   AUDIT COMMITTEE FINANCIAL
EXPERT




We
have determined that David Arie and Laurie A. Hanover meet the
requirements of an audit committee financial expert as defined under the U.S.
securities laws. Our Board of Directors has determined that the members of our
audit committee are independent, as such term is used in the Nasdaq Marketplace
Rules.





- 46
-


ITEM
16B.                   CODE OF
ETHICS




We are
subject to the Code of Ethics adopted by the Board of Directors of Medis, which
applies to all of its and its subsidiaries’ employees, directors and officers.
We will provide a copy of our Code of Ethics free of charge to any person who
requests one. Such requests may be sent to our offices at 2 Yodfat Street,
Global Park, Lod, Israel, Attention: Chief Executive Officer.




ITEM
16C.                   PRINCIPAL ACCOUNTANT FEES
AND SERVICES




Audit
Fees




For 2008
and 2007, our independent accountant was Kost Forer Gabbay & Kasierer, a
member of Ernst & Young Global. These accountants charged fees for services
related to the years ended December 31, 2008 and 2007, as follows:





2007
                
                
                2008Audit
      fees
                
                $
                30,000
                
                
                $
                31,000Audit-related
      fees
                
                
                20,000
                
                
                
                —Tax
      fees
                
                
                11,000
                
                
                $
                5,000All
      other fees
                
                —
                
                
                —Total
                
                $
                61,000
                
                
                $
                36,000





Fees for
audit services include fees associated with the audit of our annual financial
statements and services provided by our auditors in connection with statutory
and regulatory filings or engagements, including review of documents filed with
the SEC. Audit-related fees relate to assurance and related services by our
auditors that are reasonably related to the performance of the audit or review
of our financial statements. Tax fees included tax compliance and tax
consultations.




Our audit
committee has adopted a policy that requires advance approval of all audit
services, audit-related services, tax services, and other services performed by
its and its subsidiaries’ independent auditor.





ITEM 16D. EXEMPTIONS FROM THE LISTING
STANDARDS FOR AUDIT COMMITTEES




Not
applicable.




ITEM 16E. PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




Not
applicable.




PART
III




ITEM
17.                      FINANCIAL
STATEMENTS




The
Company has elected to provide Financial Statements pursuant to Item
18.




ITEM
18.                      FINANCIAL
STATEMENTS




See pages
F-1 through F-21.





ITEM
19.                      EXHIBITS




Number
            
            Description1.1
            
            Articles
      of Association of Registrant (incorporated by reference to Exhibit 3.1 of
      the Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on September 11, 2007)2.1
            
            Form
      of certificate evidencing ordinary shares of Registrant (incorporated by
      reference to Exhibit 3.1 of the Company’s Registration Statement on Form
      F-1 (Registration No.: 333-144993) filed on September 11,
      2007)2.2
            
            Form
      of warrant certificate (incorporated by reference to Exhibit 4.3 of the
      Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on July 31, 2007)4.1
            
            Employment
      Agreement, dated as of May 1, 2006, between the Registrant and Dr. Asaf
      Ben-Arye (incorporated by reference to Exhibit 4.3 of the Company’s
      Registration Statement on Form F-1 (Registration
      No.: 333-144993) filed on July 31, 2007)           - 47
-
 
 4.2
                    
                    Service
      Agreement, dated as of July 27, 2007, between the Registrant, Medis
      Technologies Ltd. and Medis El Ltd. (incorporated by reference to Exhibit
      4.3 of the Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on July 31, 2007)4.3
                    
                    Letter
      Agreement, dated as of July 30, 2007, between the Registrant and Medis
      Technologies Ltd. (incorporated by reference to Exhibit 4.3 of the
      Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on July 31, 2007)4.4
                    
                    2007
      Equity Incentive Plan (incorporated by reference to Exhibit 3.1 of the
      Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on September 11, 2007)4.5
                    
                    Supplementary
      Funding Agreement, dated as of July 26, 2007, between the Registrant and
      Scorpion Surgical Technologies Ltd. (incorporated by reference to Exhibit
      4.3 of the Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on October 23, 2007)4.6
                    
                    Asset
      Purchase Agreement, dated as of July 26, 2007, between the Registrant and
      Medis El Ltd. (incorporated by reference to Exhibit 4.3 of the Company’s
      Registration Statement on Form F-1 (Registration No.: 333-144993) filed on
      July 31, 2007)4.7
                    
                    Form
      of Warrant Agency Agreement between the Registrant and American Stock
      Transfer & Trust Company (incorporated by reference to Exhibit 4.3 of
      the Company’s Registration Statement on Form F-1 (Registration No.:
      333-144993) filed on July 31, 2007)4.8
                    
                    Convertible
      Promissory Note #1 between Medis-El Ltd. and Cell Kinetics
      Ltd. (incorporated by reference to Exhibit 4.8 of the Company’s
      Annual Report on Form 20-F (File No.: 333-144993) filed on June 30,
      2008)4.9
                    
                    Convertible
      Promissory Note #2 between Medis-El Ltd. and Cell Kinetics
      Ltd. (incorporated by reference to Exhibit 4.9 of the Company’s
      Annual Report on Form 20-F (File No.: 333-144993) filed on June 30,
      2008)4.10
                    
                    Letter
      Agreement dated June 1, 1993 between Medis El Ltd. and The Industrial
      Research and Development Institute of the Chief Scientist’s Office of the
      State of Israel (incorporated by reference to exhibit 10.9 of the
      Registration Statement on Form S-1, as amended (File No. 333-73276), of
      Medis Technologies Ltd., filed on January 4, 2002)4.11
                    
                    Agreement
      dated October 17, 1991 between Bar-Ilan University and Israel Aircraft
      Industries Ltd. (incorporated by reference to exhibit 10.10 of the
      Registration Statement on Form S-1, as amended (File No. 333-73276), of
      Medis Technologies Ltd., filed on January 4, 2002)4.12
                    
                    Amendment
      of License dated August 8, 1992 between Bar-Ilan University and Israel
      Aircraft Industries Ltd. and Medis El  (incorporated by
      reference to exhibit 10.11 of the Registration Statement on Form S-1, as
      amended (File No. 333-73276), of Medis Technologies Ltd., filed on January
      4, 2002)4.13
                    
                    Assignment
      of License Agreement between Israel Aircraft Industries between Israel
      Aircraft Industries Ltd. and Bar-Ilan University dated August 13, 1992
      between Israel Aircraft Industries Ltd. and Medis Israel Ltd.
      (incorporated by reference to exhibit 10.11 of the Registration Statement
      on Form S-1, as amended (File No. 333-73276), of Medis Technologies Ltd.,
      filed on February 11, 2002)4.14
                    
                    Letter
      Agreement dated July 18, 1996 between Medis El Ltd. and Bar-Ilan
      University  (incorporated by reference to exhibit 10.13 of the
      Registration Statement on Form S-1, as amended (File No. 333-73276), of
      Medis Technologies Ltd., filed on February 11, 2002)4.15
                    
                    Distribution
      Agreement, dated as of May 19, 2009, by and between Cell Kinetics Ltd. and
      EuroClone SpA12.1
                    
                    Certification
      of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as amended12.2
                    
                    Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act, as amended13.1
                    
                    Certification
      of the Principal Executive Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      200213.2
                    
                    Certification
      of the Principal Financial Officer pursuant to 18 USC Section 1350, as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


- 48
-


SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.






Cell
      Kinetics Ltd.Date:
      June 30, 2009
            By:
            /s/
      Asaf Ben-AryeName:
      Asaf Ben-AryeTitle:
      President and Chief Executive Officer










- 49
-


INDEX










PageCell
      Kinetics Ltd. Financial StatementsReport
      of Independent Registered Public Accounting Firm
            
            F-2Financial
      StatementsBalance
      Sheets as of December 31, 2007 and 2008
            
            F-3Statements
      of Operations for the years ended December 31, 2006, 2007 and
      2008
            
            F-4Statements
      of Stockholders’ Equity for the years ended December 31, 2006, 2007 and
      2008
            
            F-5Statements
      of Cash Flows for the years ended December 31, 2006, 2007 and
      2008
            
            F-6Notes
      to Financial Statements
            
            F-8









F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders of




Cell
Kinetics Ltd.




We have
audited the accompanying balance sheets of Cell Kinetics Ltd. (the “Company”) as
of December 31, 2008 and 2007, the related carve-out statements of
operations, stockholders’ equity and cash flows for the years ended December 31,
2006 and 2007 and the related statements of operations, stockholders’ equity and
cash flows for the year ended December 31, 2008.  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 audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide 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 the Company as of December 31,
2008 and 2007, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As shown in the financial statements, the Company
incurred net loss of $2,381,000, $2,096,000 and $1,810,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. As more fully described in Note
A, the Company needs to raise capital, find alternative means of financial
support, or both to fund its operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. (Management’s
plans in regard to these matters also are described in Note A). The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.









Tel
      Aviv, Israel
            
            KOST
      FORER GABBAY & KASIERERJune
      30,  2009
            
            A
      MEMBER OF ERNST & YOUNG GLOBAL








F-2


Cell
Kinetics Ltd.




Balance
Sheets


(in U.S.
dollars)




December
      31,2007*
                
                
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                4,000
                
                
                $
                1,055,000Other
      accounts receivable and prepaid expenses
                
                
                7,000
                
                
                
                6,000Total
      current assets
                
                
                11,000
                
                
                
                1,061,000Issuance
      costs on rights offering (Note D)
                
                
                512,000
                
                
                
                —Property
      and equipment, net
                
                
                55,000
                
                
                
                56,000Goodwill
                
                
                2,212,000
                
                
                
                2,212,000Severance
      pay fund
                
                
                139,000
                
                
                
                158,000Total
      assets
                
                $
                2,929,000
                
                
                $
                3,487,000LIABILITIES
      AND
                  STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                116,000
                
                
                $
                52,000Accrued
      expenses and other current liabilities (Note C)
                
                
                141,000
                
                
                
                216,000Total
      current liabilities
                
                
                257,000
                
                
                
                268,000Other
      long-term liabilities (Note D)
                
                
                471,000
                
                
                
                —Accrued
      severance pay
                
                
                157,000
                
                
                
                197,000Promissory
      notes from parent Company
                
                
                —
                
                
                
                1,895,000Total
      liabilities
                
                
                885,000
                
                
                
                2,360,000Commitments
      and contingent liabilities (Note F)Stockholders’
      equity (Note E)Ordinary
      shares, .01 NIS par value; 30,000,000 and 50,000,000 shares authorized at
      December 31, 2007 and 2008 respectively; 16,722,973 and 19,999,961
      shares issued and outstanding, at December 31, 2007 and 2008,
      respectively
                
                
                39,000
                
                
                
                48,000Additional
      paid-in capital
                
                
                62,556,000
                
                
                
                64,011,000Accumulated
      deficit
                
                
                (60,551,000
                )
                
                
                (62,932,000
                )Total
      stockholders’ equity
                
                
                2,044,000
                
                
                
                1,127,000Total
      liabilities and stockholders’ equity
                
                $
                2,929,000
                
                
                $
                3,487,000







*
            For
      the periods prior to July 26, 2007, the financial statements of Cell
      Kinetics Ltd., including the results of operations and cash flow, have
      been prepared on a carve-out basis from Medis Technologies Ltd. and Medis
      El Ltd. as described in Note
A-2.




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




F-3


Cell
Kinetics Ltd.




Statements
of Operations


(in U.S.
dollars)






Year
      Ended December 31,2006*
              
              
              2007*
              
              
              2008Revenues
      (Note B-11)
              
              $
              —
              
              
              $
              —
              
              
              $
              21,000Cost
      of Revenues
              
              
              —
              
              
              
              —
              
              
              
              14,000Gross
      profit
              
              
              —
              
              
              
              —
              
              
              
              7,000Operating
      expenses:Research
      and development costs
              
              $
              1,079,000
              
              
              $
              1,182,000
              
              
              $
              1,191,000Marketing,
      general and administrative expenses
              
              
              698,000
              
              
              
              901,000
              
              
              
              1,219,000Total
      operating expenses
              
              
              1,777,000
              
              
              
              2,083,000
              
              
              
              2,410,000Loss
      from operations
              
              
              1,777,000
              
              
              
              2,083,000
              
              
              
              2,403,000Interest
      expense (income)Interest
      income
              
              
              —
              
              
              
              —
              
              
              
              (24,000
              )Interest
      expense
              
              
              33,000
              
              
              
              13,000
              
              
              
              2,00033,000
              
              
              
              13,000
              
              
              
              (22,000
              )Net
      Loss
              
              
              1,810,000
              
              
              
              2,096,000
              
              
              
              2,381,000Basic
      and diluted net loss per share
              
              $
              (.11
              )
              
              $
              (.13
              )
              
              $
              (0.12
              )Weighted-average
      number of ordinary shares used in computing basic and diluted net loss per
      share
              
              
              16,722,973
              
              
              
              16,722,973
              
              
              
              20,170,258







*
            For
      the periods prior to July 26, 2007, the financial statements of Cell
      Kinetics Ltd., including the results of operations and cash flow, have
      been prepared on a carve-out basis from Medis Technologies Ltd. and Medis
      El Ltd. as described in Note A-2.




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







F-4


Cell
Kinetics Ltd.




Statements
of Stockholders’ Equity


(in U.S.
dollars)




Ordinary
      SharesShares
                                                                        
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        
                                                                        Receipts on
                                                                            Account
                                                                            of
      Shares
                                                                        
                                                                        
                                                                        
                                                                        Receivables in
                                                                          Respect of
                                                                          Shares
      Issued
                                                                        
                                                                        
                                                                        Additional
                                                                          Paid-in
                                                                          Capital
                                                                        
                                                                        
                                                                        Accumulated
                                                                            Deficit
                                                                        
                                                                        
                                                                        
                                                                        Total
                                                                            Stockholders’
                                                                            EquityBalance
      at December 31, 2005 (Note A-2)*
                                                                        
                                                                        
                                                                        16,722,973
                                                                        
                                                                        
                                                                        
                                                                        2,000
                                                                        
                                                                        
                                                                        
                                                                        37,000
                                                                        
                                                                        
                                                                        
                                                                        (2,000
                                                                        )
                                                                        
                                                                        58,602,000
                                                                        
                                                                        
                                                                        (56,645,000
                                                                        )
                                                                        
                                                                        
                                                                        1,994,000Proceeds
      in respect of shares issued
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        2,000Net
      loss
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (1,810,000
                                                                        )
                                                                        
                                                                        
                                                                        (1,810,000
                                                                        )Funds
      from parent company
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        1,716,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        1,716,000Stock-based
      payments to employees
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        181,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        181,000Balance
      at December 31, 2006 *
                                                                        
                                                                        
                                                                        16,722,973
                                                                        
                                                                        
                                                                        
                                                                        2,000
                                                                        
                                                                        
                                                                        
                                                                        37,000
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        60,499,000
                                                                        
                                                                        
                                                                        (58,455,000
                                                                        )
                                                                        
                                                                        
                                                                        2,083,000Net
      loss
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (2,096,000
                                                                        )
                                                                        
                                                                        
                                                                        (2,096,000
                                                                        )Funds
      from parent company
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        1,802,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        1,802,000Issuance
      of shares
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        37,000
                                                                        
                                                                        
                                                                        
                                                                        (37,000
                                                                        )
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —Stock-based
      payments to employees
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        255,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        255,000Balance
      at December 31, 2007 *
                                                                        
                                                                        
                                                                        16,722,973
                                                                        
                                                                        
                                                                        
                                                                        39,000
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        62,556,000
                                                                        
                                                                        
                                                                        (60,551,000
                                                                        )
                                                                        
                                                                        
                                                                        2,044,000Net
      loss
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (2,381,000
                                                                        )
                                                                        
                                                                        
                                                                        (2,381,000
                                                                        )Funds
      from parent company
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        961,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        961,000Issuance
      of ordinary shares and warrants, net of issuance costs
                                                                        
                                                                        
                                                                        3,269,815
                                                                        
                                                                        
                                                                        
                                                                        9,000
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        438,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        447,000Exercise
      of warrants
                                                                        
                                                                        
                                                                        7,173
                                                                        
                                                                        
                                                                        
                                                                        (**)
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        3,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        3,000Stock-based
      payments to employees and non-employees
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        53,000
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        
                                                                        53,000Balance
      at December 31,
                                                                          2008
                                                                        
                                                                        
                                                                        19,999,961
                                                                        
                                                                        
                                                                        $
                                                                        48,000
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        $
                                                                        64,011,000
                                                                        
                                                                        $
                                                                        (62,932,000
                                                                        )
                                                                        
                                                                        $
                                                                        1,127,000





(*)
            For
      the periods prior to July 26, 2007, the financial statements of Cell
      Kinetics Ltd., including the results of operations and cash flow, have
      been prepared on a carve-out basis from Medis Technologies Ltd. and
      Medis El Ltd. as described in Note
  A-2.


(**)  Less
than one thousands.


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




F-5


Cell
Kinetics Ltd.




Statements
of Cash Flows


(in U.S.
dollars)






Year
      Ended December 31,2006*
                
                
                2007*
                
                
                2008Cash
      flows from operating activitiesNet
      loss
                
                $
                (1,810,000
                )
                
                $
                (2,096,000
                )
                
                $
                (2,381,000
                )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization of property and equipment
                
                
                64,000
                
                
                
                44,000
                
                
                
                24,000Non-cash
      stock based compensation expense
                
                
                181,000
                
                
                
                255,000
                
                
                
                53,000Amortization
      of in-process research and development
                
                
                —
                
                
                
                50,000
                
                
                
                —Changes
      in operating assets and liabilitiesOther
      accounts receivable and prepaid expenses
                
                
                (29,000
                )
                
                
                42,000
                
                
                
                1,000Accounts
      payable
                
                
                41,000
                
                
                
                63,000
                
                
                
                (64,000
                )Accrued
      expenses and other current liabilities
                
                
                (104,000
                )
                
                
                (76,000
                )
                
                
                75,000Other
      long-term liabilities, net
                
                
                (24,000
                )
                
                
                (11,000
                )
                
                
                -Accrued
      severance pay, net
                
                
                (2,000
                )
                
                
                6,000
                
                
                
                21,000Net
      cash used in operating activities
                
                
                (1,683,000
                )
                
                
                (1,723,000
                )
                
                
                (2,271,000
                )Cash
      flows from investing activitiesInvestment
      in early-stage company
                
                
                —
                
                
                
                (50,000
                )
                
                
                —Capital
      expenditures
                
                
                (16,000
                )
                
                
                (47,000
                )
                
                
                (25,000
                )Net
      cash used in investing activities
                
                
                (16,000
                )
                
                
                (97,000
                )
                
                
                (25,000
                )Cash
      flows from financing activitiesProceeds
      from the issuance of ordinary shares and warrants, net of issuance
      costs
                
                
                2,000
                
                
                
                —
                
                
                
                807,000Rights
      offering costs paid by parent company
                
                
                —
                
                
                
                316,000
                
                
                
                79,000Issuance
      cost on rights offering
                
                
                —
                
                
                
                (357,000
                )
                
                
                —Promissory
      note from parent Company
                
                
                —
                
                
                
                —
                
                
                
                1,500,000Funds
      from the parent company
                
                
                1,716,000
                
                
                
                1,846,000
                
                
                
                961,000Net
      cash provided by financing activities
                
                
                1,718,000
                
                
                
                1,805,000
                
                
                
                3,347,000Net
      increase (decrease) in cash and cash equivalents
                
                
                19,000
                
                
                
                (15,000
                )
                
                
                1,051,000Cash
      and cash equivalents at beginning of the period
                
                
                —
                
                
                
                19,000
                
                
                
                4,000Cash
      and cash equivalents at end of the period
                
                $
                19,000
                
                
                $
                4,000
                
                
                $
                1,055,000







Year
      Ended December 31,2006*
                
                
                2007*
                
                
                2008Supplemental disclosures of cash flow
      information:Offering
      costs included in issuance costs on rights offering
                
                $
                —
                
                
                $
                155,000
                
                
                $
                —Carve
      out net balances at July 26, 2007*
                
                $
                —
                
                
                $
                44,000
                
                
                $
                —





*
            For
      the periods prior to July 26, 2007, the financial statements of Cell
      Kinetics Ltd., including the results of operations and cash flow, have
      been prepared on a carve-out basis from Medis Technologies Ltd. and Medis
      El Ltd. as is described in Note
A-2.




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




F-6


Cell
Kinetics Ltd.


Notes to
Financial Statements




NOTE
A — GENERAL MATTERS




1.
            Nature
      of Business




Cell
Kinetics Ltd. (“CKL” or the “Company”), an Israeli corporation, which as of
December 31, 2007 was a wholly-owned subsidiary of Medis Technologies
Ltd. (NASDAQ global market: MDTL)(“MTL”) and in January 2008 became a
majority owned subsidiary as a result of its rights offering described below.
CKL was formed in May 2002 and commenced operations in May 2006 to further
refine and commercialize MTL’s CellScan and related technology, as a successor
to Medis El Ltd. (“Medis El”), which is a wholly owned subsidiary of MTL. 
CKL is seeking to exploit commercially an improved cell carrier under the
Company’s CK ChipTM product
line (the cell carrier was considered to be the nucleus of the Company’s
CellScan system). This unique cell carrier can accommodate large quantities of
living cells, each in individual wells, for measuring their reactions while in a
static state. On November 5, 2007, CKL initiated a rights offering to MTL’s
shareholders, offering them the opportunity to acquire in the aggregate an
approximately 17.5% direct equity interest in CKL. Upon completion of the rights
offering on January 7, 2008, CKL sold 3,492,788 of its ordinary shares at a
price of $0.30 per share for total gross proceeds of approximately $1,048,000,
less issuance costs aggregating approximately $601,000. Subscribers also
received four year warrants (at the rate of one warrant for every two ordinary
shares purchased) to purchase additional CKL ordinary shares at an exercise
price of $0.60 per share. After the rights offering, MTL continued to own
approximately 82.5% of CKL. The ordinary shares and four year warrants of
CKL trade on the OTC Bulletin Board under the symbols CKNTF and CKNWF,
respectively.




Since the
inception of Medis El in July 1992, the Company, as successor to Medis
El, has recorded revenues aggregating approximately $1,500,000 from the
sale of its products, has incurred operating losses and has used cash in its
operations. Accordingly, the Company has relied on financing from Medis El and
MTL and, in 2008, proceeds from its rights offering to fund its research and
development activities and other operating expenses.




In
furtherance of MTL’s plan to commercialize the Cell Carrier technology, Medis El
assigned all of its intellectual property rights to the CellScan, including the
Cell Carrier, to CKL on July 26, 2007. MTL also has agreed to provide to CKL,
over an 18 month period starting with the completion of the rights offering, an
unrestricted capital contribution of up to $1,500,000 on an as needed basis.
Furthermore, in the event that such $1,500,000 capital contribution along with
other available funds would be insufficient for CKL to carry-out its operations
for at least one year from the completion of the rights offering, MTL has agreed
to provide CKL with additional financing from time to time to ensure that CKL
will have sufficient funds to carry out its operations for at least one year
from the completion of rights offering. Additionally, MTL and Medis El have
agreed to provide office and laboratory facilities and administrative services
to CKL at cost as a contribution to capital, for a period of at least 18 months
from the completion of the rights offering.  On June 30, 2008, Medis El
provided funding to the Company in the amount $1,500,000, pursuant to a
non-interest bearing, unsecured promissory note, with a due date of January 1,
2010 – subject to certain other repayment conditions that are based on the
Company receiving alternative sources of financing for its operations or the
sale of its business to or merger with a third party.  At the option
of Medis El, any remaining balance on the promissory note may be
contributed to the capital of the Company. Also on June 30, 2008, the Company
entered into a second promissory note with Medis El in the amount of $394,938,
representing issuance costs related to the rights offering that MTL and Medis El
advanced on the Company’s behalf. Such promissory note is on substantially the
same terms as the promissory note described above.




See
Note E for a discussion of CKL’s rights offering. See note F for a
discussion of the service agreement for the period after the transfer of the
CellScan and related intellectual property rights, the asset purchase agreement,
and the license and service agreement for the period prior to such
transfer.




All of
CKL’s operating and long lived assets are located in Israel.





Since its
inception, the Company has sustained operating losses and has used cash in its
operations. During the year ended December 31, 2008, the Company used cash in
operating activities of $2,271,000, incurred a net loss of $2,381,000, and
had a total stockholders’ equity of $1,127,000 at December 31, 2008. These
losses have significantly weakened the Company’s financial position and
available cash resources. In addition to the above, the financial position of
MTL and Medis El was also weakened, and the Company expects that it can no
longer rely on obtaining additional financing from MTL and Medis
El.




The
Company requires additional financing in order to continue to fund its current
operations, which continue to show losses, and pay existing and future
liabilities and other obligations. The Company is currently seeking additional
funding from strategic partner or financial investors in order to enable
execution of its business plan and future





F-7


NOTE
A — GENERAL MATTERS (Continued)




operations.
The satisfactory completion of these fund raising efforts is essential to
provide sufficient cash flow to meet current operating requirements. The
Company’s limited available cash resources coupled with cash expected to become
available in the third quarter of 2009 under its approved Chief Scientist of the
Israel Ministry of Industry, Trade & Labor (“OCS”) research and
development plan, would be sufficient to continue operations only through
October 2009. Furthermore, the Company cannot give any assurance that it will in
the future be able to achieve a level of profitability from the sale of its
products to sustain its operations. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments to reflect the possible
future effects on recoverability and reclassification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.





2.
            Basis
      of presentation




As
described in Note A-1, Medis El assigned all of its intellectual property rights
to the CellScan, including the Cell Carrier, to CKL on July 26, 2007. The
financial statements for the years ended December 31, 2006 and 2007 presents the
historic financial position, results of operations and cash flows on a carve-out
basis from Medis El and MTL as if CKL had operated as a stand alone entity
subject to Medis El’s and  MTL’s control prior to July 26, 2007. The
method and basis of allocations used in preparing the carve-out financial
statements for such periods are described below. Management believes the
assumptions made and methodology used in preparing the carve-out financial
statements for such periods are reasonable and that all of CKL’s costs of
doing business, comprised of those costs that are clearly applicable to CKL as
well those that are reasonably allocable due to expenses incurred by Medis El
and MTL on CKL’s behalf, have been reflected in these carve-out financial
statements and, as such, management does not believe that CKL’s costs of doing
business would have been materially different had it operated as a privately
held company on a stand alone basis.




For the
periods prior to July 26, 2007, the financial statements of the Company,
including the results of operations and cash flow, have been prepared on a
carve-out basis from MTL. In preparing the carve-out financial statements for
such periods, cost items and balance sheet items that have been identified as
specifically related to CellScan operations, including the cell carrier, have
been allocated to CKL on a 100% basis, while costs items that do not have such a
direct relationship have been allocated on proportional basis. Accordingly,
CellScan, including the cell carrier, related research and development costs
(excluding occupancy, information technology and depreciation and amortization),
patent costs and certain management costs have been allocated to CKL on a 100%
basis. Costs related to shared services and corporate services, such as
management and administration, stock based compensation, occupancy, accounting,
legal, information technology, foreign currency translation adjustments and the
like have been allocated to CKL on a proportional basis using an allocation base
that would be expected to reasonably reflect the proportion of CKL’s incurrence
of such costs. Costs categories included in research and development (other than
those allocated on a 100% basis) have been allocated as follows:
(i) occupancy and depreciation and amortization have been allocated based
on relative square footage, and (ii) information technology costs have been
allocated based on relative headcount. Marketing, general and administrative
expenses (“G&A”) have been allocated based on relative costs. Management
believes that the allocation method described above provides a reasonable
allocation of costs.




Individual
balance sheets accounts have been allocated in a manner that is consistent with
their corresponding statement of operation accounts, with the exception of the
following items:




Goodwill
— Goodwill has been allocated to CKL based on MTL’s allocation of goodwill to
its reporting units that was performed in connection with its January 1, 2002
implementation of Statement of Financial Accounting standards (“SFAS”) No. 142
“Goodwill and Other Intangible Assets.” (“SFAS 142”). See Note B-7 for
a discussion of the push down of goodwill to CKL.




Cash and
Cash Equivalents — CKL’s cash resources have been provided by MTL, which uses a
centralized approach to cash management. As such, these financial
statements include only those cash balances held by CKL and there has been no
allocation to CKL of cash held by MTL or its subsidiaries (excluding
CKL).




NOTE
B — SIGNIFICANT ACCOUNTING POLICIES




The
Company’s financial statements are prepared in accordance with U.S. generally
accepted accounting principles. The significant accounting policies followed in
the preparation of the financial statements, applied on a consistent basis, are
as follows:




1.      Cash
and Cash Equivalents




Cash and
cash equivalents consist of cash and highly liquid investments with a maturity
of three months or less when purchased.




F-8


NOTE B — SIGNIFICANT ACCOUNTING
POLICIES (Continued)




2.      Use
of Estimates




In
preparing the Company’s financial statements in conformity with U.S. generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.




3.      Fair
Value of Financial Instruments




The
carrying value of all financial instruments potentially subject to valuation
risk (principally consisting of cash and cash equivalents, other accounts
receivable and prepaid expenses, accounts payable and accrued expenses and other
current liabilities) approximates their fair value due to the short term
maturities of such instruments.





4.      Translation
of Foreign Currencies




The
financial statements of the Company have been prepared in U.S. dollars, as the
dollar is its functional currency. Since the Company’s operations are funded in
U.S. dollars and a substantial portion of its costs is incurred in U.S. dollars,
management believes that the dollar is the primary currency of the economic
environment in which the Company operates. Thus, the functional and reporting
currency of the Company is the U.S. dollar.





Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
into U.S. dollars in accordance with SFAS No. 52 “Foreign Currency
Translation”. All transaction gains and losses from remeasurement of monetary
balance sheet items are reflected in the statement of operations as financial
income or expense, as appropriate.




5.     Issuance
Costs On Rights Offering




Issuance
costs on rights offering are costs directly related to the rights offering that
will be accounted for as share issuance costs in the period in which the rights
offering was successfully completed.




6.    
Property and Equipment,
net




Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided on property and equipment on the
straight-line basis over the estimated useful lives of such assets. The useful
lives of property and equipment are as follows:




Useful
      Lives In YearsEquipment
            7Computers
            3Furniture
      and office equipment
            15Leasehold
      improvements
            Over
      the shorter of the term of the lease or the life of the
    asset





7.    
Goodwill




The
Company applies Staff Accounting Bulletin No. 54, which generally requires
that the push down basis of accounting be applied in the separate financial
statements of a subsidiary that is substantially wholly-owned by the parent
company. Accordingly, goodwill has been recorded in the Company’s financial
statements to reflect the allocated portion of the difference between the
purchase price and the value of net assets acquired by MTL in connection with
MTL’s acquisitions of minority interests. In accordance with SFAS 142,
goodwill is not amortized, but rather is subject to a test for impairment at
lease annually. Goodwill is tested for impairment at the reporting unit level by
a comparison of the fair value of a reporting unit with its carrying amount,
including Goodwill. During the years ended December 31, 2006, 2007 and 2008, no
impairment losses were identified.





F-9


NOTE B — SIGNIFICANT ACCOUNTING
POLICIES (Continued)




For the
year ended December 31, 2008, the Company engaged an independent valuation firm
to perform its annual goodwill impairment test. The goodwill impairment test
used the two-step process set forth in SFAS No. 142. The first step of the
process consisted of estimating the fair value of the reporting unit and
comparing that estimated fair value with the carrying value, which include the
assigned goodwill. The fair value is determined using the income approach by
applying discounted cash flow (“DCF”) model. The DCF model required the
Company’s management to use significant assumptions and estimates, including but
not limited to projected future revenues and cash flows, growth rates and market
share, future gross margins, operating results including production cost,
SG&A cost and research and development cost assumptions, future working
capital needs, future capital expenditures, as well as appropriate discount
rates. Since the estimated fair value of the Company was more than its carrying
value, the second step was not performed, and  no goodwill impairment
was recorded.




8.    
Long-Lived
Assets




The
Company’s long-lived assets are reviewed for impairment in accordance with
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the asset. During
2006, 2007 and 2008, no impairment losses have been identified.





9.    
Stock-based
Compensation




The
Company accounts for stock-based compensation in accordance with SFAS No. 123
(revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R)
requires companies to estimate the fair value of equity-based awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company’s statements of
operations.





The
Company recognizes compensation expenses for the value of its awards granted
based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Estimated forfeitures
are based on actual historical pre-vesting forfeitures.





The
Company applies SFAS No. 123 “Accounting for stock-based compensation”
and EITF No. 96-18 “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services” (“EITF 96-18”), with respect to options and warrants issued to
non-employees. SFAS No. 123 and EITF 96-18 require the use of option valuation
models to measure the fair value of the options and warrants at the measurement
date.





10.    
Revenue Recognition




The
Company sells its CKChip product mainly through direct sales, distributors and
resellers channels.






Revenues
from product sales are recognized in accordance with Staff Accounting Bulletin
No. 104 “Revenue Recognition in Financial Statements” (“SAB 104”) when delivery
has occurred, persuasive evidence of an arrangement exists, the vendor’s fee is
fixed or determinable, no further obligation exists, and collectability is
reasonably assured.




11.    
Research and Development Costs




Research
and development costs, which are charged to operations as incurred, consist
primarily of labor, materials, subcontractors and consultants, and occupancy
costs, as well as depreciation and amortization of property and
equipment.





12.     Net Loss
Per Share




The
Company computes net loss per share in accordance with SFAS No. 128,
“Earnings Per Share” (“SFAS No. 128”). Under the provisions of
SFAS No. 128, basic net loss per share is computed by dividing the net
loss for the period by the weighted average number of ordinary shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of ordinary
shares plus dilutive potential ordinary shares considered outstanding during the
period.




F-10


NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)





The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted earnings per share, since they would have an
anti-dilutive effect, were 330,000, 2,253,050 and 210,000 for 2006, 2007 and
2008, respectively.





Weighted-average
number of shares used in computing basic and diluted net loss per share have
been retroactively adjusted for all periods presented in the statements of
operations to give effect to shares that were issued to stockholders as a bonus
element in the rights offering (see note E).





13.    
Severance Pay




The
liability of the Company in Israel for severance pay, which comprises the
Company’s entire severance pay obligation, is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment, as of the balance sheet date. Employees are
entitled to one month’s salary for each year of employment or a portion thereof.
The liability for all of its employees in Israel is fully provided by an accrual
and by monthly deposits with insurance companies and other financial
institutions. The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the fulfillment of
the obligation pursuant to Israeli severance pay law or labor agreements. The
value of these deposited funds is recorded as an asset in the Company’s
carve-out balance sheet as of December 31, 2007 and in the balance sheet as of
December 31, 2008. Severance expenses for the years ended December 31, 2006,
2007 and 2008 amounted to approximately $40,000, $54,000 and $78,000,
respectively.




14.    
Income Taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes” (“SFAS No. 109”). SFAS No. 109 prescribes the use of the
liability method whereby deferred tax asset and liability account balances are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.





On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position taken or
expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.




The
adoption of FIN 48 on January 1, 2007 did not result in a change in the
Company’s accumulated deficit.




15.    
Concentration of Credit Risk




Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company’s cash and
cash equivalents are invested in banks. Management believes that the Company’s
cash and cash equivalents are held by banking institutions with high credit
standing and, accordingly, minimal credit risk exists with respect to its
investments.





16. Fair Value
Measurement.




Effective
January 1, 2008, the Company implemented the requirements of SFAS No. 157, “Fair
Value Measurements”(“SFAS No. 157”), for its financial assets and liabilities.
SFAS No. 157 refines the definition of fair value, expands disclosure
requirements about fair value measurements and establishes specific requirements
as well as guidelines for a consistent framework to measure fair value. SFAS No.
157 defines fair value as the price that would be received to sell an asset, or
paid to transfer a liability, in an orderly transaction between market
participants. Further, SFAS No. 157 requires the Company to maximize the use of
observable market inputs, minimize the use of unobservable market inputs and
disclose in the form of an outlined hierarchy the details of such fair value
measurements.




F-11


NOTE
B — SIGNIFICANT ACCOUNTING POLICIES (Continued)





SFAS
No. 157 specifies a hierarchy of valuation techniques based on whether the
inputs to a fair value measurement are considered to be observable or
unobservable in a marketplace. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect the Company’s market
assumptions. This hierarchy requires the use of observable market data when
available. These two types of inputs have created the following fair value
hierarchy:




Level 1 –
quoted prices for identical instruments in active markets;





Level 2 –
quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-derived valuations in which significant inputs and significant value
drivers are observable in active markets; and




Level 3 –
valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable





17.    
Recently Issued Accounting Pronouncements in the United States




In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer in a business combination (i) recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any no controlling interest in the acquiree,
(ii) recognizes and measures the goodwill acquired in business
combinations or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. SFAS 141R will be
applied prospectively to business combinations that have an acquisition date on
or after January 1, 2009.  The impact of SFAS 141R on the
Company’s results of operations and financial condition will depend on the
nature and size of acquisitions, if any, subsequent to the effective
date.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
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; and changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
Company is currently evaluating the potential impact, if any, of the adoption of
SFAS No. 160 on its consolidated financial statement.





In
February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13”, and FSP No. FAS 157-2,
“Effective Date of FASB Statement No. 157”. Collectively, the Staff
Positions defer the effective date of Statement 157 to fiscal years beginning
after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value on a
recurring basis at least annually, and amend the scope of Statement 157. As
described above in Note B-16, the Company adopted SFAS No. 157 and the
related FASB staff positions except for those items specifically deferred under
FSP No. FAS 157-2.





In
December 2007, the FASB ratified EITF Issue No. 07-1 “Accounting for
Collaborative Arrangements” (“EITF 07-1”), which provides guidance regarding
financial statement presentation and disclosure of collaborative arrangements to
jointly develop, manufacture, distribute and market a product whereby the
collaborators will share, based on contractually defined calculations, the
profits or losses from the associated activities. The consensus requires
collaborators in such an arrangement to present the result of activities for
which they act as the principal on a gross basis and report any payments
received from, or made to other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational and consistently applied
accounting policy election. EITF 07-1 is effective for fiscal years beginning
after December 31, 2008, which will be the Company’s fiscal year 2009, and will
be applied as a change in accounting principle retrospectively for all
collaborative agreements existing as of the effective date. The Company does not
expect the adoption of EITF 07-1 to have a material impact on its financial
position, results of operations or cash flows.




F-12


NOTE
C — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES




Accrued
expenses and other current liabilities consist of the following:




December
      31,2007
              
              
              2008Employees
      and related liabilities
              
              $
              109,000
              
              
              $
              121,000Subcontractors
      and consultants
              
              
              11,000
              
              
              
              75,000Others
              
              
              21,000
              
              
              
              20,000$
              141,000
              
              
              $
              216,000





NOTE
D — OTHER LONG-TERM IABILITIES




At
December 31, 2007, other long-term liabilities represented costs incurred in the
amount of approximately $471,000 in connection with the Company’s rights
offering, which was completed in January 2008. Of such amount, costs aggregating
approximately $316,000 represent amounts that were paid by MTL and Medis El on
behalf of the Company before December 31, 2007. In June 2008 such amount was
included in a $394,938 promissory note with Medis El. See Note F for more
details on such promissory note.




NOTE
E — STOCKHOLDERS’ EQUITY




Share
Capital




In July
2007, the Company increased its authorized ordinary shares to 30,000,000 shares
and issued 15,500,000 ordinary shares at their par value of .01 NIS per share to
Medis El in connection with the transfer of Medis El’s CellScan and Cell Carrier
related operations, including its intellectual property rights, to the Company,
pursuant to the terms of an asset purchase agreement (See note F for a
discussion of the asset purchase agreement). Since Medis El owned 100% of the
outstanding shares of the Company both before and after the issuance of the
15,500,000 shares at their par value described above and since the financial
statements for the year ended December 31, 2007 reflect Medis El’s CellScan and
Cell Carrier operations from the inception of Medis El in July 1992, in
accordance with Accounting Research Bulletin No. 43 “Restatement and
Revision of Accounting Research Bulletins” Chapter 7: Capital Accounts (“ARB
43”), the issuance of such shares has been accounted for as a stock split-up
effected in the form of a dividend. In accordance with SEC Staff Accounting
Topic 4.C and SFAS No. 128 outstanding shares, basic and diluted net loss
per share, weighted-average number of common shares used in computing basic and
diluted net loss per share, included in these financial statements have
been retroactively adjusted for all periods presented to reflect this issuance
of 15,500,000 shares of ordinary shares pursuant to the stock split-up effected
in the form of a dividend.




On
January 7, 2008,  the Company completed an over subscribed rights
offering to the shareholders of MTL, under which the Company issued 3,492,788
shares and 1,746,300 four year warrants to purchase the Company’s ordinary
shares at an exercise price of $0.60 per share for total gross proceeds of
approximately $1,048,000 and less issuance costs aggregating approximately
$601,000. Upon consummation of the offering, MTL continued to own, indirectly
through its lower tier subsidiaries approximately 82.5% of CKL and the
participating MTL shareholders owned the balance.




During
2008, warrants holders exercised 7,173 warrants to purchase ordinary shares for
gross proceeds of $3,000. In October 2008, the Company increased its authorized
ordinary shares to 50,000,000 shares.




Cell
Kinetics Stock Options




In July
2007 the Company’s board of directors approved an equity incentive plan for
employees, directors, consultants and advisors of the Company. The plan has an
initial pool of 1,400,000 options and/or restricted shares, and/or restricted
share units and is intended to qualify for capital gains tax treatment under
Section 102 of the Israeli Income Tax Ordinance. The plan provides for the
award of both incentive and nonqualified stock options under the U.S. Internal
Revenue Code.  Options granted under the plan have expiration date of
seven years and are generally vested between a year and three
years.




F-13


NOTE
E — STOCKHOLDERS’ EQUITY (Continued)





The
following table presents the Company’s stock option activity for employees,
officers, directors and non-employee consultant of the Company for the year
ended December 31, 2008:




Number
      of
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
      Price
                    
                    
                    Aggregate
                      intrinsic
      valueOutstanding
      at December 31, 2007
                    
                    
                    836,750
                    
                    
                    $
                    0.18
                    
                    
                    $
                    684,725Granted
                    
                    
                    210,000
                    
                    
                    
                    0.58
                    
                    
                    
                    89,750Exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Forfeited
      or expired
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at December 31, 2008
                    
                    
                    1,046,750
                    
                    
                    $
                    0.26
                    
                    
                    $
                    774,475Options
      exercisable at December 31, 2008
                    
                    
                    626,000
                    
                    
                    $
                    0.16
                    
                    
                    $
                    528,013Vested
      and expected to vest at December 31, 2008
                    
                    
                    1,046,750
                    
                    
                    $
                    0.26
                    
                    
                    $
                    774,475





The fair
value for options granted in 2006, 2007 and 2008 is estimated at the date of
grant using a Black-Scholes-Merton options pricing model with the following
weighted average assumptions:





Year
      ended December 31,Employee
      Stock option
              
              2006
              
              2007
              
              2008Expected
      volatility
              
              
              68.93%-85.76%
              
              
              41.00%-61.00%
              
              
              35.00%-36.00%Risk-free
      interest rate
              
              
              4.75%
              
              
              4.05%-4.92%
              
              
              2%-3%Dividend
      yield
              
              
              0%
              
              
              0%
              
              
              0%Expected
      term (years)
              
              
              6.53-8.24
              
              
              2.28-5
              
              
              3.63-5





The
computation of expected volatility is based on realized historical stock price
volatility of certain public companies that the Company considered to be
comparable. The fair value assigned to the Common stock in order to calculate
the compensation resulting from employee options, was determined primarily by
management prior to the rights offering and subsequently was the market value of
the underlying shares at the date of grant. In determining fair value by
management, it considered a number of factors, including valuations and
appraisals. As no sufficient history of exercises exists, the Company used the
“simplified” method to establish the expected term of awards as allowed under
SAB 107. The interest rate for periods within the expected term of the award is
based on the U.S. Treasury yield curve in effect at the time of
grant.





The
following table summarizes information about options to employees, officers,
directors and a non-employee consultant outstanding at December 31, 2008 under
Cell Kinetics plans:





Options
      Outstanding
              
              Options
      ExercisableExercise
      Price
              
              
              Outstanding
      at
                December
      31, 2008
              
              
              Weighted
      Average Remaining Contractual Life Years
              
              
              No
      of options
              
              
              Weighted
      Average Remaining Contractual Life Years
              
              
              Exercise
      Prices$
              *—
              
              
              
              330,000
              
              
              
              5.79
              
              
              
              330,000
              
              
              
              5.79
              
              
              $
              *—$
              0.30
              
              
              
              506,750
              
              
              
              5.75
              
              
              
              252,250
              
              
              
              5.75
              
              
              $
              0.30$
              0.51
              
              
              
              175,000
              
              
              
              6.76
              
              
              
              43,750
              
              
              
              6.76
              
              
              $
              0.51$
              0.60
              
              
              
              10,000
              
              
              
              6.07
              
              
              
              —
              
              
              
              —
              
              
              
              —$
              1.06
              
              
              
              25,000
              
              
              
              6.65
              
              
              
              —
              
              
              
              —
              
              
              
              —1,046,750
              
              
              
              
              
              
              
              626,000


__________


*Represents
a price less than one cent.





The
weighted average fair value at grant date of options granted for the years ended
December 31, 2006, 2007 and 2008 with an exercise price equal to the market
value at the date of the grant were $0.3, $0.11 and $0.2
respectively.





F-14


NOTE
E — STOCKHOLDERS’ EQUITY (Continued)





As of
December 2008, there were unrecognized compensation costs of approximately
$45,000, related to stock options that are expected to be recognized in future
periods.





Pursuant
to its employment agreement with its chief executive officer (“CEO”), the
Company granted to its CEO options to purchase 2% of the issued shares of the
Company on May 1, 2006, the date of the employment agreement. Such options are
exercisable at their par value of .01 New Israeli Shekels and vest according to
the following  schedule: 30% on December 31, 2006 and 8.75% on the
last day of each quarter beginning on March 31, 2007 and ending on December 31,
2008. The Company has accounted for these stock options in accordance with SFAS
123R. Using the Black-Scholes option pricing model, the Company has estimated
the aggregate fair value of such options granted to be approximately
$98,000.





In
October 2007, the Company granted 120,000 options to a non-employee consultant.
Such options are exercisable at $.30 per share and expire seven years from the
date of the grant. The options vest in equal installments on each of the first
three anniversaries of the grant date. Using the Black-Scholes option pricing
model with the assumptions set forth above, the Company has estimated the
aggregate fair value of such options granted to be approximately
$14,000.





During
the year ended December 31, 2006, the Company recorded compensation costs
related to options issued of approximately $181,000, of which $173,000 and
$8,000 were recorded as G&A expense and research and development costs,
respectively. Such amounts include $67,000 related to options that were granted
to Company personnel and $114,000 that were allocated to the Company based on
the methodology detailed in Note A-2.





During
the year ended December 31, 2007, the Company recorded compensation costs
related to options issued of approximately $255,000, of which $241,000 and
$14,000 were recorded as G&A expense and research and development costs,
respectively. Such amounts include $44,000 related to options that were granted
to Company personnel and $211,000 that were allocated to the Company based on
the methodology detailed in Note A-2.





During
the year ended December 31, 2008, the Company recorded compensation costs
related to options issued of approximately $53,000, of which $30,000 and $23,000
were recorded as G&A expense and research and development costs,
respectively.




NOTE
F — COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS




License and Service Agreements— As of May 1, 2006, the Company entered into a license and service
agreement with Medis El and MTL, pursuant to which they provide personnel,
administrative services, equipments usage and facilities to the Company and
pursuant to which Medis El has granted a license to the Company to use certain
of its CellScan and Cell Carrier related intellectual property and certain other
assets in connection with the carrying-out of the Company’s business. Under the
Agreement, Medis El and MTL charge the Company at cost, as an additional
contribution to the share capital issued to Medis. In July 2007, the Company
entered into a service agreement with Medis El and MTL pursuant to which Medis
El and MTL provide administrative services, equipment usage and facilities to
the Company in connection with the carrying-out of the Company’s business. Medis
El and MTL have agreed to charge the Company at cost for such services provided,
as a contribution to the Company’s capital, for a period of 18 months from the
January 7, 2008 rights offering completion date (See Note E for a
discussion of the contemplated rights offering).




Asset Purchase Agreement — As
of July 2007, the Company entered into an Asset Purchase Agreement with Medis El
whereby Medis El’s transferred its CellScan and Cell Carrier related business,
including intellectual property rights, and other related assets and liabilities
to the Company, in consideration of 15,500,000 of theCompany’s ordinary
shares. The financial statements for the year ended December 31, 2007 reflect
the carve-out of the operations of CKL as if it had been a separate legal entity
from the inception of Medis El in July 1992, Medis El’s CellScan and Cell
Carrier related intellectual property and other assets, liabilities and related
charges to operations are already reflected herein.




F-15


NOTE
F — COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)




CellScan License— Medis El
Ltd acquired the rights to the CellScan in August 1992 by assignment from IAI of
a license from Bar Ilan University (the “University”) to IAI. Medis El paid IAI
$1,000,000 in consideration of the assignment of the license and for certain
tooling and equipment. The license is a perpetual worldwide license to develop,
manufacture and sell the CellScan, and to sublicense the right to manufacture
and sell the device. The license includes all rights to the University’s
CellScan patents, know-how and inventions including any subsequently acquired,
and all improvements thereto. Medis El is obligated to pay the University a
royalty for a twenty-year period beginning in 1995. For the first ten years, the
royalty is at the rate of 6.5% of proceeds of sales (after deducting sales
commissions and other customary charges) and 4.5% on any fees received from
granting territorial rights. The royalty for the second ten-year period is 3.5%
on all revenues whether from sales or fees. In addition to such royalty
payments, the Company is required to grant $100,000 to the University during the
first year that the Company’s after-tax profits exceed $300,000. On July 26,
2007, Medis El assigned all of its intellectual property rights to the CellScan,
including the Cell Carrier, to the Company and delegated its royalty payment
commitments to the Company. No royalties were paid during the three years ended
December 31, 2006, 2007 and 2008.




Other Royalties — In
consideration of grants by the State of Israel, Medis El is obligated to pay
royalties of 3% of sales of products developed with funds provided by the State
of Israel until the dollar linked amount equal to the grant payments received by
Medis El is repaid in full. Total grants received with respect to the CellScan
technologies, net of royalties paid as of December 31, 2002, aggregate
$2,434,000. On July 26, 2007, in connection with its transfer to the Company of
its intellectual property rights to the CellScan, including the Cell Carrier,
Medis El delegated its royalty payment commitments to the Company. No royalties
were required to be paid during the three years ended December 31, 2006, 2007
and 2008.




In March
2009, subsequent to the balance sheet date, the Company’s research and
development plan related to the Company’s CKChip technology, was approved by the
Chief Scientist of the Israel Ministry of Industry, Trade & Labor (“OCS”).
Total grants approved with respect to CKChip and related accessories aggregate
up to $240,000. Under the OCS royalty-bearing programs, the Company will
not be obligated to repay any amounts received from the OCS if it does not
generate any income from the results of the funded research program. If income
is generated and the research program is successful, the Company is committed to
pay royalties at a rate of 3% to 5% of sales of the products arising from such
research program, up to a maximum of 100% of the amount received, linked to the
U.S. dollar (for grants received under programs approved subsequent to January
1, 1999, the maximum to be repaid is 100% plus interest at LIBOR). As of
December 31, 2008, the Company’s had not yet received funds from the OCS on
account of the approved plan.




Investment in Scorpion Surgical
Technologies, Ltd. — In July 2007, the Company entered into an agreement
with Scorpion Surgical Technologies, Ltd. (“Scorpion”), whereby it agreed to
acquire 20,000 shares which represents a 20% equity interest in Scorpion for
$150,000, in three equal installments. The first 6,666 shares were acquired in
July 2007, upon the Company’s payment of the first $50,000 installment. The
acquisition of the remaining 13,334 shares and the final two payments are
subject to the performance of milestones that provide for the Company’s
completion of an equity fund raising of at least $1,500,000 and Scorpion’s
signing an agreement with a medical research center for the performance of
clinical trials, as well as the fulfillment of several administrative
conditions. These two additional payments have not yet been made as management
of the Company believes the milestones per the agreement have not yet been
achieved. The Company was also given the right to appoint a director to
Scorpion’s board of directors. After completion of the second milestone payment,
subject to the terms of the agreement and for a period to end not later than
March 31, 2009, the director that the Company appoints will have a veto right
with respect to the following matters: issuance of securities, adoption of stock
option plans, approval or modification of annual budgets, related party
transactions and other material transactions outside the ordinary course of
business. Additionally, the Company has been granted a right of first refusal
with respect to Scorpion’s next round of financing, for a period of 24 months
from the date of the agreement. Such right of first refusal would allow the
Company to acquire up to 75% of the securities offered based upon the lower of a
pre-money valuation set forth in a bona fide offer made to Scorpion by a third
party or a valuation of $3,500,000. The chief executive officer of CKL is a
director and co-founder of Scorpion. The Company has recorded its investment in
Scorpion as in-process research and development expense.




F-16


NOTE
F — COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS
(Continued)




Funding arrangements with Medis and
Medis El —In July 2007, Medis agreed to provide to the Company a cash capital
contribution of up to $1,500,000 over an 18 month period on an as needed basis
commencing on the January 7, 2008 completion date of its rights offering. Medis
has also agreed that, following the completion of such offering, it will provide
the Company with such office and laboratory facilities as it may reasonably
require to further the commercialization of the Cell Carrier and to launch and
operate its proposed medical device incubator and will provide it with
administrative and professional services, at cost as a contribution to its
capital, for a period of not less than 18 months thereafter. Medis has also
committed to provide the Company with additional financing to carry out its
operations through at least January 7, 2009, if its other resources are
insufficient for such period of time. On June 30, 2008, Medis El provided
funding to the Company in the amount $1,500,000, pursuant to a non-interest
bearing, unsecured promissory note, with a due date of January 1, 2010 – subject
to certain other repayment conditions that are based on the Company’s receiving
alternative sources of financing for its operations or the sale or the Company’s
business to or merger it with a third party.  At the option of Medis
El, any remaining balance on the promissory note may be contributed to our
capital. Also on June 30, 2008, the Company entered into a second promissory
note with Medis El in the amount of $394,938, representing issuance costs
related to our rights offering that MTL and Medis El advanced on the Company’s
behalf. Such promissory note is on substantially the same terms as the
promissory note described above.





Distribution Agreements - In
April 2008, the Company entered into an exclusive distribution agreement for
marketing and distributing its CKChip in Japan. $20,000 of revenues under this
agreement were deferred and are presented in the balance sheet as of December
31, 2008 as part of the accrued expenses and other current
liabilities.





NOTE G — INCOME
TAXES




Tax
      laws applicable to the Company in
Israel:




Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law,
1985:




In
accordance with the above law, results for tax purposes are measured and
reflected in real terms in accordance with the changes in the Israeli
CPI.





Beginning
January 1, 2008, the Inflationary Adjustments Law was repealed.




Commencing
in 2008, the Company has elected to file its tax return under the Israeli Income
Tax Regulations 1986 (Principles Regarding the Management of Books of Account of
Foreign Invested Companies and Certain Partnerships and the Determination of
Their Taxable Income). The Company is not permitted to change such election for
a period of three years. Accordingly, commencing  in 2008, the
Company’s results of operations for tax purposes will be measured in U.S.
dollars.




Tax rates
applicable in Israel are as follows: 29% in 2006 – 31%, 2007, 27% in 2008, 26%
in 2009 and 25% in 2010 and thereafter.





Carryforward
      losses:




As of
December 31, 2008, the Company had net operating losses, for Israeli tax
purposes, aggregating approximately $4,597,000, which, pursuant to Israeli tax
law, may be carried forward and offset against taxable income in the future for
indefinite period.




Open
      Tax Years:




The
Company files Israeli income tax returns and may be subject to examination by
the Israeli tax authorities for the years 2006 through 2008.




Deferred
      income taxes:




Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets are as follows:




F-17


NOTE G — INCOME TAXES
(Continued)




December
      31,2007
              
              
              2008Net
      operating loss carryforward
              
              $
              446,000
              
              
              $
              1,149,000Other
      differences
              
              
              275,000
              
              
              
              480,000721,000
              
              
              
              1,629,000Valuation
      allowance
              
              
              (721,000
              )
              
              
              (1,629,000
              )Deferred
      tax assets, net of valuation allowance
              
              $
              —
              
              
              $
              —







Reconciliation
      of the theoretical tax benefit to the actual tax expense
      benefit:




In 2006,
2007 and 2008, the main reconciling items between the statutory tax rate of the
Company and the effective tax rate are carryforward tax losses, for which a full
valuation allowance was provided.












**************************










F-18